bdo seidman los angeles

ISSUE 337 7 NOVEMBER 2003 Weisbaum heads BDO Seidman in surprise board shake-up THE ARCHITECT of US firm BDO Seidman's more than doubling of tax revenues in the last four financial years has been placed on indefinite leave as audit and assurance lines exert more influence on a new-look board. Although the firm has been dogged by regulatory probes into its tax shelter practices, the boardroom coup follows a run of new business successes, several from the Big Four. BDO Seidman chairman and chief executive and former leader of the national tax practice Denis Field has been placed on leave of absence, the firm announced on 22 October. Former vice chairman Jack Weisbaum has been elected as the new chairman of the firm. The return of Weisbaum, who had retired from the firm in June but continued to work as a consultant, was matched by other board changes designed to even the balance between tax and audit and assurance at board level. A spokesman for BDO Seidman denied that Field's leave of absence had anything to do with any action against the firm by the Internal Revenue Service (IRS). Coincidentally, within a week of Field being replaced, the head of the Chicago law firm tax shelter practice embroiled in IRS tax shelter investigations with BDO was dismissed. The law firm stated RJ Ruble's departure was unrelated "to the substance of opinions at issue in current litigation" (see page 5). A two-day meeting by the BDO senior management ending 21 October sealed the fate of Field and other executives. Board members Pam Packard, Michael Lichner, Ron Marinella, Adrian Dicker and Dennis Fusco voluntarily resigned. In addition to Weisbaum, the firm appointed four new board members: Al Ferrara, Northeast business line leader for assurance and a member of the firm's SEC (Securities and Exchange Commission) Risk Management Committee; Lee Graul, national SEC director for BDO Seidman; Jeff Kane, tax partner at BDO Seidman and former Andersen leader; and Wayne Kolins, national assurance director at BDO Seidman. The 12-person board now comprises an equal balance of five audit and assurance and five tax partners. The firm also approved a board resolution to develop amendments to the partnership agreement that will allow for increased partner participation in board elections and firm leadership. A BDO spokesman told IAB: "The changes were driven by the unprecedented shift taking place in the accounting industry over the past two years. This shift led the partnership to re-evaluate the governance of the firm. The board recognised these issues and decided to make these changes at this time." To page 2 Inside this issue... Japanese Big Four firm warns fair value accounting "frightens" many clients P3: PwC fires back at DTI TransTec report with Deloitte opinion as ammunition Fannie Mae warns of fair value errors as Freddie Mac waits for PwC approval P4: Firms "contorted" law, Big Four accountant testifies at US Senate tax shelter hearing ...but Hamersley allegations over tax shelters "without merit", says KPMG P5: BDO Seidman fights Mandaric tax shelter lawsuit as battle with IRS continues P6: Mercer & Hole beats larger rivals in UK website survey P7: Rushed approach to implementing Combined Code must be avoided, warns KPMG P8: News in brief P9: Numerica eyes internal audit for growth with Nelson at the helm European networks warn EU of competition dangers in audit market P11: IAB survey: Australia P15: Industry snapshot P2: E&Y takes second place in Oz as firms fear CLERP reforms ERNST & YOUNG'S (E&Y's) integration with former Arthur Andersen offices in Australia has propelled the firm to second place in the country as the remainder of the Big Four struggle to achieve any growth. Underlying growth of 2.5 percent among firms (excluding E&Y) belies a stronger year for many of the mid tier. Tony Harrington, chief executive at Australia's biggest fee earner PricewaterhouseCoopers (with a 26.9 percent market share), told IAB the firm had seen minimal or no growth in some divisions because of the reassessment by companies and their boards as to which organisations should provide certain kinds of services. Australian firms are frantically lobbying against many of the proposed accounting reforms contained in CLERP 9. With plans to force directors to justify employing auditors for non-audit services, stringent cooling-off periods for partners at firms and a new standard of independence test, the reforms are set to shake up the market. With a large head of steam behind the corporate governance reforms, some insiders tell IAB firms are expecting the worst. Tom Ravlic See survey on pages 11 to 14. BIG FOUR MARKET SHARE IN AUSTRALIA 2003 Other 23% PwC 27% Deloitte 15% KPMG Australia 16% E&Y 19% www.lafferty.com NEWS Japanese Big Four firm warns fair value accounting “frightens” many clients A JAPANESE Big Four firm has supported the local accounting regulator's opposition to disclosing insurance companies' assets and liabilities at fair value. The firm warned that fair value accounting is fraught with dangers and that many of the firm's life insurer clients could be among the hardest hit by the introduction of fair value accounting. The Accounting Standards Board of Japan (ASBJ) last month objected to Exposure Draft 5, Insurance Contracts, issued by the International Accounting Standards Board (IASB) in July to require insurance companies to disclose the fair value of liabilities and assets. Comments on the proposals were due by 31 October. The ASBJ is concerned about the timing of the proposed fair value disclosure of insurance liabilities and assets, which would be required from 31 December 2006. The IASB's proposals are two pronged: to achieve consistent accounting for insurance contracts and to introduce fair value accounting in the sector.The proposals are the first phase of the project and the regulator wants to hammer out the proper calculation methods during the period leading up to the adoption of the new standard. "From the perspective of the ASBJ, the chief problem is that the IASB has yet to define precisely how fair value of insurance assets and liabilities should be calculated. Imposing a requirement for fair value disclosure without mapping out measurement rules is likely to cause turmoil among both life insurance companies and investors," a senior ASBJ board member told IAB. One underlying worry in the industry is that the adoption of fair value disclosure may cause insurance liabilities to appear larger when interest rates are low because a lower discount rate would be used to calculate the present value of those obligations. The ASBJ official added that the ASBJ has dropped proposals calling for a delay in the disclosure requirement until a clear set of rules on fair value measurement can be finalised. "Quite frankly, we don't really want any rules at all - we want the whole fair value disclosure requirement proposal dropped, full stop." His sentiments were echoed by a senior official at one of the Big Four: "The principle of fair value disclosure is fraught with pitfalls from an accountant's point of view. It also clearly frightens many of our clients, particularly life insurers, who would be hardest hit by such measures." Japanese insurance companies are not required to follow international accounting standards, but a new set of international rules would put pressure on Japan to rethink its own standards. The dissenting opinion of the ASBJ echoes mounting opposition to fair value disclosure in the insurance industry in the US, Europe and Japan. The fundamental stance of insurance companies is that fair value accounting is inappropriate to the long-term investment horizon that they adopt to match their liabilities. "The IASB proposal is extremely unpopular with everyone, not just us," noted the official. Andrew Mollet Weisbaum heads BDO Seidman in surprise board shake-up — from front page The US firm grew revenues by 65 percent in the two years to June 2000 on the back of dramatic growth in tax fees. Five years ago, half of BDO fees were from audit and assurance, with 28 percent from tax. Two years later, in the year to June 2000, the split was 37 percent audit and assurance and 43 percent tax. The growth in tax fees helped Field become chief executive in January 2000 after leading the firm's tax consulting practice. BDO Seidman's tax solutions group generated revenues exceeding $100 million in fiscal year 2000, up from $15 million in the previous period and against a $75 million internal target, according to reports. A BDO spokesman refused to confirm or deny the figures and said: "BDO Seidman does not discuss its finances in the media." While heading the tax practice, Field made a partner presentation in 1999 at which the IRS alleges he said: "One word sums up the strategy of the tax business line. Money!" The firm is understood to have generated as much profit from a $1 million tax-shelter fee as from $5 million of hourly billings for traditional accounting work. The firm's revenues slipped to $353 million in the year to June 2002 from $420 million in the previous period and $412 million to June 2000. However, the slip was partially due to the sale of its technology practice, which had revenues of approximately $30 million. Despite the IRS probe into the firm, it has won several new audit mandates in the last year. In the quarter to September, BDO had 12 net audit wins, with three-quarters from the Big Four. The firm outperformed mid tier rivals Grant Thornton and Baker Tilly, while the Big Four all recorded net losses, except KPMG with two net wins. BDO's net US audit wins of 32 in the 12 months to September should be positive for revenues. The firm tells IAB that the figures to June 2003 will be reported with the BDO International figures before the end of this year. Last year, BDO International revealed global annual fees of $2,395 million to September 2002, compared to $2,203 million in 2001. At the time, BDO International chief executive Frans Samyn said: "The European region grew by three percent, whereas the Americas faced unfavourable economic conditions and declining currency values compared to the euro." Audit/accounting and tax assignments continue to contribute the highest proportion of fee income, at 58 percent and 23 percent of the total, respectively. Melanie Dayasena/Iain Martin BDO SEIDMAN REVENUE GROWTH 450 400 350 300 $m 250 200 150 100 50 0 Year to June 1998 Year to June 1999 Year to June 2000 Year to June 2001 Year to June 2002 