EU and Russia square-up - AGN InternationalEU and Russia square-up IAB 542.indd 1 24/10/2014...

www.InternationalAccountingBulletin.comOctober 2014 Issue 542

Russian profession caught in political crossfire

● KPMG UK sets diversity targets ● Consultancy the driver as Deloitte retains number one slot

● Market consolidation ‘inevitable’ ● Japan country survey

EU and Russia square-up

IAB 542.indd 1 24/10/2014 12:42:11

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IAB 542.indd 2 24/10/2014 12:42:12

October 2014 y 1www.InternationalAccountingBulletin.com

Editorial Advisory BoardKevin McGrath, Crowe Horwath International CEOKevin Arnold, Nexia International CEOGeoff Barnes, Baker Tilly International president and CEOGraeme Gordon, Praxity executive directorStephen Jacobs, INPACT International presidentJon Lisby, Kreston International executive directorJames Mendelssohn, MSI Global Alliance, chairmanChristian Mouillon, Ernst & Young global vice-chair, assuranceEd Nusbaum, Grant Thornton International CEOMichael Reiss von Filski, Geneva Group International CEOLiza Robbins, Morison International CEOMartin van Roekel, BDO International CEOJean Stephens, RSM International CEORobert Tautges, HLB International CEOPauline Wallace, PwC head of public policy and regulatory affairs

Financial results season is in full swing and with it the first indication of fees earned by global accounting firms in 2014. While it is our January World Survey edition in which we dissect the revenues, this month’s issue gives us a good indication of things to come as three of the Big Four firms have reported their global fee income in the past month. The magical number appears to be 6% growth, with all three networks – Deloitte, PwC, and EY – reporting fee income growth between 5.7% and 6.2% in US dollars, which is an improvement on last year when only EY increased its fee income by more than 5%. Combined, the top three firms increased their fee income by $5.3bn to $95.6bn. In comparison, the 41 mid-tier networks and associations reporting to International Accounting Bulletin in 2013 earned a combined $55.8bn. KPMG is yet to announce its 2014 results, which are usu-ally due in December.

As in the past few years, non-audit ser-vices are the key driver of growth for the Big Four, with audit and assurance services contributing a more modest increase in fee income.

Despite the recent acquisition of Booz & Co by PwC, Deloitte for the first time ever retains its position for the second year in a row as the largest accounting firm globally with fee income of $34.2bn in the year to 31 May 2014. As explained by Deloitte’s global chief executive Barry Salzberg, consulting services grew over 10% in local currency (9.6% in US dollars) to $11.4bn firmly overtaking audit growth of 2.5% to $10.1bn. Speaking to IAB, Salzberg defend-ed the network’s focus on advisory services stating that for effective audit delivery and addressing of clients’ increasingly complex needs advisory services are “quintessentially important to delivering an effective audit”.

Deloitte is far from alone in pursuing such a strategy, which appears to be key for the Big Four. The question is where does

this leave the mid-tier, which as reported on pages 5-6 is faced with increased regulatory compliance cost and shifting global trends. For BDO’s EMEA chief executive officer Anders Heede speaking at the IAB Industry Forum the answer is inevitably consolida-tion in the mid-tier, which in his opinion will lead to strengthened market players of the future. Read full article on page 5-6.

Back to diversityBy now our regular readers should know that I like to write about diversity and find it one of the key future challenges for the profession. Only days ago an unprecedented thing happened; KPMG UK published its diversity profile and committed to improv-ing its diversity statistics by putting in place targets for 2018. In a transparent way the firm’s chairman Simon Collins admitted that the diversity profile of the firm doesn’t reflect that of society and clients. While this might be a positive step forward, break-ing the white male profile dominating the profession, it also exposes how things really stand and that only 15% of the firm’s partnership are female, 0.9% are black pro-fessionals and only 1.4% state they have a disability. The biggest challenge for the firm will be around female partners as the firm has committed to 25% of the partnership being female by 2018 (see the news story on page 2).

While the benefits of setting diversity tar-gets split opinions in business and politics, the fact that diversity improves business performance is undeniable, and perhaps we should stop worrying so much about the methods of achieving it and focus on harnessing the benefits and opportunities arising from having a diverse leadership. Change is usually a good thing.

Ana [email protected]

Indication of things to come

EDITOR’S LETTERInternational Accounting Bulletin

NEWS 02-04

CONTENTS

■ Concerns for non-financial reporting directive

■ KPMG UK’s diversity targets

■ Consultancy the driver for Deloitte’s growth

■ PwC’s global growth

FEATURE 05-09

COUNTRY SURVEYS 10-20

O5-09: IAB INDUSTRY FORUM

05-06 Network leaders and advisers share their thoughts on how the current consolidation trend will change the market’s landscape and impact networks’ ownership structure.

07-09 New technologies have become an increasingly central part of business. With them have surfaced not only a wide range of nascent opportunities, but also an entirely new set of challenges and threats

10-15: JAPAN

Growth-orientated government policies, known as Abenomics after prime minister Shinzo Abe, have been implemented and the recovering economy has begun to boost business confidence and lifted demand for accounting practices’ services. David Hayes reports

16-20: RUSSIA

As tensions between Russia and the West persist, weakened currency and tough sanctions take their toll on Russia’s economy and the professional services industry is no exception. Isabella Grotto reports

Give your students a business perspective of the world of accounting. Give your students access to content they can trust. Give your students the edge. Subscribe to The Accountant

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Subscribe to The Accountant for: • IPaccesstoourcontent.Soyourstudentscanaccessour

content campus-wide with one login

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IAB 542.indd 1 24/10/2014 12:42:13

2 y October 2014 www.InternationalAccountingBulletin.com

NEWS International Accounting BulletinROUND-UP

EU

Concerns for non-financial reporting directiveAs the Council of the EU announces the adoption of the directive for the disclosure of non-financial information, concerns linger around implementation.

The result of months of painstaking negotiation and debate, the directive will require around 6,000 listed large businesses across the EU to include environmental and social impact information in their financial reporting.

At the beginning of the year, as the May European parliamentary elections grew closer, negotiations intensified, leading to a draft directive being agreed between the Greek presidency of the EU Council and the European Parliament (EP) in February.

The draft was also endorsed by the Committee of Permanent Representatives (COREPER), responsible for monitoring issues on the Council’s agenda.

In March the Committee on Legal Affairs (or JURI) of the EP unanimously backed the non-financial reporting rules, which in April were voted in by 599 votes to 55, with 22 abstentions at the EP plenary session.

However, the directive hasn’t specified how businesses are to report the information, and with no IFRS-equivalent standard-setter for non-financial information reporting, consistency across member states is likely to remain an issue.

Climate Disclosure Standards Board (CDSB) managing director Mardi McBrien said she acknowledges the EU’s intent, but aired concerns that “as drafted, the directive will not sufficiently

address the information gap due to the lack of consistent and comparable information that will be reported.”

She urged the European Commission to develop its guidance

“with consistency in mind”, as well as recommending member states do the same when implementing it.

CDSB plans to open a second consultation on the expansion of its framework this month, in the lead up to its spring 2015 publication date.

UK

KPMG UK sets diversity targetsKPMG UK has set diversity targets for 2018 looking to increase the number of female, black, Asian, minority ethnic (BAME), disabled and LGBT professionals.

