Audit Firm: KPMG Staff Arrested in Tax evasion Investigation

Her Majesty's Revenue and Customs-HM Revenue and Customs or HMRC is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support, and the administration of other regulatory regimes including the national minimum wage.

Four partners at the Belfast office of KPMG have been arrested in connection with suspected tax evasion. HMRC officials visited the global accountancy firm's city Centre office on Wednesday and detained the men. They are Jon D'Arcy, Eamonn Donaghy, Arthur O'Brien and Paul Hollway, the firm's most senior staff in Northern Ireland.

KPMG said it is cooperating with the investigation and the four men have been placed on "administrative leave". The firm added that it does not have "any indication that this investigation relates to the business of KPMG or the business of our clients". The firm added that it does not have “any indication that this investigation relates to the business of KPMG or the business of our clients”.

HMRC said: “Officers arrested four individuals from Northern Ireland [on Wednesday] in connection with suspected tax evasion. We can’t comment further.”

KPMG has been at the fore of a campaign to persuade the Treasury to grant Northern Ireland special corporation tax status. Among the other KPMG executives arrested on Wednesday was Paul Hollway who is the firm’s head of corporate finance in Ireland. Mr Donaghy is KPMG's head of tax in Belfast and has been heavily involved in the campaign to have corporation tax powers devolved to the Northern Ireland Executive. As well as their work for KPMG, the four men are directors of a property investment company called JEAP Ltd. The firm suffered heavy financial losses when the property market crashed in 2008. However, it is unclear at this stage if that forms part of the HMRC investigation.

Additional Thoughts

Tax evasion and tax avoidance are issues which require the utmost care and attention from the auditors and authorities as economy can suffer huge losses due to this. Auditors should be very careful and should look out for transactions and other matters which may indicate the possible tax evasion. Moreover while providing taxation consulting services to its corporate clients the auditors should ask for all the pertinent information from clients to avoid any chance of the possible tax evasion.

Sources:

• http://www.bbc.com/news/uk-northern-ireland-34931675
• http://www.theguardian.com/business/2015/nov/26/kpmg-partners-arrested-hmrc-tax-evasion-inquiry

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

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

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

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

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:

• http://www.pwc.com/gx/en/about-pwc/global-annual-review-2015/campaign-site/pwc-global-annual-review-2015.pdf
• http://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/gx-gr15-summary-final.pdf
• http://www.ey.com/GL/en/Newsroom/News-releases/news-ey-reports-2015-global-revenues-up-eleven-point-six-percent
• https://home.kpmg.com/xx/en/home/media/press-releases/2014/12/kpmg-delivers-strong-growth.html

Audit Firm: Recruitment

Are you a recent accounting graduate and want to get hired at any of the big accounting firms? Here are some tips that will prove to be helpful in your search.

Curriculum Vitae: An employer will first meet you on paper through your CV. Prepare a good professional CV that defines your career goal, your education, past experience (if any) and your skills and expertise. CV is a marketing tool for a job seeker and you should use that tool to the greatest effect.

Cover Letter: The purpose of constructing an effective cover letter is to demonstrate your suitability for an organization by identifying how your past academic background and employment make you a top candidate.

Interview: Before going for the interview research the firm and understand the organization and job description. Dress appropriately for the interview, generally this means business professional dress. As it is rightly said that your energy introduces you even before you speak so try to make a good first impression on the interviewer. Ask some intelligent questions during the interview when asked about having any questions from your research conducted earlier on about the company.

Follow up: After the interview send an email to the employer and thanks them for the interview opportunity. This will not only enhance your image as a good communicator but will also ensure that the employer keeps you in the queue for potential selection. 

Some of the key soft skills that employers these days are looking for are:

• Problem solving and analytical thinking
• Initiative and drive
• Team player
• Communication skills (written and verbal)

Some of the key technical skills employers look for in young graduates aspiring to join the auditing profession are:

• Financial accounting and reporting
• Tax strategy, planning and control 
• Risk management and internal control
• IT Skills

Additional Thoughts

Some very useful information can be obtained from the websites of the big Four firms about their recruitment process and policies.

• EY
• PWC
• Deloitte
• KPMG

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:

http://www.vault.com/company-rankings/accounting/vault-accounting-50

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.

Audit Firm: Personality of Auditor

There are a few personal characteristics that are important for an auditor to have:

• Auditors should possess a strong ethical framework and report on issues (or anticipated issues) as they come across them. There is a temptation to "let things go" as further investigation may require more work or reveal embarrassing processes, performance and/or fraud.