www.lafferty.com 7 NOVEMBER 2003 – PAGE 2 NEWS PwC fires back at DTI TransTec report with Deloitte opinion as ammunition PRICEWATERHOUSECOOPERS (PwC) has vehemently attacked criticisms levelled against the firm in a Department of Trade and Industry (DTI) report into its audit work at TransTec, claiming the conclusions are not supported by the evidence. Last month's publication of the final DTI report into the collapse of engineering company TransTec in December 1999 concluded it was "an illustration of a dysfunctional and passive board of directors. It is also a fascinating example of audit failure." The report identified an unfortunate circle in which the auditors sought to rely on the executives, while non-executives relied on the auditors. The report is critical of Coopers & Lybrand - now part of PwC and appointed TransTec auditor in October 1992 as a replacement for BDO Binder Hamlyn - for not having obtained sufficient evidence to "corroborate the assertions made to them by the executive directors; it was incumbent upon them to do so". The report - conducted by RSM Robson Rhodes lead partner Hugh Aldous and Roger Kaye QC, the same team appointed by the DTI in 1994 to investigate insider dealing of Anglia Television Group shares - states: "On auditing, the message from this inquiry (which is not an inquiry into auditing standards) is not particularly that the auditors were lied to, it is that auditing by conversations with executives and representations requested from directors is not auditing. Shareholders may reasonably assume that auditors have seen appropriate and sufficient evidence on material items to satisfy themselves that the accounts are not materially misstated or misleading." The company reported pre-tax profits of £13.7 million ($23 million) for 1998. However, this included an £18.7 million exceptional gain on the sale of two businesses. The report states: "Set against this were exceptional write-offs of £15.8 million, including £5.3 million which was said to be a write-off of tooling. In fact, this sum represented part of the payments made in settlement of the Ford claim. A further £1.9 million of the compensation payable to Ford was capitalised in the accounts as 'tooling'. The remaining £3.6 million was not provided for at all. It was largely through the sale of businesses that TransTec (narrowly) met the terms of its banking coventants." TransTec was founded by former paymaster general Geoffrey Robinson, who was also criticised in the report. Robinson was chairman and chief executive of TransTec from 1991 to November 1994 and then remained as non-executive chairman until May 1997. The company went into receivership after it became clear payments to meet a £11 million claim against it by Ford could not be maintained. However, the Ford liability was not shown in the company's accounts, and its lenders were not aware of it. The report stated: "Robinson's dominance of the group as executive chairman was not conducive to certain aspects of sound management and governance. The finance function, for example, was not strong. Other board members noted 'uncomfortable differences' in the management accounts, which Mr Robinson appears to have tolerated." PwC's response to the report was swift and to the point: "PricewaterhouseCoopers profoundly disagrees with and rejects the criticisms of it made by the inspectors. These criticisms do not reflect a proper construction of auditing standards, nor are they supported by the evidence available to the inspectors. "Furthermore, PricewaterhouseCoopers instructed Deloitte, a leading firm of chartered accountants, to provide its independent opinion on the inspectors' criticisms which are embodied in the inspectors' report. Deloitte reviewed the relevant audit work and concluded: "'We fail to see how the allegations of deficiencies in PricewaterhouseCoopers' audit work can be sustained. In our view, the criticisms made by the inspectors are misconceived and misdirected and should be withdrawn.'" Iain Martin Note: Hugh Aldous is a former managing partner of RSM Robson Rhodes and a former member of the Competition Commission. He has been involved in large commercial cases such as BCCI and Grupo Torras. Fannie Mae warns of fair value errors as Freddie Mac waits for PwC approval AS US mortgage financier Freddie Mac prepares to unveil auditor PricewaterhouseCoopers' (PwC's) audited results for 2002 after uncovering a $4.5 billion earnings understatement, its cousin Fannie Mae - the largest non-bank financial services company in the world - last month revealed its internal auditors detected fair value accounting "errors" for the latest quarter. An independent report commissioned by the Freddie Mac board found top management ignored accounting rules to understate earnings. Freddie Mac is working with auditor PwC to restate earnings for the three years to 2002 in November, although a senior company official was reported last month as suggesting this date could slip. Freddie Mac peer Fannie Mae had been quick to reassure investors that the derivative transactions used by Freddie Mac to smooth earnings - as disclosed in the Botts report were not employed by Fannie Mae. Mae chief executive Frank Raines said that internal controls were in place to prevent this. Last month, Mae informed auditor of 35 years KPMG that its internal accountants had detected accounting errors. Jayne Shontell, Fannie Mae senior vice president of investor relations, said the company had filed a Form 8-K/A with the Securities and Exchange Commission on 29 October to correct "computational errors" in its third- quarter figures. Shontell said the error was linked to the implementation of FAS 149, which was issued in April and requires Fannie Mae to mark to market the majority of mortgage commitments made, which were previously not part of its financial statements. The new requirement was effective from 1 July. "In adopting a new accounting standard in a short period of time, Fannie Mae had to put in place a system and process to capture all open commitments and mark them to market. To implement this standard, Fannie Mae utilised information from its internal, automated systems in conjunction with spreadsheets that made additional calculations necessary under the new rule. Fannie Mae is already in the process of updating its automated systems to account for the mortgage commitments under FAS 149." Iain Martin 7 NOVEMBER 2003 – PAGE 3 www.lafferty.com TAX SHELTERS Firms “contorted” law, Big Four accountant testifies at US Senate tax shelter hearing SOME OF the biggest US accounting firms were accused of knowingly creating illegal tax shelters and allowing their professional standards to slip at a US Senate hearing last month. Allegations of a "rock star" culture and a fees-before-principles ethos are set to cause more damage to firms embroiled in ongoing probes into tax shelter practices. At a US Senate Committee on Finance hearing on 21 October, Internal Revenue Service (IRS) director Michael Brostek said a database of shelter transactions disclosed to or discovered by the IRS indicated a potential tax loss of $33 billion as of September, the majority occurring in the last decade. Brostek outlined the enormous task facing the regulator in tracking down abusive tax shelter promoters. He said that in May 2002, the IRS planned seven promoter investigations for fiscal year 2003. "As of June 2003, the IRS had 98 promoter investigations approved." With each investigation taking possibly thousands of hours and more being litigated, despite the almost quadrupling of staff to be dedicated to shelter work in the two years to fiscal year 2004, the IRS faces a struggle. He said that as investigations proceed and more court decisions are reached, "how much and how soon such a drop [in staffing levels] may occur in abusive cases is uncertain". As regulators outlined an increased crackdown on abusive shelters, two accountants revealed a morass of conflicts of interests at some firms during the 1990s and outright illegality and deception in some cases. Former Touche Ross (now part of Deloitte) tax manager and partner Robert Lally told the hearing: "In my former career with Touche Ross, in my role as a practice unit manager, head of the Hartford office of the tax practice, or in my role as national director of the firm's insurance practice … if a position could not stand the light of day, it was not taken. This was not an 'audit lottery' standard (the position is OK because they only look at one percent of returns). This was not a standard based on undisclosed facts or side agreements. This standard assumed facts were known. The participants were honourable. The underlying books and records were accurate… If lost at audit level, one could write a thoughtful protest for appeals and have something meaningful to say." Lally warned of a fall in standards prompted by greed. He said: "I went 16 years in public accounting and virtually never saw a partner leave other than from death or normal retirement. After 1990, all I saw were partner transactions. Careers, to borrow a phrase, became nasty, brutish and short. "Partner pay increased dramatically in the '90s. No longer were partners in accounting firms the honoured and tenured professors of our profession. We became rock stars, with aspirations of seven-figure compensation. Can it be any wonder that standards fell?" Lally warned that audit partners too were not "immune to sales". He claimed that the proliferation of special-purpose entities (SPEs) in the late 1990s - vehicles that lay behind much of the fraud at Enron - "can probably be linked to creative audit efforts to engineer balance sheets. I suspect that for each SPE one finds on a corporate balance sheet, there was a six-figure consulting fee from the outside accountants to create it and to design its reporting footprint". Lally welcomed the IRS moves to obtain client lists from tax advisers as a means to "raise the realistic spectre of audit" and encourage clients to be more thoughtful. KPMG mergers and acquisitions senior manager Mike Hamersley also testified. He said that after refusing to endorse or participate in what he believed was illegal conduct in October 2002 - and communicating that fact to federal investigators - he was placed and is still on administrative leave of absence by the firm. He said that, as a result of his treatment by the firm and "upon learning that certain KPMG partners had maliciously disseminated false statements about me in an