The future of the profession

Where is the audit and accounting profession heading and what does the future hold? Are audit-only firms likely to emerge? How important will consulting services be? What regulatory developments are to be expected? We talked to members of the BDO Global Board and the CEO and asked them for their opinions on what the future might look like.

WHERE AUDITING AND ACCOUNTING ARE HEADING

Seven leaders from the international BDO network – Dr. Holger Otte, Chairman of the Global Board; Martin van Roekel, CEO, BDO International Limited; Keith Farlinger, CEO, BDO Canada; Reinder Brummelman, Managing Partner, BDO Netherlands; Simon Michaels, Managing Partner, BDO UK; Wayne Berson, CEO, BDO USA and Jiandi Zhu, Managing Partner, BDO China – were asked to consider the future of the profession and voice their views from a BDO perspective.

Gentlemen, where do you think the profession is heading?

MICHAELS: Fifty years on from BDO starting, it’s a fascinating time for the profession and for BDO. Right now, it’s very much a perfect storm, and these situations don’t come around very often. The dynamics contributing to that perfect storm are that you have fast-developing economies (for instance the BRIC territories), a sentiment very much against the largest four networks and a very fragile global economy. The spotlight is on the profession to continue providing the highest independent quality services to their clients. This situation gives us an opportunity to exploit changes in such a way that if you roll the clock forward another five or ten years, we will have been able to take market share and cement our position as the quality network in the market place. In view of the regulatory environment in the profession, we’re going to see over the next five or ten years changes that will throw up great opportunities. There are also going to be restrictions on the sorts of services auditors can provide. So, whilst we see the audit market growing in a number of territories, the bigger opportunities for the network are, I think, going to be more around tax and advisory services, as other firms are unable to do everything for their clients. But I also think these growth opportunities will be supplemented by greater scrutiny from international regulators and an opening up of the competitive environment.

BERSON: Our profession is truly at a crossroads. Notwithstanding criticisms faced by the profession as a result of the recent fi nancial crisis, the need for credible, independent assurance is still recognised as essential to the effi cient operation of the capital markets. Based on numerous global roundtables and other forums, it is clear that investors are demanding an expansion of the auditor’s role in terms of greater insights into the company, as well as assurance on more types of information. The profession will have to develop the skills to meet this demand in order for it to remain relevant.

An avenue of opportunity lies in the development of integrated reporting, which is much broader than financial reporting and covers all relevant business areas that create value for a company. While integrated reporting is being piloted, now, by a relatively small group of large multinationals, I expect that it will eventually be used by a greater universe of smaller companies in future. This will require networks to develop specialised skills to help companies deal with this new and holistic form of reporting.

We will also likely see an environment of mandatory firm rotation for public interest entities (PIEs) in many parts of the world. This is likely to present BDO with greater opportunities to gain audit work for companies that have been audited by larger networks where the latter have independence conflicts. Equally, BDO could well gain non-audit for these companies if other contenders decide to propose only on the audit. I also expect to see future tightening of restrictions on performing non-audit services, particularly for PIEs.

To what extent has auditing become a commodity?

FARLINGER: I really think you need a bit of a crystal ball to see where auditing is going. Auditing has become  a commodity and, as the years go by, I think that commodity will become less and less valuable. So where we can add value to our clients is with auditing more specifically — for example, looking at the inventory account, asking whether the inventory is managed efficiently, auditing pieces of a company rather than the company as a whole. I think the part of auditing that involves helping clients solve their issurs and achieve their visions is something that will never change. BDO's approach is to help clients at every level, and we have many years of experience in doing just that. So we are already positioned to advise our clients on auditing the areas they need to be audited.

I think the whole area of advisory is growth opportunity fo BDO. We are growing into advisory because clients need our advice and are looking for it. The advisory stream ancompasses many disciplines, and because of the economic turmoil we've seen in a lot of markets, forensics ia an area of need. We have a strong foothold in this field at a national and global level, and we have capabilities in key financial centres where much international work originates, including New York, London, Frankfurt and Geneva. Around the world we have people on the ground who can go in and tast qualify matters where there are uncertainties. This is where the global network and our ability to go global locally is a key competitive strength, because we can bridge the big picture with local circumstances in a credible, cohesive and trustworthy manner. That's the name of the game, and that's BDO.

What about the prediction that there may be audit-only firms in future?

VAN ROEKEL: I'm convinced that there always be a function for audit firms in future. The big question is whether these firms will be audit-only firms or a art of the large international networks, especially as there ia s growing trend to focus more and more on tax and advosory services. These are considered to be growth areas, whereas auditing — especially in mature economies — is no longer a growth area. As a result, particularly in those economies, we are focusing on other activities to ensure the continuing growth of our firms as a whole. The situation is certainly different in the emerging markets, where there remains an increasing demand for audit services — combined with an emerging need for more and more advisory services. We therefore foresee substantial growth in those parts of the world.

If you ask me whether I foresee the large networks ultimately  leaving the audit profession, I would have to say hat I consider that very, very unlikely. This is primary because auditing ultimately gives them their brand: it's the only regulated business they have and providesa fantastic door opener to a lot of large companies around the world. Without that, it might become much more difficult to deliver, say, tax  servisec to those companies. Of course we all realise that, because of conflict of interest and independence rules, it's becoming more and more difficult to sell different services to one and the same client. But, ultimately, having a foot in the door in the form of an audit is still very important to many firms around the world.

