Week-end: Big4 Audit Career Commercials

How would you assess the creativity of accounting firms? This question is especially relevant in the field of attracting young specialists as new hires.In this post I've decided to pick up career commercials addressed to graduates and potential junior employees made by industry leaders, Big4.

Why Deloitte? I think Deloitte's ad was rather dynamic, with good music, but a bit of trivial.



Why EY? EY has actually disappointed me, I found nothing creative which would look like this remarkable video. Finally, I picked up this video with interview of a nice girl with interesting accent J



Why KPMG? I decided to take KPMG Singapore's ad. The background music really touched me, it's style differs from music which other accounting firms place in their ads. Meanwhile, image could have been more clear.



Why PwC? In my opinion, there was not anything interesting among new PwC's commercials. So I end up selecting relatively old commercial: it might be viewed as pompous and pretentious one, but sometimes I find such kind of creativity rather appealing. I do not know why, but it has reminded me Ayn Rand's "Atlas Shrugged".



What commercials related with graduates hiring do you find interesting? Are there any appealing ones or real masterpieces? Please share information in comments.

Audit Exam Ultimate Pass Key

Last summer I successfully passed ACCA exam, P7 “Advanced Audit & Assurance”. While preparing for the exam, I designed succinct and universal “question tackling plan”, which helped to structure my ideas on auditing. In this post I would like to share my knowledge just before coming ACCA examination session.  

I believe it would be useful for all exams related with financial audit. So the candidates for qualifications like CPA or ICAEW are welcomed to utilize it as well. J

The logic is simple: the plan consists of common subjects/questions and points suggested to be addressed.

Question Tackling Plan

1.      Ethics area question

1.1.   Technical competence;

1.2.Objectivity/Independence (possible threats: self-review, familiarity, intimidation, self-interest, advocacy)

1.3.   Professional behavior;

1.4.   Integrity;

1.5.   Confidentiality.

Mnemonic: TOPIC

2.      Professional (audit business) area question

2.1.   Competence;

2.2.   Resources/costs;

2.3.   Reputation;

2.4.   Staff quality;

2.5.   Quality control: Acceptance; Directorship; Supervision; Review; Consulting; Disputes.

3.      Audit Opinion related question

3.1.   Clarity;

3.2.   Details (standards, amounts, scope);

3.3.   Structure (is heading on the right place?) of opinion and its Consistency (starts like “except for” and finishes like adverse opinion);

3.4.   Types of appropriate opinions. This depends on evidences (sufficient, mistake material and pervasive?);

3.5.   Prior year opinion.

4.      Audit Matters (audit evidence/process) question

4.1.   Materiality;

4.2.   Standard breached (IFRS, recognition, valuation criteria etc.);

4.3.   Risks of misstatement;

4.4.   Impact on Audit Opinion;

4.5.   Reliability (source of evidence).

5.      Audit Evidence question

Mnemonics:

Sources of evidence -  DADA3: Document Asset Director (interview/representations) Accounting record 3rd Party

Procedures AE IOU: Analytical (plausibility/predictability)   Enquiry & Confirm (written/verbal)     Inspection (documents/assets)       Observation (assets, process) RecalcUlation (opening balance check)

Elements of evidence:

5.1.   General: budgets/plans, accounting policy;

5.2.   Calculations: rates, models, risks, probabilities, impairment reviews, useful lives, assumptions reasonableness explanation;

5.3.   Disclosure: draft notes;

5.4.   Documents types:

5.4.1.      Bank statements, invoice, bill, dispatch/delivery note;

5.4.2.      Contract, agreement, insurance policy, title deed;

5.4.3.      Claim litigation copy, insurance claim;

5.4.4.      Log books, time-sheets;

5.4.5.      Minutes, orders, policies;

5.4.6.      Correspondence, letters;

5.4.7.      Tax returns;

5.5.   Reconciliations (with tax authority, debtor), confirmations;

5.6.   Record of discussion, interview, talk with employees;

5.7.   Valuation reports, surveys;

5.8.   Breakdowns (check for misclassification), samples.

Golden Rule:

Your answer should be always close to the question scenario: (1) the answer should be relevant; (2) the question text contains hint for answer.

You are welcomed to share your tips for audit exams. Good Luck! J

          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".

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.