effort to discredit me, I filed a lawsuit against KPMG and certain of its partners [on 23 June]". He claimed his allegations illustrated "one of the most significant and harmful 'collateral problems' that arise in connection with the promotion of abusive corporate tax shelters by [a] public accounting firm". Hamersley - who said he joined the firm in 1998 and was based in Los Angeles, providing transactional planning advice and review with respect to the federal income tax consequences of deals and corporate restructurings - said that most tax shelters involve "some contortion of the law". He added: "Tax shelter promoters often misrepresent even gross contortions of the law as a 'loophole' when, in fact, a reasonably thorough and intellectually honest evaluation of most such 'plays' generally yields a conclusion that Congress clearly never intended the tax benefits purported to be derived from the tax shelter." Hamersley accused firms of outright abuse. He said: "The most abusive tax shelters of recent years require more than a distortion of the law to be viable. These abusive tax shelters also require a distortion or concealment of facts. They require not only intellectual dishonesty, but also deception, secrecy and even conspiracy. The reason for such fact distortion or concealment is simple: the promoters know that these transactions could never survive the light of day in court." Hamersley concluded that changes to the law designed to eliminate tax shelter abuses would have "no real or lasting impact" on the level of abuse as long as promoters and taxpayers distort and conceal the facts. "The IRS can hardly be expected to hit what it cannot see." However, he warned against "throwing the baby out with the bath water" by unduly punishing legitimate business transactions. Deloitte was unavailable for comment as IAB went to press. Iain Martin ...but Hamersley allegations over tax shelters “without merit”, says KPMG KPMG (US) has strongly countered mergers and acquisitions senior manager Mike Hamersley's tax shelter testimony against the firm (see above) as a separate court ruling goes in KPMG's favour. KPMG told IAB that allegations of abusive activity at KPMG by Hamersley were "simply wrong" and said that he had failed to tell the committee that "he had demanded several million dollars from KPMG prior to bringing his baseless suit against the firm". The spokesman said: "His posture of standing on principle against a culture of greed is sheer hypocrisy." KPMG claimed that Hamersley was not involved in the provision of tax services related to corporate tax strategies and was "simply not qualified to reach the purely personal opinions he espouses about alleged improper or so-called 'abusive' activity". To facing page www.lafferty.com 7 NOVEMBER 2003 – PAGE 4 TAX SHELTERS BDO Seidman fights Mandaric tax shelter lawsuit as battle with IRS continues ONE OF the US accounting firms involved in an ongoing regulatory investigation into abusive tax shelters has been landed with another client lawsuit over its tax advice. Top 20 US firm BDO Seidman faces allegations of fraud and misrepresentation from UK football club Portsmouth FC chairman Milan Mandaric over tax advice that generated tax losses of almost $100 million. The allegations follow a continuing audit of Mandaric's tax returns by the Internal Revenue Service (IRS). The lawsuit seeks compensation for losses and costs as well as punitive damages. However, a spokesman for BDO Seidman said the Mandaric lawsuit was without merit. Mandaric's suit is believed to be the second brought by a client against the firm. The client lawsuits come as the accounting firm fights a standoff with the US authorities over tax shelters. In the past 18 months, the US authorities have filed lawsuits against BDO Seidman over alleged marketing of illegal tax shelters and to obtain confidential client lists associated with the shelters. On 24 July, the US Court of Appeals for the Seventh Circuit ruled against a group of unidentified BDO Seidman clients fighting to protect their identities. The group is now believed to be considering further action. The US tax code requires tax shelter promoters to register each tax shelter with the IRS before offering it for sale. It also requires promoters and sellers of certain tax shelters to keep lists of all investors in each shelter, and to make that list available to the IRS on ten days' notice. Promoters and sellers that do not register the tax shelter or maintain or supply the IRS with the list of investors may be liable for penalties. The tax code also imposes penalties for promoting abusive tax shelters. The US Justice Department filed a suit against BDO Seidman in July 2002 at the federal court in Chicago to enforce summonses issued to the firm for information relating to its marketing of tax shelters since 1995. The court papers sought to obtain information on tax shelter transactions that the government believed BDO Seidman had marketed. BDO continues to deny promoting such transactions. At the time, Eileen J O'Connor, assistant attorney general for the Justice Department's Tax Division, said: "Certain tax shelter transactions are devised to exploit the complexity of the tax law to claim benefits Congress never intended. The Justice Department is working with the IRS in its efforts to root out and shut down abusive tax shelter promotions." The IRS demanded that BDO Seidman should disclose its tax shelter dealings and clients' names. However, the firm argued that the IRS was seeking privileged information and defended the work it had undertaken. IRS commissioner Charles O Rossotti said the IRS action showed that it would use all the necessary enforcement authority available to obtain information from promoters of tax shelters. "It is unacceptable for those holding themselves out as tax professionals providing legitimate tax advice to refuse to comply with legal disclosure requirements," he said. In October 2002, US District Senior Judge Milton Shadur in Chicago rejected BDO's claims of privilege and ordered the firm to disclose its clients' names and other confidential documents. In response, around 100 of BDO Seidman clients asked the US Supreme Court in August 2003 to overturn a controversial finding by a federal Appellate Court restricting accounting firms from using claims of client privilege to protect the identities of investors seeking tax shelter advice. However, the US Court of Appeals for the Seventh Circuit in Chicago declined to rehear the case. The Court found that the investors did not establish "that a confidential communication will be disclosed if their identities are revealed in response to the summons" and that the investors' "participation in potentially abusive To page 10 Hamersley allegations over tax shelters “without merit”, says KPMG — from facing page The firm said that the issues raised by Hamersley were investigated and reviewed thoroughly by "more experienced and expert tax and audit personnel at KPMG". The spokesman said: "In each and every case, Hamersley's allegations were found to be without merit and his analysis to be flawed." Last month's Senate Committee testimony followed an order in September from US District Judge Kenneth Ryskamp ruling that Peter Loftin was barred under securities law from alleging racketeering against KPMG in this instance, and that claims of fraud and negligent misrepresentation were premature until Loftin settles with the Internal Revnue Service (IRS) and any actual injury can be determined. Loftin sued KPMG and First Union National Bank (now known as Wachovia Corp) in federal court in Florida in December, and sought at least $3.9 million in fees and compensation. Loftin was founder and chairman of privately held BTI Telecom Corp. He sued KPMG and First Union National Bank - now known as Wachovia Corp - on 30 December. The racketeering and fraud complaint alleges that KPMG and First Union induced him into sinking $30 million into illegal, unregistered tax shelters that have since become the focus of an IRS fraud crackdown. KPMG, also accused of malpractice, refutes the claims. Loftin sold his stake in BTI subsidiary FiberSouth to BTI for $30 million in 1997. He claims representatives of the bank and the accountant persuaded him to invest the money in a "no lose" tax avoidance strategy. His income tax return for 1997, prepared by KPMG, listed $27.4 million in capital losses from the tax strategy, he claims. In October 2000, the IRS audited Loftin's 1997 tax return. Loftin alleges his accountants and bankers failed to disclose to him that the tax shelters were "likely to be found improper by the IRS" and that KPMG had failed to register them with IRS as required by law. Law firm Sidley Austin Brown & Wood are also named as defendants in the suit. The Loftin case is among at least ten brought by individuals against KPMG - alleging fraud and malpractice among other claims - since the beginning of last year as tax shelter strategies are reviewed by the IRS. KPMG continues to defend its advice and resist attempts by the IRS to obtain client names. A filing by special master Patrick Attridge on 10 October concerning KPMG's client privilege defence was largely supportive of the firm's decision to deny IRS requests for many documents, the spokesman said. The spokesman told IAB that it understands times have changed and that the tax rules are changing too. "Our tax practice is continually evolving to meet changing circumstances. We have enhanced our professional training programmes and intensified quality control, and have also restructured and reorganised our tax groups to reflect these changes." Iain Martin 7 NOVEMBER 2003 – PAGE 5 www.lafferty.com NEWS Mercer & Hole beats larger rivals in UK website survey A UK accounting firm with less than £10 million ($16.8 million) of annual fees has beaten mid tier players such as RSM Robson Rhodes, Mazars and Grant Thornton to win the accolade of "best accountancy firm website" in a recent survey. The survey illustrates the growing attention firms are devoting to the web as a means of attracting new staff or clients. It also shows the degree to which the web can level the playing field between firms. Website development and management services company Intendance's survey was targeted at the mid tier and smaller firms in the London-based accounting market. Mercer & Hole, a UK firm with fees of £8.62 million and 15 partners, achieved the highest score of 87 percent in the survey for the content, design