The firm’s targets are most ambitious around increasing the number of women in leadership positions. The firm’s female population currently accounts for 15% of all partners, 23% of directors and 36% of senior managers. By 2018 the firm wants to see the number of female partners at 25%, directors 36% and senior managers 46%. In order to achieve this the firm’s chairman Simon Collins said the firm will have to “double the number of female audit partners to hit our gender target”. KPMG UK is the first professional service firm to set such targets and Collins said: “The diversity profile of the workforce across the professional services industry does not reflect society or our client base.

“We need to change and I believe a crucial part of achieving a meaningful shift is providing more transparency of the make-up of

our current staff against where we would like to be.

KPMG UK targets reveal 7% of its current partners are BAME, with only 0.9% black professionals. The firm has committed to increase those numbers to 9% and 2.2% respectively by 2018.

UK

Grant Thornton UK grows 9%Following two years of double-digit growth Grant Thornton UK has seen a slight slowdown in its financial results, reporting revenues of £512m in the year to 30 June 2014, up 9% compared to the previous year.

Grant Thornton UK CEO Scott Barnes told IAB this slowdown was due to stagnant results in the firm’s tax practice, but that the overall results of the firm remained strong.

Grant Thornton UK’s audit practice grew by 4%, a slower rate compared to last year’s 9%. “Even though the economy is improving, audit remains a mature market where there continues to be some price pressure and with the audit thresholds moving up it means fewer businesses need to have to an audit,” Barnes said. “So there is pressure at all ends in the audit market and it’s not a big growth area for any of the firms frankly.”

Barnes said he believes there will be an increased number of audit tenders in the next two to three years due to new regulations in the UK and Europe.

In the past year the tax service line has been flat and Barnes said the main reasons for that were the environment around tax planning, which has made corporates less inclined to engage in tax advisory work, and the slowdown in the transaction market.

NEWS ROUND-UP

MOVERS & SHAKERS

KPMG has promoted 102 new directors, a third of them women, bringing its total number to 871, a 13% increase on last year’s figures. KPMG UK head of people Colm Coffey described the move as part of a wider strategy of business growth “at the top and bottom line”. The largest number of promotions occurred in the firm’s audit service line, following success in securing several high profile UK contracts,

including Unilever and Royal Mail.

Deloitte has appointed Eric Dugelay as global leader of the network’s sustainability services.With 13 years’ experience working on sustainability issues, Dugelay has most recently been the Europe, Middle East and Africa regional leader for sustainability services and a partner at Deloitte France.He will succeed former global sustainability services leader Dave Pearson, who becomes the

network’s chief sustainability officer.

Bob Dohrer has been appointed to serve as a member of the International Auditing and Assurance Standards Board for a three-year term. Dohrer is RSM global leader for quality and risk and joined from the Forum of Firms, an organisation he chaired since 2010.

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IAB ONLINE – OCTOBERTop 5 articlesPwC’s 6% global growth to $34bn still leaves Deloitte in the lead

Grant Thornton UK grows by 9%

KPMG UK sets 2018 diversity targets and commits to 25% of partners to be female

Implementation concerns remain as EU adopts non-financial reporting directive

Consultancy main driver for Deloitte’s 5.7% growth: Salzberg

Most retweeted articleConsultancy main driver for Deloitte’s 5.7% growth: Salzberg

Read in 172 countriesUK 23%

US 12%

Mexico 5%

India 5%

Singapore 4%

Rest of the world 48%

Hong Kong 3%

IAB 542.indd 2 24/10/2014 12:42:18


NEWSInternational Accounting Bulletin ANALYSIS

RESULTS

Consultancy is the main driver for Deloitte’s 5.7% growthDeloitte has registered a fifth consecutive year of growth, reporting global revenues of $34.2bn in the year to 31 May 2014, up by 5.7% (6.5% in local currency) compared to the previous year.

Deloitte Global CEO Barry Salzberg said he was proud of the network’s ability to maintain a good level of growth “focusing on quality while dealing with difficult eco-nomic environments and various recessions around the world”.

Deloitte’s key factors for success were the firm’s focus on quality, people and delivering innovative solutions, according to Salzberg.“We identified the areas in the world where

growth is happening and demand is present, cyber for example, and we invested in those areas which helped us produce these results,” he continued.

Consulting led the global network’s boost in revenue with double-digit growth in local currency (10.3%), up to $11.4bn. The fastest-growing services in this area were strategy and operations (10.5%), technology (10.3%), and human capital (9.6%).“In fact Deloitte consulting practices have

grown robustly for the last eight years,” Salzberg said. “This trend reflects greater opportunity for consulting services as busi-nesses adjust to new economic and techno-logical necessities.”

As businesses have an increased interest in efficiency, cross management restructuring, risk and cyber-related areas, Salzberg said it will continue to be a source of opportunities

in the coming years.Deloitte experienced good performances

in local currency across all its service lines, with audit growing by 2.5%, up to $10.1bn; tax and legal by 7.7%, up to $6.5bn; finan-cial advisory by 6.8%, up to $3bn; and enterprise risk services by 4.2%, up to $3.2bn.

Asked about the increasing challenges in the audit service line, Salzberg said: “When you compare it to consulting which is a high-demand services market, audit looks less robust, but our growth rate in audit was higher than previous years so we are obvi-ously extending our practice and increasing our quality.”

In recent years, with shrinking audit fees and increased regulatory compliance, accounting networks, and the Big Four in particular, have looked for additional rev-enues in the advisory and consulting arena.

This strategy was highly criticised in the wake of the Enron scandal in the early noughties, and some regulators have since put in place measures to draw a clear line between audit and non-audit services.

In response to those criticising the Big Four’s recent investments in consulting Salzberg said: “We’re well aware of our responsibilities in serving the public inter-est and we’re never going to take our eye off the most important ball, which is quality, and particularly audit quality as we have a commitment to the public and to the various stakeholders that have an interest in that.”

In a world of increasing complexity and greater and broader clients’ needs having an advisory and consulting practice “is almost quintessentially important” to delivering an effective audit, according to Salzberg.

“When you look at what you need to do an audit you need accrual services, tax services, valuation services, industry capabilities and the list can go on, so having a robust con-sulting practice can only contribute to the production of a high-value audit.”

Salzberg said he looked at it as a very smart business model for Deloitte and con-cluded: “I think that as long as we continue both in law and spirit to follow the rules we will continue to deliver well to the market on our professional responsibilities.”

Deloitte reported an uptake in revenues across the globe with emerging economies reporting the fastest growth: Africa grew by 17.6% and Latin America 14.1%.

The US remained Deloitte’s largest market and led a 7.5% growth across the Americas.

The second-biggest region of the global network, Europe, Middle East, and Africa, grew by 5.8% in local currency with Italy (11.5%), Germany (11.8%) and France (10.5%) leading the way.

Japan, India and New Zealand have been the best-performing countries in Asia-Pacific, according to Deloitte, and contributed to the regional growth of 4.9% in local currency.

The network hired 54,000 professionals in the year, bringing their total workforce to 210,400 compared to 202,885 in 2013. <

Morison International member firm and association of regional firms MHA MacIntyre Hudson has left the organisation to become Baker Tilly International’s UK member firm. The move was effective from 7 October and improves Baker Tilly International’s position in the UK after losing Baker Tilly UK to RSM earlier in the year. According to the International Accounting Bulletin 2013 UK survey, MHA and its association of nine regional firms in the UK earned £103m ($165.2m)

in annual revenues in 2013, which is substantially less than Baker Tilly UK’s £170m that year.