Audit Procedures: Final Stage

The incentive for writing this post was recent article by Lisa Weaver, ACCA Advanced Audit examiner, on the topic of audit completion. Following essential subjects were covered there:

1)  Review of audit files and evaluation of misstatements (ISA 220, ISA 230, ISA 450);

2)      Final analytical procedures (ISA 520);

3)      Subsequent events and going concern procedures (ISA 560);

4)  Written representation and communication with those charged with governance (ISA 580, ISA 260);

5)      Audit clearance meeting.

The issue of subsequent events and going concern auditing I have already covered in one ofmy previous articles. In this post I would like to consider analytical procedures and meetings with client.

Being analyst

The task of performing analytical procedures in respect of financial statements usually called overall analytical review (OAR). It enables to examine client’s financials in terms of common sense and ensure that test of details were relevant. In addition, for audit senior or manager it is great opportunity to show broadness of mind and deepness of understanding of client. Of course, the quality of work done would influence his/her performance assessment.

Example of Gross Margin Analysis

The major problem, which auditors face in performing OAR is lack of time. This is because at the end of audit project everybody expects deliverables from you, there are lots of work need to be done. So it is necessary to organise audit process in a way that it would save time in future.

One possible solution is to delegate part of work to junior staff while they are doing audit of separate accounting sections. For example, after performing principal audit procedures junior auditor would be responsible to make reasonable analysis from the business point of view. Why inventory item in trial balance increased so dramatically this year? So by the time of doing OAR senior auditor will have preliminary analysis of item in balance sheet, which could be expanded or left as it is if explanation provided is comprehensive and sensible.

Inventory structure analysis

I would also like to emphasise necessity of using understanding of general business tendencies and economic factors while doing OAR. For example, I had following case. The inventory of client increased and accountant explained vaguely that it is due to prices leap. To address this explanation I have undertaken following steps:

1)    Found out what kind of inventory caused increase: it was special alloyed construction steel;

2)  Found out that sales and percentage of this kind of steel in total inventory also increased;

3)   Found out from external sources (steel producers magazines, special business overviews) and internal sources (invoices, contract specifications) that special alloyed construction steel is rather expensive type of metal;

4)   Found out that due to increase of demand on construction steel in China (it was before 2008) price on all types construction steel and its components (e.g., chemical additives) had increased.

So the shift to production of more expensive special alloy steel was driven by market and fit into general economic tendencies, i.e. there was nothing controversial in client’s explanations of increase in inventory value.

I like analytical procedures, because it is creative and intellectual task: it allows you to compare facts from different sources, and find out if client explanations are coherent and persuasive enough.

Being diplomat       

At the end of audit it is necessary to discuss major issues occurred during audit process and their implications. Generally, there are no problems in carrying out this meeting. However, there are some issues arising in case of multilocation audit. Management of subsidiary is usually rather nervous about audit outcomes and sometimes there is a substantial lag between the moment of fieldwork end and issuing of audit opinion. So to my opinion if auditors want to maintain good relations with local management it would be good to communicate some preliminary (flexible) deadlines of finalising work or find words which make client employees understand further steps and ensure your future effective cooperation.

If you have any interesting examples of your experience finalising audit please comment and give some tips.       

Auditors’ turn to needle Greece

Greece, Greece, Greece… all types of economists, political analysts, simply dilettantes, and  pseudo specialists are trying to comment on the issue of sovereign debt, Eurozone and the role of Greece in this mess. So I think it is time for us, accountants and auditors to make our pedantic and diligent (as we always do ;) contribution to process of pointing finger at Greece J

I have been recently interested in IFRS adoption in different countries and implications of this rather painful process. There are remarkable research papers dedicated to this topic, among which is study by Siqi Li (2010), who analyses impact of IFRS implementation on the cost of equity capital in Europe. I am going to use his analysis to raise some issues about Greece.

Lots of Requirements and No Enforcement

The author of research took into consideration the fact that effective implementation of IFRS depends on country’s institutional arrangements. In other words, benefits from mandatory IFRS adoption in terms of reduction in the cost of equity are expected to be sensitive to whether the new rules are effectively enforced (Li 2010). So, the scholar compared the European countries using such variables as law enforcement (utilizing studies by La Porta et al. (1998); Leuz et al. (2003)), additional disclosures and inconsistencies in standards. This interesting and appealing analysis was presented in Table 5 of his study, which is attached to this post.