and usability of its website services. Senior partner at Mercer & Hole Howard Wilkinson said the content and usability of its website was a priority in serving individuals and businesses. "We are delighted that our work to develop a modern, informative site has been recognised in this way. The site was developed as part of a rebranding exercise for Mercer & Hole, as a key communications tool," he said. Wilkinson highlighted the important role of the website in promoting the firm's services overseas following its membership of The International Accounting Group (TIAG) network. Mercer & Hole - despite being outside the top 30 UK accounting firms by revenues - beat off competition from most of the UK's largest accounting firms. RSM Robson Rhodes, more than seven times as big with annual fees of £65.8 million, was pipped into second place with a score of 86 percent. The tie for third place - with Hacker Young and Mazars both scoring 84 percent - again illustrated that building an effective website is not solely driven by how much is invested in the project. RSM Robson Rhodes believes its website highlights its expertise in various sectors and the range of services it is able to offer clients. Geoff Field, financial partner at RSM and responsible for IT services, said: "Our website aims to anticipate our clients' requirements to establish what issues they are facing and to offer suitable solutions." RSM manages its site internally to meet client expectations of up-to-date and relevant content. "In order to address this, the site is internally managed, which means that we have maximum level of control with minimum costs. We have dedicated resources responsible for the maintenance and strategic planning of the website," Field explained. RSM's website provides an online platform for prospective candidates wanting to join the firm. "We also benefit greatly from the careers and graduate recruitment sections that we have on the site. There is a lot of interest in both working for and training with our firm, which is very encouraging given our ambitious growth plans for the future," remarked Field. Joint third-place winner Hacker Young scored highly for its site design. Howard Spencer, chairman of Hacker Young, said: "We have always taken it [the website] very seriously and have had no hesitation about investing resources into it since its very inception." Hacker Young has increased the amount of business generated via its website, the firm claims.The firm also believes the site has acted as an effective recruitment tool. "Everyone knows the importance of having a website as a shop window to enhance corporate image and bring added credibility, but there are many other benefits too," said Spencer. Baker Tilly came fifth overall in the survey, but was rated best for website design with a 90 percent score. Richard Spooner, partner and head of IT consulting at Baker Tilly, said the firm's website aims to put the needs of its clients first in terms of usability and content. "We keep abreast of industry developments and usability standards and incorporate them into the website wherever we can so that the site is constantly as effective as it can be," he commented. Baker Tilly developed its website between August and December 2001 and then between March and April 2002 as a result of its merger with HLB Kidsons. "Since the relaunch, our monthly traffic has grown from around 4,000 unique visitors per month to over 10,000 last month," said Spooner. The firm also plans to further develop its website to make it accessible to people with disabilities. Baker Tilly claims its website is an efficient means of communication with its clients and as a recruitment tool. "We save considerable time and money in recruitment costs by allowing graduates to apply online for positions with the firm," said Spooner. MacIntyre Hudson ranked joint sixth in the survey, scoring highest for design and usability with scores of 93 percent. Vicky Smith, central marketing manager, said: "Intendance scored us highly on design and usability, the expertise for which we bought in from an outside agency that had done previous work in other sectors which impressed us," she said. London-based firm Blick Rothenberg - a member firm of BKR International - achieved the highest score of 93 percent for the content of its website. RSM Robson Rhodes, MacIntyre Hudson and KLSA all scored highest for usability with a 93 percent score and Alliotts was the top scorer for website design with 98 percent. James Tuke of Intendance emphasised the need for businesses to keep up to date with advancements in web technology. "Businesses that don't develop an effective web presence will be left behind without ways to service clients better and certainly losing potential new clients. Our findings again show that there is no strong correlation between size of firm and quality of website. Success depends on how wisely you spend your website budget," he remarked. Intendance surveyed 86 active websites among 100 of the largest London-based accountancy firms, excluding the Big Four, based on a listing from the Institute of Chartered Accountants in England & Wales (ICAEW). Melanie Dayasena ACCOUNTANCY FIRM WEBSITES 2003 Number of London partners 5 36 21 26 57 4 5 6 4 9 Content (%) 82 75 86 73 80 23 16 20 11 14 Design Usability (%) (%) 93 95 95 93 90 45 43 58 48 45 88 93 70 90 80 45 48 28 48 43 Total (%) 87 86 84 84 83 36 33 33 32 32 Rank Firm name 1 2 3 3 5 82 83 83 85 85 Mercer & Hole RSM Robson Rhodes Hacker Young Mazars Baker Tilly Nyman, Linden & Co Leigh Carr Sinclairs Leigh Sorene Cooper Murray Sedley Richard Laurence Voulters Source: Intendance Ltd www.lafferty.com 7 NOVEMBER 2003 – PAGE 6 NEWS Rushed approach to implementing Combined Code must be avoided, warns KPMG Less than half of company executives believe their board regularly reviews reports on risk management and only 32 percent have a rigorous independent process for selecting non-executive directors (NEDs), a mid tier firm survey warned as the deadline for the Combined Code loomed. The Combined Code of corporate governance comes into effect for companies with reporting years on or after 1 November but one-third of boards are still yet to review their performance at least annually, according to a survey by RSM Robson Rhodes in cooperation with The London Stock Exchange. However, director of corporate governance at KPMG Timothy Copnell argued that the timing of the survey might have been a little premature, since the Combined Code was released after the survey was completed. "The Combined Code didn't actually come out until 23 July, so they are surveying something and drawing conclusions from responses before the Code came out…" he noted. Just under one-third (32 percent) of respondents agreed that they have rigorous, independent procedures in place for the appointment of NEDs. Derek Higgs told delegates at the Institute of Chartered Accountants in England & Wales (ICAEW) annual conference in July that only four percent of NEDs had an interview before their appointment. Last month, a High Court judge allowed Equitable Life to pursue a £3.3 billion ($5.5 billion) claim for negligence and breach of duty against nine former NEDs. Copnell argued that cases like this highlight the importance of rigorous appointment procedures for selecting NEDs. "As you have seen of recent days, [with] the issues with Equitable Life and other organisations, there is a significant amount of personal risk in becoming a NED and therefore it is a two-way process. The board needs to ensure this is the right man for the job, fulfils all the various skill sets and has the right chemistry with the other board members," he said. Copnell was not surprised by the low statistics for board review, performance review and appointment procedures for NEDs. "It doesn't surprise me that companies haven't yet got to grips on those issues," he said. However, he believes companies should take their time to implement procedures that comply with the Code rather than temporarily trying to meet the Code's requirements. "I think it is very important that companies take these points seriously and take time to implement proper procedures, [as it is] much better to have a fully transparent rigorous appointment procedure in place…" he remarked. Over half of respondents (59 percent) believe their board has the right blend of experience to take the company forward successfully. However, one-third of respondents disagreed that their board reviews its collective performance annually and 31 percent disagreed that their board has a rigorous process in place for selecting NEDs. Copnell found these responses inconsistent and he argued that these points are very closely connected. "How do you ensure that you have the right blend of experience to take the company forward successfully unless you appraise your current board, identify the gaps effectively and fill those gaps either through professional development or recruiting new members for the board through rigorous processes?" he remarked. Forty-four percent of executives felt regular reviewing of risk management reports was the area that required the most improvement. The release of the Turnbull report in 1999, followed by the original Combined Code in 2000, tackled the issue of regular reviews of risk management. "UK companies that comply with the current Combined Code are required to state in their accounts whether the board receives regular reviews from management of the risk management issues.And they all do," said Copnell. However, he pointed out that respondents could be asking for more improvement in this area rather than stating that reviews are nonexistent. "What I can only assume is that they are saying there is more work to be done and the regular reviews they are receiving could be better, could be more detailed, that they could receive them more often or that they could cover more areas," he said. Less than one-quarter (24 percent) of respondents agreed that their boards review key human resources measures such as employee motivation and satisfaction. Copnell argued that boards should be aware of human resources issues that pose a significant risk to the development of the company. "I think it is crucial that the board reviews the main risks to the business and those risks will change from organisation to organisation, and in certain organisations the loss of key individuals is a significant risk," he said. Board remuneration is high on the agenda of institutional