BDO International and BDO China have invested in a shareholding in BDO Hong Kong, effective 1 January 2015. The agreement will combine the business and advisory services in China and Hong Kong and is a first step towards the integration of the two firms, according to a statement by BDO International. The

announcement was made a little over a month after the standoff between BDO Hong Kong and BDO China. In September, BDO China had set up two firms in Hong Kong, which BDO Hong Kong quickly argued was a violation to BDO’s territorial regulations as member firms are not supposed to compete with each other.

Nexia International has added three member firms in Tanzania, Mozambique and Qatar.

Kreston International’s Australia

network Bentleys has opened its first

office in New Zealand, confirming

the increased integration of a

trans-Tasman economy. Based in

Auckland, Bentleys New Zealand has

been launched by Nick Den Heijer

and Roger Thompson, who said they

wanted to create a local firm that was

able to provide services and solutions

for clients between Australia and New

Zealand.

FirmMovements

IAB 542.indd 3 24/10/2014 12:42:19


NEWS International Accounting BulletinANALYSIS

PwC’s 6% global growth to $34bn still leaves Deloitte in pole positionDespite PwC’s global growth of 6% to $34bn in the year to 30 June 2014, Deloitte, remains the largest global accounting firm by revenue for the second year running with fee income of $34.2bn in the year to 31 May 2014.

PwC’s said its revenues increased across all service lines with assurance growing 3% to $15.1bn and representing 45% of the network’s overall revenue; tax practice rev-enues were up 8% to $8.8bn; and advisory fee income increased 10% year-on-year to $10bn.

Despite the acquisition of global consul-tancy Booz & Co, now named Strategy&, earlier in the year, which is likely to boost PwC’s advisory revenue significantly, the benefits are yet to be accounted for. The network stated: “The Strategy& acquisition was only completed in the last quarter of FY 2014 and therefore its full impact will not

be felt until FY 2015”.By region the network said the Middle

East and Africa practice showed growth of 16%, “reflecting PwC’s sustained invest-ment and the growing demand for our ser-vices as these economies rapidly develop and mature”.

South America revenue increased 13%, North America 7%, Europe 4% and Asia revenue was up 9%, an improvement from last year’s 2% growth.

PwC global chairman Dennis Nally said: “PwC firms continued to perform very well in FY 2014. This strong performance was despite economic challenges in some coun-tries, increased regulation and stiff com-petition in all our markets. PwC’s growth in emerging markets outpaced that in the developed economies. The emerging mar-kets are an increasingly important part of our business. They now make up 20% of

our global revenues and are expected to grow substantially over the next five years.

“We also saw excellent results from our largest firms in the developed world. Rev-enues were up in the US by 6%, in the UK by 5%, Germany by 4%, and in Japan by 10%. Even in countries such as Italy and France where the economic conditions remain tough, we have seen growth of 8% and 5% respectively,” Nally added.

The network’s headcount increased to 195,000, up by 6%. The firm added 45,000 people including 20,000 graduates world-wide.

PwC’s results mean that for the first time Deloitte will be the largest accounting firm globally for the second year running. Last year Deloitte took over PwC by only $300m after losing its leading spot to PwC in 2012 after it overtook its close rival for the first time in 2011.

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IAB 542.indd 4 24/10/2014 12:42:20


FEATUREInternational Accounting Bulletin IAB INDUSTRY FORUM

Is today’s consolidation trend going to affect tomorrow’s accounting land-scape? A quick glance at international accounting networks history is proof

enough that consolidation is not a new trend in the accounting sector, but with increased regulatory oversight and a pres-sured audit market what are the benefits and risk of external growth strategies for accounting networks?

Part of an expert panel speaking at the 2014 International Accounting Bulletin Industry Forum which tackled those ques-tions, BDO EMEA chief executive officer Anders Heede says that market consolida-tion will considerably modify the market structure for the mid-tier.

Heede says the mid-tier market is cur-rently crowded with networks all compet-ing in the same space and believes further consolidation will transform this landscape.

“In the future there will be few truly global networks and they will be bigger than their current size,” he says. “Then we will have mid-tier networks with a regional footprint and some smaller networks with a local presence.”

Six drivers of consolidationConsolidation in the mid-tier market will be led by six drivers, according to Heede, the first of which is the globalised nature of accounting networks’ clients. He cites a 2009 study by the EU Commission which looked at the internationalisation of Euro-pean SMEs.

According to this study, 44% of EU SMEs said they were involved in business activities outside the internal market. This includes at least one of the following activities: import, export, foreign direct investments, techno-logical cooperation with enterprises abroad, acting as subcontractor for a foreign main contractor and having foreign sub-contractors.

“This means that you need an inter-national footprint to better service your

clients,” Heede says, before highlighting the second driver for consolidation: the transformation of new markets.

According to global consulting firm McKinsey, emerging markets will be increasingly represented in the top 500 com-panies in the world over the next 10 years. The consulting firm predicts that by 2025, China will count 120 companies in the top 500 (against 54 in 2010).

Equally, in 2010 Latin America had 10 companies in the top 500 and by 2025 it’s expected to have 34. South Asia as well as Eastern Europe and Central Asia were rep-resented by eight businesses each in 2010, and are expected to grow respectively to 11 and 26 by 2025. Southeast Asia is expected to grow from four to 12 and Africa and the Middle East from one to 26 in the same period.

This trend has only picked up recently; in 1980 the developed regions had 477 com-panies in the top 500, by 2010 they still had 415 companies. But by 2025 McKinsey pre-dicts the number will drop to 271.

For Heede, this will have a huge impact on the mid-tier market landscape as it means networks will need to ensure they have a strong presence in the new markets.

Moreover it remains to be seen if and how regions like China will impact the profes-sion. “How is the Chinese market going to redefine the accounting landscape global-ly?” Heede asks. “We think that China will have the same impact on the industry as the US market had some years ago.”

The third and fourth drivers for further consolidation according to Heede are the increased cost of quality and the increased cost of technology. “Regulators are getting more and more involved, increasing the emphasis on networks’ responsibilities and capabilities,” he says. “This results in rising cost of compliance, growing financial sanc-tions and severe reputational risks.”

Equally the need for technological invest-ments is more and more important in order

to bring efficiency up, Heede continues.Heede’s fifth driver for consolidation is

the growth in advisory services. Over the last few months this has been particularly noted in the Big Four networks which have acquired a number of consulting compa-nies around the world. Most notably, PwC acquired Booz & Co in April this year. In 2012 Booz & Co had 3,000 staff in 57 offic-es worldwide and reported about $1.4bn in revenues. This merger earned PwC the 2014 IAB Award for Advisory Firm of the Year.

While the mid-tier networks are only starting to be active in this sphere, Heede believes it will pick up in coming years. And in the context of advisory and consolida-tion, Heede questions whether the Big Four are really the big four. “PwC and Deloitte are taking off especially due to their posi-tions in advisory,” he explains. “And in China two of the Big Four are not among the four largest firms.”

Heede’s sixth and final driver for con-solidation is the war for talent. He believes this will increase as the working population in some key markets will drop and as net-works all fight for the same scarce talent.

“Size matters – in order to have the width or, in other words, a global presence and the depth in quality and services to have the ability to invest in technology, process and people,” Heede concludes. “Size builds brand and not the reverse.”