Which markets do you expect to grow in future?

OTTE: The stronger markets today are definitely to be found in the Far East, and we have to cope with this reality. I think that the influence of China and India, especially, will grow. And these countries, their businesses, their economy and their member firms within BDO will influence our network in a very positive way. Today we are a global network that is still strongly influenced by ‘old Europe’ and ‘old America’, but in the future we will have a broader variety of international infl uence, especially from those emerging markets in the Far East.

BERSON: There is also significant growth potential in Africa. The continent’s growing native industries, together with global investment – especially from China – is driving substantial demand for accounting services. Firms will need to ensure that they have the right level of local talent to meet this demand. There are also good opportunities for growth in South America, particularly in countries like Brazil, Colombia, Peru and Chile, which have substantial natural resources and supportive governments. In the US we are seeing opportunities in many of the non-audit type services. Many of the consulting services like global forensics and the specialised tax services are in demand.

How will consolidation impact on the profession?

VAN ROEKEL: What we see in many countries around the world, and in particular in the mature economies, is that the revenues of accounting firms are not increasing, whereas costs are – in many territories we have to deal with higher regulatory costs, for instance. So if we want to maintain an acceptable level of profi tability that will enable us to invest in people, in  training, in infrastructure, in IT, in tools etc., we need a larger revenue base. And BDO is certainly not the only network facing that challenge. I’m pleased to say, however, that, given the relative size of BDO firms in many countries, BDO is undoubtedly a very attractive option for any firms looking for a new home. Ultimately, there will be fewer players in the majority of economies.

Where are things headed on the regulatory front?

BRUMMELMAN: Of course there have been lots of discussions in the recent past about our profession and the way it will evolve. My expectation is that auditing will return as a very important element of our industry. What I mean by ‘return’ is this: the audit profession is, in a way, under regulatory attack. So you could get the impression that auditing is becoming less and less important. I however, believe that the auditor will continue to play an absolutely important role in the future.

BERSON: Regulatory oversight of the profession is expanding rapidly, as we have experienced with IFIAR, which has over 40 national regulators as its members. Regulators will become more focused on network and firm structures, including pushing for the right tone at the top in order to create a high level of consistent audit quality around the world, and setting an environment for greater partner accountability, including effective protocols for monetary rewards and penalties.

While the environment around regulatory enforcement actions against auditors has been relatively stable in recent years, the pace of enforcement activity may heat up in the near future as a result of criticisms emanating from the financial crisis and other developments.

What are the key challenges the future will bring?

OTTE: The challenges we are facing from the international regulation of our business are a problem every accounting network has to cope with – it’s a fact of life and one that doesn’t affect us unduly. On the other hand, there are many, many chances we can seize and use to shape our network. Doing business in the emerging markets will, I think, be very challenging. Growth rates in China of 30% a year, for example, will bring enormous changes not only to the business world but also to our BDO world. The impact of China and India will completely change the old western world of accounting. And I think our appointment of a Chinese CEO as member of our Global Board is just the fi rst step. I do not know what our Board will look like in five years’ time, but there will definitely be some other countries represented on it, and our international network will benefit from these developments. The second thing is that we have to concentrate on advisory services, which is a very good idea and an excellent development: the mixture of traditional accounting and future-orientated advisory services is good for the overall development and growth of an international network.

How significant is the appointment of a Chinese CEO to the BDO Global Board in terms of the future of the profession?

JIANDI ZHU: BDO China is the first Chinese firm to have a representative on the global board of any international accounting network and, as our CEO, Martin van Roekel, said at the time, this appointment to the BDO Global Board recognises the importance of China in the international BDO network. He was also kind enough to say that BDO will benefit from the valuable insight that I will bring to the Board, certainly in relation to international companies both working out of and wishing to invest in China. Personally, I am honoured to be joining my colleagues from the largest firms in BDO on the Global Board. In China we set high standards and operate coordinated global systems that ensure our people are given responsibility for delivering the tailored service to our clients that they expect. In terms of client relations, our people will be able to take advantage of this platform to approach international businesses. Internally, it enables all of us in BDO China to have wide-ranging business exchanges with other firms within the network. There are 140+ firms in the BDO network and not only will they be able to learn first-hand about China and the importance of Chinese business, our firms will have more chance to see the inner management experience of the large member firms on the Global Board and learn from their experience in global management. This will mean that we can undertake more responsibility for global business interaction. I believe also that this appointment will give Chinese accountants a bigger international discursive power overall, because we will be kept informed of international trends and will be able to find more  development opportunity through this sort of information exchange.

As for the future, from China’s point of view our strategy is to expand within and to strengthen our position throughout the Asia Pacific region. We anticipate the strengthening of relations between BDO China and all BDO Member Firms, and being able to act more from a global leader standpoint rather than solely in the interests of the Chinese firm.

And what does the future hold for BDO?

OTTE: The accountancy world is undoubtedly changing. Our clients have high expectations and are focused on cost, value and service – a consistently high-quality service delivery that meets their needs. As an integrated organisation, BDO is ready to meet these challenges and must be ready to grasp opportunities. I firmly believe that by working together in the spirit of partnership to make the BDO vision a reality, we will remain the only credible challenger to the bigger global players.