shareholders, especially for FTSE 100 and 250 companies. Sixty-nine percent of FTSE 250 companies fully agree that their board has incentive schemes in place that only provide rewards for outstanding performance, compared with 64 percent in the FTSE 100 and 53 percent for smaller listed companies. Copnell concluded that boards must take a considered approach in meeting the requirements of the Combined Code and that they should refrain from attempting to "tick all the boxes on day one". "I think that can weaken the Code because it is about getting solutions that fit with the spirit of the Code, which need to be considered, long term and sustainable…" he said. Melanie Dayasena DIRECTORS' BOARDROOM ASSESSMENT Principal strengths (%) Discussing matters fully before taking major decisions Having clarity on key business risks Discussing key performance measures regularly Ensuring performance is in line with expectations 74 72 67 65 Areas for improvement (%) Monitoring social responsibility performance Reviewing key HR measures Carefully reviewing executive directors' performance against set criteria Identifying/communicating key performance drivers Annually reviewing collective performance Regularly reviewing risk management reports, with follow up 14 24 39 40 43 44 Source: RSM Robson Rhodes/The London Stock Exchange 7 NOVEMBER 2003 – PAGE 7 www.lafferty.com NEWS ENTERPRISE NETWORK and GMN International formed a strategic alliance, with effect from 1 October, creating a global top-20 accounting network with 110 member firms in 38 countries. The two networks will operate as GMN Enterprise and both will benefit from the exchange of technical resources, staff members and client referrals on a global scale. Chief executive of Enterprise Network Troy Waugh said: "This new relationship will add tremendous value to our Enterprise Network members whose clients have increasing demands for international services. We are excited about the global opportunities the GMN International group brings to our members and their clients." Australian chairman of GMN International Dennis Robertson said the partnership would pool the resources and expertise of both networks to the benefit of its clients and members. "We are not seeking to be a small version of the Big Four." Enterprise Network consists of 60 North American firms with approximately 100 office locations. GMN International currently has 51 participating firms in 37 countries with 250 partners and 1,700 professional staff. GMN Enterprise will be led by Waugh, Enterprise president Kevin Poppen and Randi Rosen, international director of GMN, who will facilitate the international business side. BOB LINDQUIST, the internationally recognised chartered accountant who first coined the phrase "forensic accounting " and pioneered work in that field, has returned to his Canadian roots by forming an alliance with Grant Thornton LLP, the fifth-largest accounting firm in Canada. He had been working with PricewaterhouseCoopers in Washington since 1993. Lindquist joined Grant Thornton as senior forensic counsel in September. He also continues to serve as senior managing director of Citigate Global Intelligence & Security (CGIS), an international business intelligence, corporate investigations and business controls firm with headquarters in New York. Ken Froese, service line leader for the Grant Thornton forensic team, said he was proud to be able "to leverage Lindquist's extensive knowledge and worldwide experience here in Canada." For his part, Lindquist said he was "absolutely delighted to re-establish a presence in Toronto knowing that Ken and his team will provide me with the intellectual infrastructure to serve our Canadian clients. Forming this alliance is clearly a win-win situation for both our teams." THE FORMER head of the tax and legal department at Big Four firm KPMG, Danie Folscher, has left to become head of the Western Cape operations with PricewaterhouseCoopers (PwC). Folscher was replaced at KPMG by Allan Field. Originally from PwC in Cape Town, Folscher joined Arthur Andersen in Johannesburg and became head of the tax and legal department. He kept that title when KPMG merged with Andersen in May 2002. CANADIAN BIG FOUR firms are among the backers of Paul Martin's bid to be the next Liberal leader and prime minister. Martin is expected to be named as Jean Chrétien's successor at a convention on 15 November. Martin has received over C$10 million ($7.5 million) in funds, according to a filing last month disclosing C$1.67 million in new contributions. The filing reveals a C$100,000 donation from Harry Steele, head of Newfoundland Capital Corp, along with donations from KPMG and PricewaterhouseCoopers of C$100,000. TENON GROUP boosted the number of non-executive directors on its board by making its third appointment, of Mark Struckett, on 28 October. Struckett has acted as group chief executive of DTZ Holdings PLC since 1995. Tenon chief executive Andy Raynor believes Struckett has first-hand experience in a business very similar to Tenon. "Mark's experience is directly relevant to Tenon. He has been intimately involved in the transfer of partnership structures to the PLC environment and in the expansion of business in a professional services sector," said Raynor. Tenon does not plan expanding capabilities in transferring partnerships to PLC status, following recent acquisitions. "But we are a business that very recently was in a partnership structure and outside a public environment, and we are now in a business that is in a public environment and we want to make sure that we develop that in the best possible way," said Raynor. Tenon now has three non-executive directors, excluding the chairman, and Raynor is confident that the group has the required balance on its board.. BKR INTERNATIONAL'S Greek member, BKR Protypos Elegtiki (based in Athens), has been appointed the official auditor of the Hellenic Olympic Committee, the accounting network announced on 27 October. The Committee is planning and organising the 2004 Olympic Games in Athens. Christodoulos Damianou, vice chairman of BKR's European Board, said: "It is with great honour that we see a member of our organisation receiving the highest recognition for a significant event such as the Olympic Games. This appointment proves the high-quality standards represented by the members of our association." BKR has also added a new member in the Asia-Pacific region with Cleland Hancox. The firm was founded in 1988, is ranked among the top ten in Hamilton, New Zealand, and consists of three partners and 11 staff. The firm's services include tax, audit, business advisory and compilation services. Local and regional clients are in industries including transport and contracting, retail, import/wholesale, and thoroughbred horse breeding and racing. The firm also offers specialised services in financial planning, dispute resolution (arbitration and mediation) and agriculture accounting. BKR has 22 independent firms in the AsiaPacific region (including four firms in mainland China), a rise of almost 50 percent since 2001, stated the network. TWO BIG FOUR firms from the US and Canada have collaborated to help produce draft guidance for executives on employing IT to meet new rules on internal controls in financial reporting. The IT Governance Institute, a US body aimed at advising executives on IT matters, published the joint publication on 31 October. The discussion paper IT Control Objectives for Sarbanes-Oxley: The Importance of IT in the Design, Implementation and Sustainability of Internal Control over Disclosure and Financial Reporting was authored by PricewaterhouseCoopers (US) accountant Christopher Fox and Deloitte (Canada) accountant Paul Zonneveld. A final document is expected by mid December. ERNST & YOUNG (E&Y) was awarded the "Best Management of Knowledge" accolade at the Managing Partners' Forum (MPF) 2003 European Practice Management Awards on 15 October. E&Y received recognition for its integrated knowledge of contacts, market and environmental trends into its planning and service delivery. Shirley Jackson, UK director of knowledge management at E&Y, said: "Today, too many knowledge management concepts are academic and not business led; most knowledge management initiatives are dominated by technology and result in extremely impressive tools that no one uses. In contrast, all Ernst & Young's knowledge management initiatives are practical." www.lafferty.com 7 NOVEMBER 2003 – PAGE 8 NEWS Numerica eyes internal audit for growth with Nelson at the helm THE UK consolidator that unveiled a profit warning in September has targeted internal audit and risk management as a sector ripe for growth. Numerica recently appointed former president of the Institute of Internal Auditors - UK and Ireland, Richard Nelson, to help lead its drive into the commercial market. He assumed the role of director of risk and assurance services in September. Nelson was approached by a Numerica director to join the internal audit and risk management commercial sector team after completing his 12-month role as president at the Institute. Numerica's risk and assurances division provides internal audit and risk management services to the health service and local government but the consolidator wanted to move into the commercial sector. "It is a new area in a lot of respects because there is quite a lot of interest both in internal audit and risk management now in companies and what they should be doing," Nelson explained. He told IAB that the increased interest in internal audit goes further afield, outside of the UK. "I have just been in Dubai for a conference where I spoke about internal audit and ran a workshop on risk-based internal auditing." Nelson's responsibilities are to provide internal audit services for companies without their own internal audit department and to assist them in setting one up. He will also be involved in risk management work and advising companies on what services they require. Prior to his presidency at the Institute, Nelson worked as the head of audit at Lattice, BG Group and British Gas in developing their internal audit and risk management approaches. Nelson said the demand for internal audit services has been increasing over the past few years due to legislative changes. "Directors of companies are now looking for much greater assurance that things are all right within the company, that they have the right internal controls and the right processes to identify the risks and