Importance of advisoryWhile increased M&A activities among mid-tier networks will help growth and fos-ter new opportunities, Heede is not oblivi-ous to the challenges that will arise. In par-ticular he raises the question on the grow-ing importance of advisory in networks’ revenues.

“If we move into advisory in a big fash-ion, how are the regulators going to react in an audit context?” he asks. “It comes back to the recent and current debate on ‘is it advisory and audit, or advisory or audit?’”

Industry leaders agree accounting market consolidation is inevitable Speaking at the 2014 IAB Industry Forum in September, network leaders and advisers share their thoughts on how the current consolidation trend will change the market’s landscape and impact networks’ ownership structures, Vincent Huck reports.

Employers Staging:- 2014 40,000- 2015 200,000- 2016 880,000- 2017 1,160,000- 2018 540,000

Auto Enrolment is HERE, it’s REAL and it’s NOW!

Will your SME & micro Clients suffer from the Pension’s advisory Gap?

Spencer Hayes Financial Services is directly authorised by the FCA under licence number 461563. Our AE solution is an IFA-based proposition,

with a single pension provider selected for their experience and proven capability in delivering exactly this kind of product for exactly this application.

Call for a FREE consultation today – you will not be disappointed. This is THE Auto Enrolment solution for You, Your Clients and Your Business.

Phone: 01254 505520 or email: [email protected]

Is this YOU?…• Does your existing IFA connection provide a compliant solution for all your SME and micro Clients?

• What happens if your Client’s can’t find an Auto Enrolment pension provider?

• Does your Client base fully understand the implications?

Our experience in the market has confirmed that some providers and advisers are

reluctant to get involved with employers numbering less than 49 employees.

This segment is 99.2% of the UK’s employers with 80% employing 30 or less.

This is US…• An IFA-based proposition

• A single pension provider with a heritage of providing high volume AE solutions

• An end-to-end solution for employer and/ or Payroll Bureau

• Unique, batch processing option for Accountants providing scale efficiencies

• No selectivity – all sizes of employee base accepted

We Offer…• Fixed cost, single one-off Client fee – no hidden or additional costs

• Satisfies your Client’s Statutory Obligation to provide compliant workplace pension

• “One size fits all” – this is an “out of the box” solution that covers SME’s and micro’s

• Act now to ensure your Client’s avoid Regulatory fines – this is a complex process

Under the Pensions Act (2008) all employers have a statutory obligation to provide their employees with a compliant, workplace pension scheme by the employers appointed

staging date, which is allocated by The Pension Regulator.

IAB 542.indd 5 24/10/2014 12:42:20


FEATURE International Accounting BulletinIAB INDUSTRY FORUM

Also part of the panel of experts, Grant Thornton International general counsel Dan Lichtenstein says Heede’s vision is interesting.

“But for me all our organisations are on a spectrum,” he adds. “At one end, loose associations of firms which are essentially referral networks and at the other end of the spectrum you have global partnerships.”

“Where you want to go on that spectrum is going to dictate where you focus in terms of growth,” he continues.

On the question of advisory versus audit Lichtenstein says audit is, and has always been, the core activity of accounting net-works.

“We can’t lose sight of audit quality, so when we look at diversifying we should keep it on our mind,” he says.

Similarly he says greater diversification is not necessarily better, and a smarter

strategy might be to pick a few core services and focus on those. Commenting on the recent trend amongst Big Four networks to acquire legal firms Lichtenstein asks: “Does a client actually wants the same firm to pro-vide accountancy and legal services?”

Moreover while the combination of accounting and legal services might work in some countries, in other countries there needs to be a clear separation, he says.

RisksFor Lichtenstein the most important aspect surrounding external growth strategy is for a network not to lose sight of its reasons to grow.

“You’re growing because you want to improve quality,” he says. “You want to improve your client base; you want to be able to win new clients; you want to see the growth through being a bigger better

entity. So don’t lose site of the reasons why you’re growing and other options such as organic growth and lateral ladders might be worth exploring.”

Wragge Lawrence Graham & Co partner Jane Howard, also a panellist, reminds the audience at the 2014 IAB Industry Forum that external growth strategies do not come without risk. There are two scenarios net-works should consider in order to protect themselves, she says. One is losing a mem-ber firm and the other is acquiring a mem-ber firm.

“When the waters are calm it’s a good time to look at the network’s constitutional documents and stress test them,” Howard says.

“Regularly dust your constitutional doc-uments off to make sure that they ensure power for you at network level to manage the network.”<

Q&A

William Buckley, Linklaters partner and panel chair: Is consolida-tion just about bulking up – as you said earlier size builds the brand – or is it about cutting costs?

Anders Heede, BDO: It’s both. Having a stronger presence in the mar-ket is one thing. Getting more efficient around your cost base is another tremendous driver, so I would say it’s both.

Dan Lichtenstein, Grant Thornton: A key driver for expansion is also responding to the needs of larger clients. So I think the answer to your question is the consolidation is coming from different angles.

Jane Howard, Wragge Lawrence Graham & Co: A merger has two real purposes. One is the sharing of resources and cutting of costs, but it’s easy to forget that this is the quick win. The real opportunity is how you merge with hearts and minds and you go out to market and present something that’s bigger than the two parts. I think there can be a distraction in the early stages of the merger, worrying too much about the costs and forgetting the bigger picture.

Keith Tracey, managing director, Aon Global Professions: Do you think the ownership structures are a barrier to implementing a suc-cessful global strategy? And do you see the ownership structures changing?

Heede: Most mid-tiers firms have a geographical model and it is pretty solid for national opportunities. But it does limit us in some of our growth aspirations, especially in the advisory field when it comes to cross-border activities. If we stay where we are it can last pretty long, but if we want to diversify we have to look into how we cooperate on an international level with all the questions coming from the legal and risk side of that.

Lichtenstein: Structure should be constantly reviewed, because the environment is constantly changing. We have to look con-tinuously at the structure to make sure that it’s enabling the networks and firms to reach full potential. The Big Four have a very robust global risk management infrastructure which allows for a level of integration that you don’t see in the mid-tier networks. My instinct is that given the general direction of the mid-tier firms they will develop similar platforms so that they can become more integrated.

Buckley: How do you deal with risks coming from new members in new countries?

Howard: Some networks deal with this by having different levels of memberships. So you might have some lesser form of membership such as ‘correspondent member’ where there’s an incubation period to prove their worth before stepping up to full membership and that might include not being able to use the name or logo for example, which reduces the risk for other members.

John Bailey, managing partner, Haines Watts: In the UK the regula-tory bodies says there’s a need to provide more competition for the Big Four. Do you think the mid-tier firms can offer a viable alterna-tive or would it take a merger between Grant Thornton and BDO, for example, to become the Big Five?

Heede: I think that quite a few of us are already competing in many markets against the Big Four. The Big Five is an interesting question, when we [BDO] overtook EY in the Danish market, for example, we didn’t call them the Big Four anymore. We’re able to challenge market position and serve global clients so I think we’re already there competing with the big guys.

IAB 542.indd 6 24/10/2014 12:42:21



In September, the 2014 IAB Industry Forum featured a session on the real-ity of cyber risks and how to manage them, with experts gathered to dis-

cuss one of the most publicised and fastest- developing issues for businesses and indi-viduals across the globe: cybersecurity.