• Good communication skills allow auditors to have a rapport with a variety of employees, managers, directors and external parties. As auditors establish good rapport with a variety of individuals, however, they should keep in mind the objectives of the audit (for instance, the reliability, verifiability, accuracy and timeliness of information), as they can often be tempted to not report on issues discovered.

• Strong interpersonal skills are important, due to the variety of informational requests - and often, resistance to those requests - required from a variety of sources. Strong and/or ambitious types may attempt to dissuade auditors from revealing embarrassing findings.

• Auditors need to be team players. As the scope of the audit can be fairly large, it is beneficial to help in other areas of an audit when resource constraints warrant it.

• Finally, "professional skepticism" is an important trait to have, especially when reviewing a company's internal controls. One needs to assess how perpetrators of fraud can beat a company's controls, and auditors need to design and implement a system that can effectively protect the organization's assets.

Audit Firm: Big4 Interview Questions

Here is a list of top 10 interview questions for all the young specialists who wish to join any of the Big four audit firms (in fact any consulting firm) in their future career.

1. Tell me a little about yourself or background?
2. Why KPMG/Deloitte/PwC/E&Y?
3. Why audit/tax/advisory?
4. Are you interviewing with other firms? What’s the response from them?
5. Where do you see yourself in 5 to 10 years?
6. If your friends could pick three words to describe you, what would they be?
7. Do you prefer to travel?
8. What is your biggest weakness/strength?
9. Tell me about a time when you improved a process (or came up with a creative solution)?
10. What do you like best about a career in accounting/auditing?

Audit Firms: Non-Audit Services

Growth in consultancy among the Big Four is outpacing their traditional tax and audit services, while the firms are also outperforming management consultants. Big Four firms have been steadily rebuilding their consultancy arms through a series of acquisitions in order to compensate for stagnating growth for traditional audit work. The type of non-audit services that audit firms provide ranges widely from audit firm to audit firm. They may include professional advice on transactions (for example, a merger, acquisition or restructuring) as well as tax and broader business advisory services (including performance improvement and information technology). Non-audit services may also include advisory work to assist companies to comply with laws and regulations.

The strict regulations imposed by Sarbanes Oxley Act introduced in USA led to a rash of sales of consultancy divisions by the auditing firms. IBM for instance bought PwC's consulting arm, E&Y Consulting had already sold to Cap Gemini and KPMG did an IPO of KPMG Consulting, which then became BearingPoint. But by the time the Big Four's non-compete clauses expired, typically in three to five years, consulting was back as a high-focus area at the accounting firms.

Soon after the Enron controversy died, the accounting firms realized that regulations could be taken care of if they built a practice that largely consisted of non-audit clients where conflict situations didn't arise; and where there was overlap, they could always avoid selling certain services. And that's what they did. Deloitte recorded a revenue figure of US$ 34.2 billion (2014) with growth for consulting at 10.3 percent. EY advisory grew by 14.4% as compared to assurance growth of 4.5% in 2014. Out of PWC total revenue of US$ 34 billion in 2014 18.8 billion was generated by Tax and Advisory Services. Kpmg total advisory revenues for the year 2014 were up by 10.4% to US$9.09 billion, up from 6.5% in FY13.

That's indeed a high turnaround from 2002 when following Enron's bankruptcy and the dissolution of Arthur Andersen, KPMG and PwC dumped their consulting arms; Ernst & Young had already done so in 2000. The sell-off was a reaction to a toughened up Sarbanes-Oxley Act that restricted the scope of non-audit services that could be offered to audit clients to limit any conflict of interest.

Additional Thoughts

In many countries the codes of corporate governance forbids auditors to provide non-audit services to audit clients if that would present a threat to independence for which no adequate safeguards are available. It is the responsibility of the audit committee being the representative of shareholders to oversee the relationship between the auditor and the company. The audit committee must scrutinize the provision of non-audit services by the audit firms and must have to make sure that the independence and objectivity of the audit firm is not compromised.  

Audit Firm: Message from Financial Reporting Council to the Big 4

The Financial Reporting Council is the UK’s independent regulator responsible for promoting high quality corporate governance. It recently issued Audit Quality Inspection Report for the year 2014/15.