manage their risks," he explained. Numerica plans to further expand the internal audit team as its workload increases. "As we get more work, we will be taking more people on and providing a national coverage for this sort of work," he said. Numerica targets the mid market and small and medium-sized enterprises (SMEs). It claims to be one of the major players outside of the Big Four in this market. "Obviously, the very big FTSE 100 companies tend to focus on the Big Four external auditing firms - although a lot of them have now decided that they don't want their internal audit and their external audit provided by the same firm. Although, this is not a requirement in this country…" Nelson remarked. As well as providing internal audit and risk management services, Numerica offers seminars on corporate governance and riskbased internal auditing. "We are putting forward presentations to a number of companies about providing their internal audit service. That is one of the main thrusts of the work, which is linked into risk management as well," Nelson said. Numerica saw its share price more than halve in October, less than a month after announcing it anticipated a small loss for the six months to 30 September before approximately £200,000 ($335,930) of redundancy costs. As IAB went to press, the share price remained depressed. The consolidator reported operating profits of £3.4 million on a turnover of £45.2 million in the year to March 2003. Chief executive of Numerica Tony Sarin said: "This is a market reaction to a public company and I'm of the view that we will see an improvement as we get the profitability back up again." Melanie Dayasena European networks warn EU of competition dangers in audit market MID TIER EUROPEAN accounting networks have warned European politicians of the competition dangers to the audit market of retaining current auditor liability rules. Among a swathe of concerns with the market in the aftermath of Enron - and the resulting Sarbanes-Oxley Act and European Commission plans to modernise its Eighth Directive on statutory audit - the networks believe there is a real threat of a big firm dropping out of the audit market. The European Group of International Accounting Networks (EGIAN) warned the European Commission last month that it must consider business competitiveness in its plan for EU audit market reforms. The EGIAN, a body representing the European members of leading international networks outside of the Big Four, welcomed the Commission's discussion paper titled Reinforcing Statutory Audit in the EU as a means of strengthening confidence in the EU capital markets. The paper focuses on issues such as a modernised and principlesbased Eighth Directive, the creation of an Audit Regulatory Committee, public oversight of the audit profession and auditor independence. Jerome Adam, executive director for MRI Europe and chairman of EGIAN, told IAB that the group wanted to express its views on the discussion paper in the early stages. "That is why EGIAN has reacted earlier to try and put across in one common answer how the mid tier professional networks see our position. The intention of the EU DG Internal Market is to completely redraft the Eighth Directive and they are hoping to have the first draft out in January or February 2004. Then there will be time to put a lot of input into this," he said. However, the EGIAN voiced concerns over the new proposed system for regulation currently being developed across the EU and the possibility of family and owner-managed businesses suffering from excessive audit costs. Anthony Carey, technical partner at RSM Robson Rhodes and chairman of the EGIAN taskforce, believes the new system must be adaptable for all types of business. "These businesses form the backbone of the European economy and provide significant employment. The new system must be relevant for them as well as for the 7,000 listed companies," he said. Adam said the EU's final legislation and intention is to regulate all statutory audits and not just those of listed companies. "In the US, the PCAOB [Public Company Accounting Oversight Board] talks about regulation in terms of SEC [Securities and Exchange Commission] listed companies. When the EU talks about statutory audits, they go beyond the listed companies. In the To page 10 7 NOVEMBER 2003 – PAGE 9 www.lafferty.com NEWS BDO Seidman fights Mandaric tax shelter lawsuit as battle with IRS continues — from page 5 tax shelters is information ordinarily subject to full disclosure under the federal tax law". As BDO Seidman continues to battle with the authorities, Chicago law firm Sidley Austin Brown & Wood was sued by the IRS on 14 October to obtain names of clients involved in tax shelters. The law firm was often employed in conjunction with BDO to provide clients with opinion letters on the legality of tax shelters designed by BDO. Within two weeks of the action, the law firm was reported to have dismissed the head of its tax shelter practice, RJ Ruble, for breaches of fiduciary duty and violations of the firm's partnership agreement. The law firm stated his departure was unrelated "to the substance of opinions at issue in current litigation". Several other accounting firms are also battling with the US authorities over tax shelters. In September, Grant Thornton (US) received nine administrative summonses over its tax shelter practices. The US government has also issued enforcement summonses for KPMG (see page 4). In July, Ernst & Young reached a $15 million settlement with the IRS following an investigation into its compliance with tax shelter registration and maintenance requirements. PricewaterhouseCoopers reached an undis- closed settlement with the IRS last year. BDO Seidman generated 41 percent of fees from tax work in the year ending 30 June 2002, compared with 28 percent in the year to 30 June 1998. Melanie Dayasena BDO SEIDMAN FEE SPLIT 1998 2002 Other 22% Other 18% Audit and assurance 41% Tax 28% Audit and assurance 50% Tax 41% Source: WAI European networks warn EU of competition dangers in audit market — from page 9 EU, there are only 7,000 listed companies, whereas the number of statutory audits could be well over one million," he said. In terms of competition, Adam explained that the EGIAN is in complete agreement to have one standard and quality of audit across all companies. However, he urged the Commission to bear in mind that the listed companies should be considered as one group of audits. "If they were to apply the same stringent independence rules on the smaller audited businesses, they may find this to be less cost effective because many of these smaller companies outside of public interest companies may not have the same in-house facilities as large listed companies," he explained. Adam urged the EU to find a means of opening up more competition in the audit market. "The current concentration of audits of listed companies, particularly for smaller and medium-sized listed companies, is not in the public interest. More competition would benefit the business community and also reduce the impact should the number of large audit firms be further reduced in the future," he said. The EGIAN met with the EU's head of unit in DG Internal Market Karel van Hulle to urge the Commission to adopt an integrated approach to audit reform taking into account the diverse nature of European business. The meeting touched on the modernisation of the Eighth Directive, which, once it has been approved, will be implemented in all the member states. "What I think is very encouraging is that the EU is trying to find common ways of behaviour with the US as far as what the PCAOB is doing. There is definitely contact with what is going on in the US and the EU will try to find common ways of working together," remarked Adam. The talks also brought up questions on how accounting networks are organised and the importance of ensuring all audits are completed to common standards. The Commission is also keen to discuss potential methods of dealing with the possibility of a financial scandal hitting the EU. "At the moment, there is no pan-European response to an EU financial scandal. So they want to see how they can eventually be able to respond at pan-European level instead of a country-by-country level," said Adam. The group is also fighting for urgent reform in the area of auditor liability and it argued that "the auditor should not be seen as an insurer against corporate failure". The EGIAN acknowledged the possibility of one large firm dropping out of the audit market and it is concerned about the reduction in competition. The group said it was opposed to joint and several liabilities, instead favouring a system of proportionate liability. The EGIAN argued that it is essential to ensure that the threat of litigation does not deter the best people from becoming auditors. Carey also commented on governance issues and the need for boards to maintain an effective risk management system as set out by the Turnbull report and the Combined Code. "The EU is right to focus on creating the conditions for robust auditing. However, good governance for listed companies requires an effective audit committee," he explained. The EGIAN group was set up to allow mid tier networks to speak with "one voice" and it provides a forum to discuss key developments affecting the profession in Europe. EGIAN comprises of 20 networks representing 68,000 partners and staff in accounting firms throughout Europe. Adam believes the group has an important role to play in helping the mid tier voice to be heard. "It is a very exciting time for our group and the profession but we need to make sure that we move forward in the interest of both the public and our clients, and also of the profession and the audit firms," he said. Melanie Dayasena www.lafferty.com 7 NOVEMBER 2003 – PAGE 10 AUSTRALIA SURVEY Oz gets tough on independence Australian accounting firms experienced a tough year as the fallout from the Andersen collapse, HIH Insurance investigations and the impact of SARS on the Asian and Australasian economies began to take effect. In addition, they now face a regulatory overhaul following the publication of a draft bill last month. Tom Ravlic reports ACCOUNTING FIRMS have little time left to mount a dynamic campaign to try to lessen the stringency of the Australian government's proposals for auditor independence and employee relationships. The bill, which is a part of the government's corporate law economic reform programme (CLERP), proposes stringent conditions on audit partner rotation, auditor independence and any future activities a partner in an accounting firm may choose to engage in once he or she departs. Some of the proposals - such as the restriction on having more than one former partner of any single accounting firm on the board of directors or senior management role - are drawn from the report of Royal Commissioner Justice Neville Owen following the inquiry into the collapse of general insurer HIH. A new standard of independence test will be included in the legislation that will force both boards of directors and auditors to seriously evaluate whether they can afford to be seen to be associating with each other at all in the commercial sense. "The general standard of independence proposed in CLERP 9 will be refined to provide that an auditor is not independent with respect to an audited body if the auditor might be impaired - or a reasonable person with full knowledge of all relevant facts and circumstances might apprehend that the auditor might be impaired - in the auditor's exercise of objective and impartial judgement on all matters arising out of the auditor's engagement," the explanatory memorandum states. Directors will be required to provide a statement of all non-audit services they have sourced from the audit firm and the relevant fees paid to the external audit firm for each of those items of work. Partners and staff of accounting firms will be subject to fairly stringent cooling-off periods of up to four years, which is the period during which they cannot take a position with a board of directors that is overseeing the operations of a former audit client. Professional employees engaged in the audit and making decisions on how accounting and auditing standards should be applied by the client are also caught. They will also face a cooling-off period of four years. Those partners that have had no contact with the audit will be banned from joining the board of a former client of their firm for two years. These proposals are generally supported by the federal opposition - and while the profession is keen to place arguments against the extent of the changes, some commentators have told IAB they are expecting the worst. The reason the reform juggernaut is causing some degree of consternation within the accounting profession is that corporate governance and audit independence debates have had a profound impact on the profitability of the business lines in Australian practices. PricewaterhouseCoopers chief executive Tony Harrington says his firm, which tops this order to place a more principle-based approach on the various players in the corporate governance game. Brian Schwartz, the Australian chief executive of Ernst & Young (E&Y), told IAB that much of the last 12 months had been spent bedding down the merger with Andersen in May 2002. Reaction has been fairly positive. The deal propelled E&Y to second spot in Australia, while others in the Big Four struggled to achieve growth. Schwartz and the team at E&Y spent more than 12 months integrating the firms. Even heritage Andersen staff members that had initial reservations because of the cultural changes that were imposed on them began to feel at ease once several of their number had begun to climb the ranks within the firm. "For the first six months, things were quite torrid as the heritage Ernst side enforced its policies firm wide," commented one of the former Andersen staffers. "The six months to September have seen a gradual change and people from the Andersen side are being promoted up into leadership roles within firm divisions." Schwartz said: "There was absolutely no doubt about the fact this was a once-in-alifetime opportunity and it is proving to be so." There was no great exodus from the firm after the merger and, in fact, the staff turnover numbers are substantially similar to those that were being reported in the couple “We’ve been pushing governments hard this year on the issue of getting proportionate liability, so if you’re an accountant and you make a mistake, you’re only liable for what you did” year's survey with total fee income hitting A$906 million ($634 million), has experienced no or minimal growth in some divisions because of the reassessment by companies and their boards of directors as to which organisations should be providing certain kinds of services. Harrington told IAB there was not as much growth in the firm's corporate finance area, for example.The static nature of this, according to the PwC chief executive, is partly the result of the companies market working its way through the governance issues and deciding there are some areas where it is inappropriate to engage external auditors. The PwC chief was one of the few members of the profession to attack the proposed legislation as going beyond the perimeters set down by the Sarbanes-Oxley legislation in the US.A media release issued by the firm a day after the release of the CLERP audit reform proposals called on the government to reconsider some of the measures in of years before the merger was actually consummated. The story is pretty much the same for the number of clients the firm has retained since the merger with Andersen. "The message that we keep telling people around here is that we think we can count on one hand the number of clients we have lost for reasons other than the parent changing the audit firm or adviser overseas," Schwartz explained. Proportionate liability Proportionate liability is becoming a reality and incorporation of accounting firms is being proposed in the draft bill currently out for public comment. "We've been pushing governments hard this year on the issue of getting proportionate liability, so if you're an accountant and you make a mistake, you're only liable for what you did," James Millar, E&Y's deputy chief executive, says. 7 NOVEMBER 2003 – PAGE 11 www.lafferty.com AUSTRALIA SURVEY LEADING ACCOUNTING FIRMS AND ASSOCIATIONS IN AUSTRALIA — FEE DATA Fee split (%) Most recent year's fee income (A$/m) 906 (1) 636 530 (5) 514 21.2 20 19.4 Manage -ment consulting 16 - International affiliate/firm PricewaterhouseCoopers Ernst & Young KPMG Australia Deloitte Kreston International BKR Walker Wayland MSI Legal & Accounting Network Worldwide Growth rate (%) 1 40 -1 -10 54 5 -5 Audit 52 (2) 24 9 19 Account -ing 31 18 17 Tax 37 (3) 22 (6) 52 (8) 10 (10) Corporate finance 11 (4) 10 4 - Legal 3 50 Other 10 (7) 1 (9) 4 Year End Jun-03 Jun-03 Jun-03 May-03 Oct-02 Jun-03 Dec-02 ASSOCIATIONS OF INDEPENDENT ASSOCIATIONS OF INDEPENDENT FIRMSFIRMS Baker Tilly International Horwath Australia Ltd AGN International Ltd PKF International Moore Stephens Australia (Pty) Ltd Grant Thornton Association Inc RSM Bird Cameron Bentleys MRI Nexia Australia SC International MGI Midgeley Snelling Hayes Knight Group/ Morison International Haines Norton Chartered Accountants/UHY GMN International DFK Australia IA International ACPA International INPACT International (34) Polaris International 75.4 73.2 73 71.7 65.3 60.8 58.3 51 35 31 (26) 29.8 (27) 29.4 15.2 13.4 (31) 12.4 10.8 9.2 7.7 1.8 12 13 9 18 9 9 18 8 40 5 37 1 16 10 -1 84 22 -90 13 17 18 55 (16) 43 (18) 22 71 (22) 18 35 10 7 20 10 15 - 31 44 (13) 29 31 55 48 29 77 (30) 31 37 - 25 (11) 10 (14) 20 33 27 58 (20) 7 21 (23) 10 (25) 27 27 (28) 35 (32) 31 - 4 14 4 10 16 14 12 31 20 10 - 2 2 1 5 3 - 0 - 25 (12) 13 (15) 33 8 (17) 19 (19) 20 (21) 6 11 (24) 6 (29) 3 4 (33) 7 (35) - Jun-03 Jun-03 Oct-02 Jun-03 Jun-03 Dec-02 Jun-03 Jun-03 Jun-03 Dec-02 Jun-03 Jun-03 May-02 Dec-02 Sep-02 Oct-03 Mar-03 Dec-02 Dec-02 TOTAL REVENUE/ AVERAGE GROWTH 3,371.0 7 (1) PwC sold its consulting division, business processing and outsourcing division, visa and migration services, and financial services; (2) Audit is described as assurance and business advisory services; (3) Tax includes legal services; (4) Corporate finance includes recovery; (5) 2002 for KPMG included A$26 million in discontinued consulting operations; (6) Tax is made up of eight percent tax compliance and 14 percent tax consulting; (7) Other is made up of eight percent corporate recovery/insolvency and two percent forensic accounting; (8) Tax is tax compliance; (9) Other is corporate recovery/insolvency; (10) Tax is made up of five percent tax compliance and five percent tax consulting; (11) Tax is made up of tax compliance; (12) Ten percent of other is corporate recovery/insolvency; (13) Accountancy includes tax compliance; (14) Tax is made up of tax consulting; (15) Eight percent of other is corporate recovery/insolvency and five percent is forensic accounting; (16) Accountancy is included in audit; (17) Six percent of other is made up of insolvency; (18) Accounting is included in audit; (19) Two percent of other is made up of insolvency; (20) Tax is described as tax/business advisory services; (21) Other is made up of 13 percent insolvency and seven percent investment/other consulting; (22) Accounting is included in audit; (23) Ten percent of tax is tax compliance and 11 percent is tax consulting; (24) Other is made up of corporate recovery/insolvency; (25) Tax is made up of tax consulting; (26) $1 = A$1.76991; (27) $1 = A$1.49898; (28) Tax is made up of tax compliance and tax consulting; (29) Four percent of other is financial planning; (30) Accounting includes tax compliance and tax consulting; (31) Includes New Zealand; (32) Tax is made up of tax compliance and tax consulting; (33) One percent of other is made up of corporate recovery/insolvency; (34) INPACT Asia Pacific has four member firms practising in Australia: BDS Accountants in Brisbane, McDonald Carter in Melbourne, Sygnum Financial Services in Perth and Kam & Beadman in Sydney; (35) One percent of other includes insolvency. Source: IAB www.lafferty.com 7 NOVEMBER 2003 – PAGE 12 AUSTRALIA SURVEY "If you're judged in a claim to be ten percent responsible, you'll be liable for ten percent of the damages. That's been agreed and that will help." It is also significant, Millar asserts, that the state governments are now committed to ensuring professional standards laws are enacted so that professionals have their liability capped, in return for a firm being insured to a level appropriate for the type of work being done by a professional firm. These developments are critical, according to Millar. The alternative is a regime where accountants unable to afford insurance practice remain uninsured, and that creates its own problems. He says the consequences of maintaining the