Few security issues have attracted more attention than cyber attacks in recent years, concerning businesses and provoking imagi-nations across all sectors of industry. In an age in which increasing amounts of sensitive information are stored online, privacy is fast becoming one of the most pressing concerns facing the professional services industry globally.

Through seeking to investigate “the threat landscape”, the session addressed not only how businesses protect themselves from attackers, but also who these attackers are, and why and how they are attacking. In par-ticular, according to Keith Tracey, managing director, Aon Global Professions and chair of the session, key questions are: “What data is at risk? What are the key vulnerabili-ties and how do you go about thinking and organising yourself once you have answered those questions?”

Cost of cyber security “The scale is astonishing,” admits Orla McRae, assistant director of the UK govern-ment’s Department for Business, Innova-tion & Skills. For example, she says a 2014 Breaches Survey, conducted by the govern-ment in partnership with PwC, “found that 81% of large companies and 60% of small companies had experienced a breach”.

A breach can mean anything from a mali-cious insider, to insider threat, to accidental loss, she explains, but also said: “One of the really notable findings this year is the cost of cyber attacks. For a small business they’ve nearly doubled from £65,000 to £115,000”, a cost McRae describes as “pretty devastat-ing” for a small business. “That is part of the reason why the UK government has invested so much money in addressing this situation,” she explains: “It’s not just a national security

issue for us; it’s a clear threat to our econom-ic wellbeing, as well.”

The UK government has responded to the threat through the national cybersecurity strategy, published in November 2011. It has received £860m in funding, which is a clear indication of how seriously Westminster sees the issues, adds McRae.

“I think what’s really important for the accountancy profession is the understanding of what your clients really value,” contin-ues McRae. “You might not have the same understanding of what information assets are important to them, but you should do.”

“You can’t protect everything all of the time, so you really need to think about what’s most important to you. Is it your cus-tomer list? Is it commercial positioning? Is it bid information? Is it intellectual property or telephone calls? You really need to focus on what matters most and then put the most controls on that.

“If people acted like they do on the street online, then we wouldn’t have so many problems,” says McRae and explains this principle is at the heart of much of the gov-ernment’s action on cybersecurity: “If you were just more aware of who had access to your information the same way you are aware of who has access to your house, then maybe we could cut down on the level of successful cyberattacks.”

“I was at a talk recently by one of the technical directors at GCHQ and his slide on the matter was entitled: “Winged ninja cyber fairies”. I think it was his attempt to try and combat some of the stereotypes,” she explains. “It’s not that mystical; it’s not that otherworldly. These are real people that behave like humans and there are some very sensible things you can do to protect yourself against them.”

As such, she says: “We feel cybersecurity should be part of the day job. We think eve-ryone should understand what their respon-sibilities are and where they can go for help.”

In terms of the which professions might find themselves most at risk, McRae says there are two reasons behind the

government’s choice to partner with accountancy and law firms in particular: “One is because we see attacks against these companies which are seen by several [cyber-criminals] as a soft underbelly – so compa-nies might be taking steps to protect their business information and then they send it to their trusted business advisor, or accountant or lawyer, who has less protection and sud-denly that has undermined their work.

“The second, more positive reason is because the reason people send you all their information is because you are trusted. We hope to use that trust to our advantage and get the profession to be messengers for cybersecurity, to advocate for good practice and join us on this journey.”

Stakeholder expectationsAs attacks become more frequent, sophisti-cated and effective, “stakeholder expectation is probably what worries me most”, reveals PwC UK security director John Burdett. “It’s our customers and our business partners say-ing ‘I will not do business with you unless you’re protecting my information properly, and when we do have a problem, I’m sorry I’m going to go somewhere else’. That’s the real threat to our business.

“In our last survey, 50% of companies said they had a strategy for dealing with cybersecurity and they were proactive in put-ting that into effect and 74% said they were confident with their cybersecurity posture.” Although this is “fantastic news”, according to Burdett, he admits: “I don’t believe it.”

He points to a recent FTSE 350 survey, which showed only 11% of respondents describe their boards as “well-placed to manage risk in a digital age”. Conversely, 80% said none of their board members had undertaken any training in cybersecurity in the past year. There are some skills missing at the board level, he finds, as well as “a war for talent” for security practitioners adding to the difficulty of getting real experts into organisations.

“Money, vision, leadership and strat-egy are all things that are completely in the

Cybersecurity and the threat landscapeNew technologies have become an increasingly central part of business. With them have surfaced not only a wide range of nascent opportunities, but also an entirely new set of challenges and threats. Isabella Grotto reports

IAB 542.indd 7 24/10/2014 12:42:21


FEATURE International Accounting BulletinIAB INDUSTRY FORUM

hands of the organisation and its leadership to deal with,” says Burdett, and yet they are all listed as barriers to security in PwC’s lat-est Global State of Information survey.

In order to reduce the risk to organisa-tions “we need the right capabilities”, says Burdett. “There are technologies; there are frameworks out there that we can use to reduce the risk to organisations substantially and it’s just up to us to get on and use them.”

One challenge involves addressing the skills gap at board level, as often those with the capabilities to deal with issues are so jun-ior within their organisation that they don’t have the power to take necessary major action. In the long run, this is also likely to prompt some major questions around talent management, adds Burdett.

The establishment of a leadership capable of defining the issue, forming a vision for its solution and driving change is fundamental, he says. Indeed, he sees the road to strong cybersecurity capabilities as a largely top-down one: significant changes in leadership, strategy and governance, architecture and operational control and management are all vital to security.

Furthermore, cybersecurity should be incorporated by management into risk and governance mechanisms from the start, “built into our performance metrics, built into the way we operate and built into the way we measure our performance,” he says.

A final point Burdett addresses is the need to form strategic alliances. “There are lots of services out there that partner with organisa-tions and will help you operate some of these things and manage some of these things for you,” he says.

According to Burdett, collaboration between organisations, enabling useful knowledge sharing and mutual learning, is especially useful. There are several oppor-tunities for such exchanges “some organ-ised by the government, some organised by industry bodies, by product vendors, firms like mine – all ways we can form alliances”, although ultimately nothing can replace the core management of the organisation.

Bring your own device“Possibly one of the biggest issues I see in the real world of data breaches is around bring your own device (BYOD); the notion that people come into your place of work, using their own devices and connecting them to your computer network,” says OpenSky

practice director for cyber security, risk and compliance Nigel Stanley.

Although formal company policies allowing for BYOD are relatively rare, he explains, the reality is that most businesses are probably doing it without realising, as productive workers store data necessary for work on their devices, completely outside the control of their bosses.

“If hackers can compromise a smart-phone, think of the information they can get about you, your business, and your clients’ business,” warns Stanley. “Data breaches relating to devices and smartphones are increasingly prevalent,” he says. “This is a very big area that certainly the bad people are getting into.”

Another security issue is caused by loss of the devices themselves, a trend Stanley defines as “incompetent and non-malicious; a data breach because someone has made a mistake”. By comparison, he explains, “the competent and malicious is actually quite rare”.

The “golden hour”Once a breach has occurred, the way you manage it in the first “golden hour” fol-lowing the event is of primary importance, explains Stanley, and “often that’s down to leadership and deciding how you ‘triage’ the issue and manage it moving forward”.