The review of the firm’s policies and procedures supporting audit quality is undertaken by the Audit Quality Review team of the Financial Reporting Council (“the FRC”) and it covered aspects of the following areas: 

• Tone at the top and internal communications
• Transparency report
• Independence and ethics
• Performance evaluation and other human resource matters
• Audit methodology, training and guidance
• Client risk assessment and acceptance / continuance
• Consultation and review
• Audit quality monitoring
• Other firm-wide matters

 Some of the key messages given by the FRC to the Big 4 audit firms are as follows: 

• Improve the testing of management reports and other system generated information to obtain assurance on its reliability for audit purposes.
• Improve the testing of controls.
• Ensure that audit planning discussions are held with Audit Committees on a more timely basis to enable their input to be reflected appropriately in the audit plan.
• Ensure audit teams pay more attention to the nature and complexity of entities when determining the scope and extent of group and component audit procedures.
• Improve the audit approach in relation to the testing of journals including the selection of journals based on the characteristics of fraud risk
• Ensure that, when using the firm’s valuation and other specialists, audit teams obtain sufficient appropriate audit evidence to corroborate their conclusions.
• Take action to ensure that partners are notified promptly of new audited entities and dispose of any financial interests held in them on a timely basis.
• Ensure that the firm’s audit reports accurately describe the audit procedures performed to address the identified risks.

Additional Thoughts

The key messages given by the FRC to the audit firms can be used as guidelines by the firms to improve the quality of their audits. Firms should develop more stringent internal quality control review mechanisms to improve audit quality and deliver services to the complete satisfaction of all the stakeholders. 

Audit firms: Sponsorship Activities

Big accountancy firms have much to gain from sponsorship activities, from supporting charitable causes to developing leadership programmes and promoting sports and arts. Through sponsorship programmes the audit firms not only fulfill their corporate social responsibility by making a positive impact on society and the environment but also maximize value for their business. For the smaller accountancy firms, sponsorship is often more about cultivating business and identity locally. Sponsorships programmes aim to extend positive impact across communities, sports, the arts and business. Audit firms support others to make progress where it matters most whilst offering exciting opportunities for their people and clients to experience who they are in different ways. Firms pursue focused sponsorship partnership strategy where they support a large number of causes aligned with their vision, values and purpose.

Through various sponsorship programmes the Big 4 accountancyfirms spend money all over the world.

EY has been an official partner to the 2012 and the 2014 Ryder Cups. EY also will serve as an official supporter and exclusive provider of professional services in the consulting category for the Rio 2016 Olympic Games. On 15 July 2013, Tate and EY announced a major new three-year arts partnership, making EY one of the largest corporate supporters of Tate.

Deloitte has been a top-tier partner of the Royal Opera House in UK since 2007. British Paralympic Association is the official charity partner of the Deloitte Ride Across Britain event.

PWC sponsor PGA tour event TPC Sawgrass in USA. PWC also supports Irish rugby, Irish Ice Hockey and The America’s Cup.

KPMG's association with the golfers Stacy Lewis and Phil Mickelson reflects shared values.

Additional thoughts

How can the risks be managed?

The key to manage risks in a sponsorship deal is by clearly defining the expectations and objectives of the programme. Choosing the right sponsorship programme and knowing when to end the deal if any controversy erupts can potentially make or break a firm’s reputation. Endorsement insurance can also help protect the sponsor in the event of a scandal or negative publicity. Another method is to sponsor numerous programmes across a range of venues such as sports, arts, culture and charity thus weakening the link between sponsorship and brand.

Chinese Companies Need Vigilant Audit

Some of my readers have shown their interest to the assurance services in BRIC in the comments to the last post. And guess what? The recent issue of The Economist contains the article “Accounting in China”, which reflects my concerns about audit of companies from BRIC in general (see link). The beginning of the article is quite appealing:

“CAN you trust Chinese accounts? Many investors fear (and several short-sellers are betting) that the answer is “no”. Sino-Forest, a big forestry firm listed in Toronto, is a case in point. Last year Muddy Waters, a short-seller, accused it of running a Ponzi scheme, which it denies. On January 31st Sino-Forest released the final report of independent investigators into the charge. Insiders crow that the gumshoes found no smoking gun. The gumshoes grumbled that, lacking access to all the evidence, they were “not able to reach definitive conclusions”.

America’s SEC is trying to force the Shanghai office of Deloitte Touche Tohmatsu, a big Western accountancy firm, to hand over papers related to Longtop, a Chinese software firm that was delisted by the New York Stock Exchange last year. Deloitte refuses, saying this would violate Chinese laws on “state secrets”. Deloitte may have a point. If it co-operates, its local staff could be jailed under Chinese law.”

So, this is the question, which had to be raised sooner or later: can be the companies transparent while operating in the conditions of non-transparent political system? There are no big traditions of Chinese government accountability to citizens of China. The market incentives to provide true and fair financial statements are seem to be not enough.

How to deal with this issue?

China need not take all the blame for the failure to provide true financial statements. The problem is common for all emerging markets. It could be said that the reason for that is not necessarily deliberate misrepresentation. Errors might happen due to lack of knowledge, the absence of open communication tradition.