Following observations could be made from this table.

First, the best “mutual friends”, Germany and Greece, are among top 4 countries, which had the greatest number of inconsistencies between local GAAP and IFRS. So here we see that Greece is not alone in it is remoteness from modern accounting practice. If you noticed, Spain is leader in terms of inconsistencies with IFRS.  

Second, considering the number of additional disclosures required per IFRS, Greece as well as Spain remain under our focus as leaders of the list. Germany occupied middle ranks. This shows that financial statements of the Greek and Spanish entities based on local GAAP were less transparent than the other European countries. Even newly accepted Poland and Czech Republic did better job in a convergence process.

Finally, according to the table the worst enforcement ratings belong to Greece, Italy, Spain, and Portugal. Does it remind you something? The problems with sovereign debt and liquidity touched exactly the same list of countries. I wonder if investment analysts use the enforcement ratings as factor to hedge investments of their clients, it would be good thing to do so.

But what can we infer from Greece’s ratings? Having the biggest number of inconsistencies and necessity of additional disclosures under IFRS the country faced huge challenge to enforce accurate financial reporting. On the other hand, low level of legal enforcement and development of institutions impeded this process.

This pattern of reasoning might leads us to the same conclusion regarding Greek tax system. As my Greek acquaintances evidence that the tax and legal system in Greece is overcomplicated and not easy to comply with. Thus, in the situation of low level of law enforcement, the efforts to evade taxes might be rather successful.  As a result this impacts tax collectibility and ability of country to meet its debt service obligations.

Quite another issue is the level of indebtedness of the Greek private businesses, particularly banks. Given the information above, can we rely on their IFRS financial statements and do they reflect actual financial position of businesses?

By the way

Kebab mix

By the way, I do not have anything against Greece or Greek people. In fact, last week I was in Greek restaurant and had fabulous dish of mixed kebab, which comprised of chicken, pork, and lamb meat as well as sheftalia… yummm, delicious! J

References

La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny. 1998. Law and finance. The Journal of Political Economy 106 (6): 1113–1155.

Leuz, C., D. Nanda, and P. Wysocki. 2003. Earnings management and investor protection: An international comparison. Journal of Financial Economics 69 (3): 505–527.

Li, S. 2010. Does Mandatory Adoption of International Financial Reporting Standards in the European Union Reduce the Cost of Equity Capital. The Accounting Review 85 (2):  607-636

Nobes, C., ed. 2001. GAAP 2001: A Survey of National Accounting Rules Benchmarked Against International Accounting Standards by Andersen, BDO, Deloitte Touche Tohmatsu, Ernst & Young, Grant Thornton, KPMG, PricewaterhouseCoopers. New York, NY: J Wiley & Sons.

Pure Audit

There were lots of fuss last month over audit business separation from the rest of consultancy. Indeed, The Economist, Accountancy Age and other business media decided to pay attention to this hot topic.

Actually, I can not say I was much surprised by this news. The idea emerged in European Commission (EC) at the end of 2010, when so called Green Paper was issued. In my overview of this discussion paper in February this year I emphasised, that EC used in their report categories like “pure audit firms” and “inspection units”.

In this post I am going to contemplate some aspects of pure audit.

No problems?

There is no problem for existence of pure audit firms except for initial stages of industry restructuring. I am sorry for Big 4 and other audit firms, but restructuring should cause painful changes in their business model.

There are some other issues of interest. For example, are brands for audit and consultancy going to have same name? What it if consultancy business would collapse or in other way would be able to damage the auditors’ reputation? Would the business be allowed mutual investment, e.g. Deloitte consultancy owns audit and audit owns consultancy? So at this point we reach the level of problems which usually attributed to banking business. The idea of banks ring-fencing has been discussed rather massively in UK this autumn and Glass-Steagall act recalled as well.

Would accounting ethical codes change accordingly I wonder? I suggest that previous projects of employee who used to work for consultancy should be checked to avoid independence problems.

Refocusing reforms

Would this reform change anything in current governance structure? Frankly saying I am in a huge doubt. This is because connection between consulting and audit segments should be totally cut to make changes relatively effective. The questions I set above should be answered by US and European policy makers.