status quo is the maintenance of a highcost insurance regime and an escalation of those prepared to work without insurance. "You'll encourage accountants to do two things [in that] situation. You'll encourage the accountants to 'go bare' - that is, they won't have any assets in their own name anywhere or anytime to cover anyone's legitimate claim. Or they will leave the profession," Millar explains. "If we as a community think it is a good idea to have accountants - whether they be one partner, two-partner practices or the Ernst & Youngs of this world - then we can't have them going off to work in the morning always feeling their house is on the line." The importance of this cannot be underestimated, a spokeperson for CPA Australia told IAB, because in some cases accountants have experienced a hike in the cost of insurance premiums of between 40 percent to 1,000 percent. With the collapse of Stockford Ltd, the past 12 months have seen the consolidation or integration model of financial services practices lose its lustre. What has started to replace that phenomenon is a string of mergers or alliances. These have been formed between various accounting practices to take advantage of some of the opportunities unveiling themselves following the decline in the acceptability of using an external audit firm to provide a full suite of services. Pitcher Partners, for example, extended its operations into a third state in early October. It has struck up a relationship with a Brisbane-based accounting practice in order to ensure a national presence. The firm had also appointed national technical director Dianne Azoor Hughes earlier in the year, in order to provide more effective coordination of the risk management involved in dealing with accounting technical matters. Another combination is the one between William Buck and the Brisbane office of Hall Chadwick, which occurred for similar reasons. In addition, Melbourne-based accounting practice Spencer & Co folded its tent and went off to join Pannell Kerr Forster in the city. The remuneration of accountants has tended to be fairly flat over the past few years, according to some commentators on recruitment trends, and a talent drought looms within the recently qualified sector with three to five years' experience. Accounting firms had opted for a recruitment freeze some years back, which has resulted in the inability of these practices to ensure they retain their best people. Elizabeth Roberts, an associate director at Michael Page, says a shortage of post-qualified staff with three to five years' experience will hit accounting firms when it most matters. Roberts says accounting firms will begin to reap the harvest of their failure to recruit steadily over the past few years in around 2006 or 2007, which is when she expects there to be a thinning of the ranks of experience within that three- to five-year range. "We have seen a decrease in the recruitment of graduates within the chartered firms, which is where the companies and the banks find these qualified individuals," Roberts explains. "The chartered firms are actually saying they haven't decreased dramatically, but that it's just been a slight decrease." Roberts says another factor that complicates matters for accounting firms is the fact that the younger staff members with the three- to five-year experience level are much sought after by large companies and financial institutions. An upturn in economic activity results in a demand for individuals with that three- to five-year experience level, Roberts asserts. "As the market picks up, business improves and DESPITE A downturn in the global economy, Australia's steady growth of just under three percent in the third quarter gives confidence to the government's official prediction that the economy will grow to 3.25 percent in early 2003/2004. Among firms supplying industry data to IAB, financial services remains the dominant sector at 27 percent, followed by industrial products at 24 percent and energy, chemicals and utilities at just over 20 percent. Interestingly, the bulk of work from PricewaterhouseCoopers came from government work and "resource services", making up just under one-third of its revenue. Top clients from Ernst & Young included AMP Ltd, The News Corporation Ltd and the Commonwealth Bank of Australia. No new offices were added and no mergers took place among the Big Four during 2003, although KPMG - which has received the largest portion of fees from financial services and industrial products (27 percent a piece) - and Deloitte described the market as "slightly improving". Mid tier firms such as RSM Bird Cameron and Bentleys MRI were also upbeat. RSM Bird Cameron observed: "The professional services market in Australia is developing in line with the continued strong economy. We are seeing considerable activity in the consolidation of firms within the mid tier group, along with good growth in revenues and expanding areas of service." Bentleys MRI remarked that opportunities existed for "disciplined mid tier firms", adding: "Greater use of shared information to gain betterquality work and clients is raising the average fee per client." Marc Barber PRO FORMA AUSTRALIAN AUDIT INDUSTRY SPLIT Technology, communications and entertainment 11% Retail and Other consumer 3% products 7% Real estate, hospitality and construction 5% Energy, chemicals and utilities 22% Industrial products 24% Health sciences 1% Financial services 27% Source: WAI 7 NOVEMBER 2003 – PAGE 13 www.lafferty.com AUSTRALIA SURVEY the purses loosen up a bit more than they have in the past few years. Staff with this level of experience are the most valuable for banks and companies to recruit," she says. "The demand outweighs the supply." One of the reasons companies are seeking out the individuals with that degree of experience, Roberts says, is that some companies have been making some of their top finance and accounting people redundant. "They are now just going to be refilling at the junior end." Another phenomenon becoming more evident in the Australian profession is the fact that a larger number of companies are moving towards using external consultants for various engagements rather than developing their own staff from within. Headcount freezes within the business community are one of the many factors that contribute to the increased use of specialist accounting contractors by some companies, according to a recent survey conducted by recruitment agency Resources Connection. The agency's fourth annual review of the market found that a boost in the volume of regulation, combined with factors such as downsizing or freezing of permanent staff numbers, has led more companies to use contract talent in the areas of accounting, tax and finance. Of the 63 companies surveyed, 48 percent reported an increased usage of contractors to fill urgent or specialist gaps. The 2003 survey shows a 14 percentage point rise from the 2002 survey over the increased use of accounting contractors. The agency's survey findings report that 52 percent of companies have actually cut back the use of contractors. Increases in the volume and complexity of regulatory change have resulted in companies calling on outsiders to take on special projects that permanent staff would be unable to tackle. There is also a greater demand for the use of external experts because of the more intense scrutiny of the corporate governance framework within companies. LEADING ACCOUNTING FIRMS AND ASSOCIATIONS IN AUSTRALIA — STAFF DATA Firm BKR Walker Wayland Deloitte Ernst & Young (2) KPMG Australia Kreston International (3) MSI Legal & Accounting Network Worldwide PricewaterhouseCoopers Offices 2003 2002 8 23 7 16 11 10 9 9 25 16 9 11 10 Partners 2002 23 281 258 22 42 349 Professional staff 2003 2002 139 3,143 (1) 2,494 2,442 128 107 3,186 181 3,013 2,784 97 115 3,353 Administrative staff 2003 2002 30 908 891 50 68 1,159 40 1,190 39 80 1,298 Total staff 2003 2002 192 3,423 3,680 3,638 202 213 4,701 244 3,294 4,232 158 237 5,000 2003 23 280 278 305 24 38 356 ASSOCIATIONS OF INDEPENDENT FIRMS ASSOCIATIONSOF INDEPENDENT FIRMS ACPA International AGN International (3) Baker Tilly International DFK Australia GMN International Grant Thornton Associaltion Inc (3) Horwath Australia Ltd IA International INPACT Asia Pacific (3) MGI Midgeley Snelling Moores Rowland International Moores Stephens Australia (Pty) Ltd Morison International Nexia Australia PKF International Polaris International (3) RSM Bird Cameron SC International (3) UHY 5 14 8 7 7 5 9 6 4 9 13 13 9 6 13 2 32 12 5 5 14 8 7 6 5 9 6 4 8 13 11 9 7 12 7 34 11 5 17 75 67 21 21 54 80 17 10 39 75 69 38 42 96 5 49 45 20 17 75 65 21 22 59 78 17 9 35 71 62 43 51 94 16 47 43 23 N/A 531 502 72 85 375 365 74 67 211 407 520 206 252 540 12 268 194 101 N/A 488 532 72 87 388 335 74 70 157 334 403 167 250 478 69 262 194 95 N/A 144 154 32 30 104 154 10 20 67 63 142 39 15 155 6 149 63 28 N/A 134 153 32 24 102 127 10 19 60 65 109 38 15 116 20 139 56 26 17 750 723 125 136 533 599 101 97 317 545 731 283 309 791 23 466 302 149 17 697 750 125 133 549 540 101 98 252 470 574 248 316 688 105 448 293 144 TOTAL 263 261 2,144 1,823 16,421 13,998 4,481 3,892 23,046 19,713 (1) Administrative and client service are categorised by Deloitte as professional staff; (2) 2002 data N/A; (3) 2002-2001 figures. Source: IAB www.lafferty.com 7 NOVEMBER 2003 – PAGE 14 INDUSTRY SNAPSHOT AUSTRALIA FEE SPLIT GLOBAL FEE SPLIT Management consulting 3% Other 15% Other 16% Audit 38% Management Consulting 9% Tax 23% Audit 33% Tax 29% Accounting 15% Accounting 19% Source: WAI, Lafferty Source: WAI, Lafferty TOP EIGHT FIRMS (BY REVENUE) IN AUSTRALIA BY FEE PER STAFF MEMBER, 2002 TOP EIGHT FIRMS (BY REVENUE) IN AUSTRALIA BY FEE PER STAFF MEMBER, 2003 140,000 Fees per member of staff (US$) 120,000 Fees per member of staff (US$) 120,000 100,000 80,000 60,000 40,000 20,000 PKF International 20 100,000 80,000 60,000 40,000 20,000 0 PwC Deloitte KPMG Australia INPACT KS Asia Pacific International Jeffreys RSM Bird Baker Tilly Henry Cameron International International Horwath Australia Ltd Source: WAI, Lafferty Source: WAI, Lafferty PERCENTAGE OF US PUBLIC COMPANY AUDIT MARKET BY COMPANY SALES, 2002 US AUDIT WINS/LOSSES SIX MONTHS TO 30 SEPTEMBER 2003 Others 1% PwC 34% E&Y Deloitte 24% PwC Deloitte KPMG Baker Tilly Moores Rowland KPMG 18% E&Y 23% -60 -40 -20 Horwarth 0 40 Source: GAO Source: WAI, Lafferty 7 NOVEMBER 2003 – PAGE 15 www.lafferty.com AGN International Deloitte KPMG Baker Tilly PwC E&Y 0