According to the article in The Economist one of the Big4 bosses acknowledged the issue and insisted that “the Big Four have greatly increased their vigilance in China”. To generalize this comment one can state an implicit rule for the audit of financial statements in emerging markets: the financial statement risk for all companies originated from emerging markets should be assessed as "high" at the beginning of audit unless otherwise could be proven. The proof of lower risk assessment could be obtained after one or two years of audit, which would provide evidence about low susceptibility of systems to errors and effective control system.

I agree that this proposal could be viewed as a strict and reactionary one, but I stated it to initiate discussion of what could be done regarding accounts provided by BRIC and other emerging markets. I expect you to share your valuable ideas in the comments, and we might discuss them.

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.

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 5^th and 7^th 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.

2. Big4.com analysis. 

The Role of Big4 in promoting IFRS

The audit of IFRS reports is one of the major services provided by the international accounting networks. This is because they possess necessary knowledge and skills, which could be used all over the world. However, there are negative moments in this process, which could be illustrated by conclusion made by Sucher and Alexander (2002) in their research:

     “Given their power over both the production and audit of IAS accounts, the Big Five firms play a very large role in interpreting and implementing IAS standards in a particular country.  This raises issues of power and responsibility with respect to compliance with IAS that need to be addressed clearly by the IASB”

So this post is going to address this issue and point out on existing problem especially in emerging markets.

Illustrations

The issue was substantially researched by Sucher and Alexander (2002) based on the example of Russia and by Sucher and Jindrichovska (2004) in study of situation in Czech Republic.

The problem is that companies in emerging economies suffer from lack of knowledge and expertise in preparation of IFRS accounts. The probable solution could be to hire IFRS specialist or to outsource reporting process. But on the one hand there is a shortage of qualified and experienced professionals in emerging markets. On the other hand, outsourcing by one and afterwards auditing by another independent firm are seen as superfluous costs. Finally, these companies opt into simple solution – they ask audit firms both to prepare and audit their IFRS accounts. This state of things as honourable auditors we can’t tolerate, can we?

Sucher and Alexander (2002) illustrated the situation by remark of one of Big Five (at the moment of research) interviewees:

“As you know we do not prepare accounts for our clients – it is an independence issue….however, we do provide a degree of assistance….. Some accountants in enterprises crunch the numbers (for IAS) and others say, ‘look guys we pay you to do it.  It is a fairy tale’”

It is not only willingness to save money, the issue is also related with the perception of an audit as no-value-adding activity. Interviewees in Czech Republic complained that the earlier Big 4 audit firm provided such package of services while the latest Big 4 auditors refuse to do this (Sucher and Jindrichovska 2004). One of the Big 4 auditors (interviewee) added fuel to the fire:

“Some financial managers and accountants [in enterprises] do not know what is going on [with IFRS]. They are only the passive receivers. In [X audit firm], there are templates that transform Czech accounting to IAS. The knowledge is kept in the audit company. It is big business [for the audit firm]. You can train companies to do the supporting sheets hut the final bit is done by the audit firm.”(Sucher and Jindrichovska 2004).

Meanwhile, management of the companies would always be keen on saving costs on such things like audit. It is quite likely that such kind of cosy relations are more beneficial to audit firms. At least they could have separated audit and accounting team, but according to research it would be too costly for audit firms and they end up by assigning one team of people to do both jobs, which is a shame.

Problems

The basic issue which arises here is how far should we trust financial statements prepared in emerging markets? To what extent this practice spread in other emerging countries, where corporate governance and law enforcement are not developed enough? I think that it is highly probable that similar “reporting-auditng” is practiced in China, where local management is rather pushy in accounting issues (see Deloitte’s case).

The other question how can we deal with the issue in sensible way. For example, one is audit manager and one is doing audit of IFRS reports of Brazilian company. The resourceful Brazilian finance director provides auditor with financial statements (FS) essentially based on Brazilian GAAP, but with name of IFRS on its face. The trick is that you will do honest auditing, spot discrepancies from real IFRS and provide list of adjustments which need to be done J It is foxy tactic, isn’t it?

What do you think about truthfulness of IFRS accounts of companies from emerging markets listed on global stock exchanges? Have you faced approach mentioned above in your reporting or auditing practice? How to discourage auditors from doing that especially in the context of coming “pure-audit-firms” legislation? Please share your knowledge and experience.

References

Sucher, P. and Alexander, D. (2002) IAS: Issues of Country, Sector and Audit Firm Compliance in Emerging Economies (London: Centre for Business Performance of the Institute of Chartered Accountants in England and Wales).

Sucher P., and Jindrichovska I. (2004) Implementing IFRS: A Case Study of the Czech Republic. EAA, Accounting in Europe, Vol. 1, pp. 109-141.