Further, for most businesses that have suf-fered a malicious breach the exclusion of the person responsible is a top priority. As such, his advice is: “Think about your policies, think about your governance, because that is the starting point when it comes to manag-ing these incidents and moving the incident forward.

“The first thing you ought to do when you go back to your offices, as of tomorrow, is to think about this. Think what you would do if you were subject to a data breach. How on earth you would manage it and how you would make sure the right people were involved at the right level of the organisa-tion, rather than the junior person down the corridor managing what is a serious inci-dent.”

After the session chaired by Tracey, IAB caught up with both Tracey and Stanley and asked them to comment on the proposition that “cybersecurity is an issue increasingly recognised as important within the account-ing industry, particularly among the larger entities, primarily because of how important

the security of client data is to firms”.It’s “hugely important”, agrees Stanley, as

dealing with clients and client data means the impact of a possible breach has the potential to be huge for the firm. “It could mean massive reputational damage if they are seen to be losing client information or client intellectual property,” he says.

“Interestingly, hackers and cybercrimi-nals are identifying the supply chain, and accountancy professionals are often in the supply chain to an end-user, so instead of tackling an end-user directly to try and obtain their intellectual property, they might be going in via their professional services companies. Quite often the professional ser-vices companies might have less in the way of technical controls and maybe less of an understanding of the issue. Therefore they are a weaker target.” As such, “even a fairly short risk-assessment I think would be a very valuable use of their time and effort”.

Address the issueLooking back, Stanley says the main mes-sage he intended to transmit to those attend-ing the session on cybersecurity was: “This is the complexity of the threat; now what can you do to address that issue today?”

“The number one action [individuals and organisations] should undertake would be some form of an assessment, so they can get an understanding of what their cyber business risk actually is, as it applies to their individual companies.”

Tracey agrees: “I think for the smaller firms it’s a risk-based approach – what expo-sure do they have?” he says.

While wider understanding of the phe-nomenon is driven by “rather sensational-ist” media coverage, he says a challenge for organisations continues to be not only understanding that there’s a threat, but also putting in place a response that’s proportionate.

As regulators realise the importance of cybersecurity, compliance is likely to become an increasingly important driver, adds Tracey, but he warns that on its own it’s unlikely to be sufficient. “There’s a dif-ference between being compliant and being secure. It’s very easy to be seduced by the notion that you’re compliant and you think therefore you are secure, but they are two very separate issues.”

“People need to be thinking broader than just compliance,” he concludes. <

IAB 542.indd 8 24/10/2014 12:42:21



Q&A

How does the UK government’s work in the area of cybersecurity com-pare to that in other countries?

McRae: Obviously the UK is leaps and bounds ahead of our inter-national partners, so that’s good news. But, in all seriousness, it is a global threat so there does need to be a global response. There is a lot of work going on at a European level; there’s a new directive currently being negotiated in the Council which will address certain elements of cybersecurity, and it says each member state should have a cybersecurity strategy, a central emergency response team and there’s also an element of reporting of breaching for certain industries. We’re negotiating that at the moment, but some of the requirements the UK is ahead on, some of them we don’t like par-ticularly and some of them might go away.

In the US they are doing very similar things to us, so they have something called the Nist Framework, which is their effort to create standards for cybersecurity so it’s slightly more in-depth than cyber-essentials, but is very much along a similar philosophy.

Every country is interested in it, because every country is being hit; there are no borders in cybercrime.

If clients comes to you worried about their data in your environment, how can you give them comfort that you’ve done all that is possible to do?

Burdett: That’s a really important question. Quite often you get a question along the lines of “Are you ISO certified? Do you meet these standards?” and so we answer those, but my question [to the client] is always: “What is your concern? What data is it you

are worried about?” I am happy to explain what we do and work out the appropriate risk management, because actually maybe the answer is: “You don’t need to give me some of that data.

Actually, maybe you need to do something different in the way you operate with us that makes this whole service and process more secure. Maybe you need to encrypt it at your end before you give it to us, or maybe there are ways we can operate on site.

Who knows what the processes are we can do to make it more secure? But I would rather have that debate, than simply fill in the questionnaire or tick the box that says we’re ISO certified, which we are.

Those things might answer the question if it’s a simple procure-ment exercise, but if there’s a real debate around what are the risks to the organisation, that’s much more valuable, I think.

When you are called in, is it usually a case of “we know something has happened, but we’re not really sure what it is”, where somebody may have penetrated the system but the business is not sure of the consequences?

Stanley: The issue is there has to be an event which indicates to peo-ple that something has happened. There has to be something that gives something away. I think the sad thing is that, for many of the organisations I work with, they have actually been subject to a data breach for many, many months and they just don’t know about it. I heard a great stat a while back – according to the UK payments industry, the average time from a data breach through to detection is about 18 months, so it’s pretty scary stuff that happens under-neath the radar.

IAB 542.indd 9 24/10/2014 12:42:27

COUNTRY SURVEY International Accounting Bulletin


While Japanese companies and households are still cutting costs, the government under Prime Minister Shinzo Abe is working

to promote domestic investment, as well as encouraging public confidence after win-ning the bid for the 2020 Olympic Games, which will be held in Tokyo.

Big Four as well as mid-tier accounting firms are reporting increased revenues in the past financial year as a result of increased client engagements.

While audit services still generate the bulk of accounting practice revenues, fees from advisory services are growing as companies begin investing in business expansion.

Spurred by the business sector’s improved confidence, many Big Four and mid-tier firms have begun to streamline and expand their advisory services to support clients investing in Japan and the growing number of clients seeking overseas M&A opportu-nities, particularly in the Asian region.

Revenue growthAccording to firms surveyed by the Interna-tional Accounting Bulletin at least three of the Big Four have reported revenue growth in the past financial year with the top-ranked firm Deloitte Japan, recording a 5% rise in revenue for the financial year ending 31 May 2014, compared with the previous year.

Second-placed KPMG Japan reported revenue up 2% in the financial year ending

30 June 2014, compared with the previous year, while third-placed EY Japan reported a 5% increase in revenue for the financial year ending 30 June 2014, compared with the previous financial year.

Fourth-ranked PwC Japan had estimated revenue of ¥62.87bn ($584.6m), up 5% in the year to 30 June 2014.

Results among mid-tier firms in Japan show greater variation than among the Big Four, due in part to mergers that have taken place among several local members of inter-national accounting firm networks.

BDO Japan, the fifth-largest accounting practice in Japan, with revenue equivalent to about 20% of fourth-placed PwC Japan, reported a 4% increase in revenue in the year to 30 June 2014, while Grant Thorn-ton International in sixth place reported a 6% increase in revenue for the year ending 30 September 2013.

Baker Tilly International, meanwhile, reported a strong 26% increase in revenue to ¥2.57bn in the year to 30 June 2014, moving to eighth place, followed by Rean-da International which reported a 17% increase in revenue for the year ended 30 June 2014.

Crowe Horwath International is in 11th place after recording a 4% increase in rev-enue in the year ending 31 December 2013, followed in 12th place by Nexia Interna-tional which reported a 14% rise in revenue for the year ending 30 June 2014.

Audit is the major service line for at least

12 of Japan’s top 15 accounting practices, being equally important to Big Four as well as mid-tier firms. Audit and accounting fees, for example, account for 75.6% of KPMG Japan’s total revenue, 76% of EY Japan’s and 75.4% of Grant Thornton Japan’s.