Why not refocus our attention on shareholders? Let me speculate a bit on this subject. Shareholders are major users of auditors’ work, audit reports are addressed to them. It is obvious that shareholders (principals) hire one type of agents (auditors) to check quality of work and truthfulness of other agents (managers). The idea should be simple: shareholders should win or lose from the decision of hiring good or bad auditor. In more broad view this would include stakeholders for public interest entity.

Thus, I would propose idea of introduction mechanism according to which shareholders would be able to participate more actively in the process of selection and approving annual auditor. First, it might include creation of separate audit (governance) expenses reserve/fund, which would be used by shareholders for audits without consent of managers. Second, introduction of information systems in the process of auditor selection and dealing with audit reserve money by shareholders. Third, opportunity of minority shareholders to use resources of audit reserve and appoint additional auditors in case of any need. Yes, I honestly think that possibility of the second opinion is appropriate tool to discipline first auditors and fully appropriate if shareholder wants to have alternative view of professional. Fourth, the arrangements for other stakeholders’ participation should be made. For example, banks might want the opinion to be issued by PwC, government wants to appoint local audit firm, shareholders have more belief in KPMG’s report. You are welcome! If all of these interested (and powerful enough) parties have money to pay different auditors for their independent audit projects (not joined audit) then why not let them embark for this journey. Again, the idea is that stakeholders should bear risks of doing nothing and doing something.      

In Denial? I told you so! J

Here is small anecdote in the end. On 13^th of September UK PwC Twitter account posted following: “Best question about our performance last year wins an iPad. First read our Annual Report?”. Being cautious auditor and willing to get free iPad (probably to do iAudit J ) I read their annual report. As I did not find even a word in their strategy on how PwC UK is going to tackle coming audit regulations I twitted in response:

PwC guys ignored my question… and plans to impose regulations on audit firm rotation revealed at the end of September. I told you so! J   

Audit Procedures: Subsequent Events

The subject of subsequent events is always relevant both for accounting students and professionals. The risk is quite high due to broad definition of “adjusting event” category in IAS 10:

     “An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate.”

The assessor of ACCA F8 paper, Steve Collings, wrote good article on this issue and I am going to highlight some moments and give examples in this post

Going Concern – No Conditions

Insolvent?
Going Concern issue!

As could be noticed from definition IFRS requires that some conditions should preexist for event to be adjusting. For the purpose of provision accruals IAS 37 specifies those conditions:

• Reliable estimation of obligation;
•  Obligation (conditions) whether constructive or legal existed at year end;
• Transfers of money are expected with regards to this event.

For example, the CEO of well-known oil company gave a promise to clean any mess caused by his company on the 31^st of December. The oil spill happened on 5^th of January and as a result all expenditures required to clean the oil should be undertaken by company no matter if there is any special legislation.

Quite another situation with going concern issue. No special conditions required to acknowledge that company is not going concern anymore. The roots of this in concept of IFRS which assumes that observation of standards gives true and fair results only if company is going concern.

Examples

In my practice I had some issues related with subsequent events. For example, warehouse full of food (inventory) was burned. The issue was that it happened someday around the year end, it happened near the Siberian forest so it was difficult to access the warehouse. Finally, after thorough investigation it was found out that it happened after the year end, the matter was material so I had to disclose this issue in the notes to inventory section.

The other issue was as follows. My client has signed the management representation letter where he confirmed that he had disclosed all information, including environmental matters. Meanwhile, after a week the representation letter was signed but before the audit report signature it got known that local authorities started the investigation regarding recent air pollution committed by company. Eventually, the pollution had immaterial implications, but there are several lessons to be learned from that. First, the management representation letter should be signed the date closest to audit report, but bear in mind that this could become an issue incase of multilocation audit. It requires additional coordination efforts to make management of subsidiary sign the representation letter the date nearest to the date of audit report. Second, the procedures requiring review of outside information (newspapers, journals, databases) about the client should not be ignored, to be done thoroughly and client should be questioned in case of material issues. Third, even if the news/management answers evidently show that conditions did not exist at the year end, there is still necessity to check reason of pollution (in my example), whether there was a concealment with management involvement.

Timeline

I provide you with timeline of dates relevant for auditor in detection of events affecting audit procedures and actions to be undertaken in accordance with ISA 560.