Tax work is the second-largest revenue source for most Japanese firms. However, most practices are investing in develop-ing advisory services which seem likely to become the second-largest source of revenue for many in future.

“Until last year our total revenue was declining but the result for financial year 2014 [the year ending 30 June 2014] was a slight increase,” says Tsutomu Takahashi, chairman of KPMG Japan. “Tax work rev-enue saw a slight decline, but KPMG is still number one for tax work revenue among Big Four firms in Japan.

“In advisory we have been fortunate as we achieved a revenue increase in financial year 2014 of over 13%, which is a good sign.”

Japan’s audit market is quite stable in terms of accounting firm market share as most companies prefer to use the same audit firm each year. However, some companies do change their audit firm from time to time.

“The audit market in Japan doesn’t have as many tenders as Europe or the US,” Takahashi says. “It’s rare for our audit cli-ents to change to a competitor firm, or for a company to change auditor from a compet-

Brighter days dawn in the Land of the Rising SunThe past year has been a busy period for Japanese accounting firms as growth-orientated government policies, known as Abenomics after prime minister Shinzo Abe, have been implemented and the recovering economy has begun to boost business confidence and lifted demand for accounting practices’ services. David Hayes reports

IAB 542.indd 10 24/10/2014 12:42:35

COUNTRY SURVEYInternational Accounting Bulletin


JAPAN

ing firm to us.”Audit fees remain under pressure due to

tough competition among Big Four and mid-tier firms with clients unwilling to increase the level of fees paid.

“Due to the regulated audit industry we operate in Japan, fees on engagements have not kept up with the increase in hours to meet the demands of the ever-changing regulatory environment,” says Soichiro Kitano, international division partner at BDO Japan.

“Although we have increased the number of audit clients, audit service revenues have remained flat overall, primarily due to the highly competitive market coupled with public audit clients delisting from the stock market.

“On a positive note, our firm has experi-enced an increase in audit clients wanting to list in Japan and we expect to see our client list of prospective IPO clients increase.”

Audit quality remains an important issue, Kitano notes, with the Certified Public Accountants and Auditing Oversight Board (CPAAOB), having updated its Audit Firm Inspection Policy in April this year.

The CPAAOB is a subdivision of the Japan Financial Services Agency (JFSA), which regulates and inspects accounting firms involved in the audit of publicly listed companies. The CPAAOB has indicated in its updated policy that routine inspections will be conducted every two to three years for Big Four and mid-tier audit firms.

Top management attitudeThe CPAAOB has also indicated that the emphasis of inspections will be directed at audit firms’ top management attitude to audit quality, tying in high-quality audits with the performance evaluation process, along with partner and professional staff salaries, and audit firms’ capability in con-ducting “group” and “financial institution” audits.

Audit firm competence at conducting group audits, Kitano observes, has come under the spotlight since accounting fraud was discovered at an overseas subsidiary of Olympus in 2011.

At the same time company auditors and the top management of Japan’s publicly listed companies are becoming more

involved in assessing the capability and rep-utation of their audit firms as part of their corporate responsibility to shareholders and commitment to improved corporate governance.

“The CPAAOB has issued damaging inspection reports on several audit firms, which resulted in the suspension of these accounting firms, which are forbidden from taking on new publicly listed audit clients for one year,” Kitano says.

“These inspection reports, which are available to the public, have negatively impacted the reputation of these audit firms and, in certain cases, the clients have replaced their accounting firms.

“In 2014 the impact of these reports has been limited to small and mid-sized firms and fortunately has had a minimal impact on financial markets in Japan.

“We believe that the CPAAOB will con-tinue to raise the bar on audit quality for audit firms and continue to place pressure on the large and mid-size accounting firms auditing publicly listed companies.”

With Japan’s economy finally showing signs of recovery in response to the govern-

■ JAPAN

NETWORKS — FEE DATA

Rank NameFee income

(¥m)Growth

rate

Fee split (%)

Year-endAudit &

AccountingTax

servicesManagement

consultingCorporate

finance

Corporate recovery/

InsolvencyLitigation

support Other

1 Deloitte* 134,839.0 5% 63 7 23 7 — — — May-14

2 EY* 107,438.7 5% 76 7 — — — — 17 Jun-14

3 KPMG* 106,832.0 2% 76 11 — — — — 13 Jun-14

4 PwC* (e) 62,867.7 5% — — — — — — — Jun-14

5 BDO* 12,498.6 4% 44 42 8 1 — — 5 Jun-14

6 Grant Thornton International* 6,521.0 6% 72 15 3 4 1 1 4 Sep-13

7 RSM International* 3,806.0 –1% 25 13 — — — — 62 Dec-13

8 Baker Tilly International* 2,574.9 26% 46 36 16 — — — 2 Jun-14

9 Reanda International* 2,284.0 17% 10 27 41 — 20 — 2 Jun-14

10 PKF International* 1,174.8 6% 86 2 12 — — — — Jun-14

11 Crowe Horwath International* 1,897.7 4% 77 1 19 1 — — 2 Dec-13

12 Nexia International* 1,836.0 14% 85 — 13 — — — 2 Jun-14

13 HLB International* 1,313.8 10% 32 47 17 — — — 4 Dec-13

14 ECOVIS International* 1,302.2 5% 60 40 — — — — — n/a

15 Kreston International* 1,093.6 6% 78 4 — — 1 — 17 Oct-13

16 Mazars* 278.6 72% — — — — — — — Aug-14

17 Moore Stephens International* 512.0 –2% 65 26 — — — — 9 Dec-13

Total revenue/growth 449,070.5 4%

Notes: (e) IAB estimates made on the besis of staff growth informtion provided to the IAB. *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not included.

Source: International Accounting Bulletin

IAB 542.indd 11 24/10/2014 12:42:41



JAPAN

ment’s growth strategy to stimulate private investment, most Big Four and mid-tier firms are gearing up their advisory services to meet growing interest among new and existing clients.

Spurred by the business sector’s improved confidence, many practices have begun to streamline and expand their advisory ser-vices to support companies investing in Japan, along with the growing number of clients seeking overseas M&A opportuni-ties, particularly in the Asian region.

“We’ve strengthened our advisory ser-vices such as Financial Accounting Advi-sory Services (FAAS), Fraud Investigation and Dispute Services (FIDS), Supply Chain Management (SCM) and Customer Rela-tionship Management (CRM),” explains Seiji Yamamoto, executive board member of EY ShinNihon.

“In April 2014 we established Ernst & Young Financial Services Advisory Co Ltd, which specialises in providing support for financial institutions.

“Companies are still continuing to slash costs, but at the same time the yen depre-ciation has increased overseas investment in Japan. These trends are leading to increased demand for cross-border consulting and IT advisory services.”

KPMG Japan recently streamlined its advisory services by consolidating sever-al services into one unit in July this year, when KPMG Management Consulting and KPMG Business Advisory merged to

become KPMG Consulting which offers business transformation, risk and compli-ance, and technology advisory services.

“One of our targets is to expand advisory services. For audit and tax work we are in a good position in the market, but advisory we need to strengthen,” explains KPMG’s Takahashi.

“We had six advisory member firms in Japan, so we consolidated some advi-sory service firms, other than KPMG FAS, KPMG AZSA Sustainability and KPMG Healthcare Japan, into one unit. We want to market KPMG Consulting, as well as KPMG FAS which is well established as one of the major financial advisory firms in Japan.

Mid-tier practices are also seeing demand for advisory services increase which is lead-ing many to hire new consulting staff to expand their advisory teams.

“We have reconstructed and streamlined our organisation for more efficient advi-sory services delivery,” explains Satoru Endo, managing partner of Grant Thorn-ton Japan, noting that the firm changed its corporate brand on 1 October to strengthen its presence in Japan’s accounting market.

“We see a continuous growth in the advi-sory services market and the revenue from these service lines has steadily increased accordingly. We are now facing the issue of hiring quality staff to enhance our service capabilities.”

A&A Partners, an independent member

firm of Morison International, is expand-ing its advisory activities as well. The firm’s overall revenue has increased about 3% during the past 12 months following the acquisition of some non-listed clients while three listed clients also started using A&A Partners’ services.

“Revenue from advisory services has increased by around 4%,” Kenji Oka, a partner at A&A Partners says. “Although revenue from audit services increased this year due to new clients, competition among accounting firms is still intense.

“We consider revenue from advisory ser-vices as very important and will make fur-ther efforts to enhance our service capabil-ity in that area.”

Baker Tilly Japan is another mid-tier firm that expects advisory engagements to increase in future, but has also strengthened its audit and tax service capability during the past 12 months.

Baker Tilly Japan managing partner Mickey Kida says: “It’s been an exciting year for Baker Tilly Japan as we’ve strength-ened our coverage through adding a leading Tokyo-based firm, Nihombashi Corpora-tion, to the network. We also merged with Daido, an audit firm based in Osaka.

“Audit has been growing at a slow but steady rate, but the key areas where we’ve seen real growth is in tax and advisory ser-vices for foreign investment structures.

“We’ve seen a general increase for tax advisory services on inbound M&A and

■ JAPAN

ASSOCIATIONS – FEE DATA

Rank Fee income

( ¥m)Growth

rate

Fee split (%)

Year-endAudit &

AccountingTax

servicesManagement

consultingCorporate

finance

Corporate recovery/

Insolvency Litigation

support Other

1 PrimeGlobal* 1,980.7 30% 40 35 18 — 1 5 1 May-14

2 Integra International* 1,400.0 0% 55 25 20 — — — — Jun-14

3 Praxity* 1,045.0 7% — — — — — — — n/a

4 INPACT Asia Pacific* 999.1 1% 29 66 5 — — — — Dec-13

5 Morison International* 686.5 –8% 87 — 12 — — — 1 Dec-13

6 CPA Associates International* 572.3 3% 50 40 8 1 1 — — Mar-14

7 MGI* 386.2 9% — — — — — — — Jun-14

8 DFK International* 382.5 –13% 44 41 15 — — — — Sep-14

9 AGN International* 372.0 13% 70 30 — — — — — Oct-13

10 MSI Global Alliance* 68.6 37% 100 — — — — — — Dec-13


Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not included. Source: International Accounting Bulletin

IAB 542.indd 12 24/10/2014 12:42:42



JAPAN COUNTRY SURVEYInternational Accounting Bulletin

investments.“Part of our strategy is to focus on the

following areas which we see as profitable in the next few months: workings with non-profit organisations, corporate recovery, and corporate finance and IPOs.”

The recent growth in advisory work has been affected by overseas investment trends among Japanese companies and by foreign investors’ activities in Japan. While the yen depreciation has made Japan more attrac-tive to inbound investors, the weak cur-rency has resulted in overseas M&A deals becoming more expensive for Japanese com-panies to pursue.

Kenneth Smith, managing partner and Japan area leader for transaction advisory services at EY ShinNihon says: “The yen devaluation has had several impacts vis-à-vis M&A. First, outbound investment from Japan has taken a “wait and see” stance as deals become 10% to 20% more expensive.

“Companies most impacted by this were the first-time buyers, typically middle mar-ket clients. Larger companies continued with their investments despite the currency

situation as long as the deals made strategic sense.

“Secondly, and in conjunction with the increasing confidence of the new Abe government, foreign investors are slowly investing again in Japan, led by private equity firms, real estate and life science companies.”

Mid-tier firms assisting outbound Japa-nese investors include RSM Japan which recently assisted a client in completing a primary listing on the Hong Kong Stock Exchange and is advising a number of clients establishing business activities else-where in Asia.

“We’ve been involved in project finance for mega solar power systems and cross- border wealth planning including inter-national inheritance tax services due to demands in the market,” RSM Japan man-aging partner Akinaga Murayama explains.

“Transfer pricing, customs duty, corpo-rate revitalisation and business takeover consulting are services we are focussing on.

“We are emphasising assistance services for investing in Asian countries and cross-border M&A. Global-based tax planning is

required and we appreciate being in the inter-national network of RSM International.”

One reason that demand for outbound referral and cross-border M&A advisory services is growing is Japan’s declining, ageing population which currently numbers 127 million people.

Consumer-orientated companies includ-ing food and beverage companies, depart-ment stores, car-makers and other enter-prises are concerned about the consumer market decreasing as the population ages and declines.

More and more Japanese companies are hoping to create future business growth by investing overseas.

“KPMG Consulting has recently hired many technology consultants in response to the needs of Japanese companies, which are looking at how to expand outside Japan and pursuing business transformation by information technology,” explains KPMG’s Takahashi.

“We can provide advice for strategy, r isk management, and performance management and we can establish more sophisticated financial controls through

■ JAPAN

NETWORKS – STAFF DATA

Rank Name

Total staff Growth rate

Partners Professional staff Administrative staff Offices

2014 2013 2014 2013 2014 2013 2014 2013 2014 2013

1 Deloitte* 8,693 7,928 10% 714 699 6984 6351 995 878 39 39

2 EY* 7,077 6,757 5% 677 675 5,650 5,340 750 742 33 33

3 KPMG* 6,374 6,252 2% 718 713 4,945 4,844 711 695 35 36

4 PwC* (e) 3,833 3,650 5% - - - - - - - -

5 BDO* 1,165 1,049 11% 162 160 898 793 105 96 43 35

6 Grant Thornton International* 492 453 9% 67 67 272 216 153 170 8 8

7 Crowe Horwath International* 338 314 8% 54 50 252 235 32 29 15 10

8 Baker Tilly International* 267 244 9% 56 53 118 148 93 43 13 11

9 RSM International* 236 236 0% 21 21 189 189 26 26 4 4

10 Reanda International* 190 171 11% 11 11 169 150 10 10 10 5

11 Nexia International* 175 123 42% 37 37 118 78 20 8 4 4

12 PKF International* 163 141 16% 18 25 139 111 6 5 3 2

13 ECOVIS International* 127 114 11% 8 8 111 97 8 9 2 2

14 HLB International* 110 101 9% 18 18 79 70 13 13 5 4

15 Kreston International* 88 86 2% 16 16 54 56 18 14 3 3

16 Moore Stephens International* 37 36 3% 11 11 24 23 2 2 1 1

17 Mazars* 28 22 27% 2 2 24 18 2 2 2 2

Totals 29,393 27,677 6% 2,590 2,566 20,026 18,719 2,944 2,742 220 199

Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not included.Source: International Accounting Bulletin

IAB 542.indd 13 24/10/2014 12:42:43



JAPAN

technology consulting.“Transfer pricing is a big area for

tax advisory services as companies are expanding overseas, especially for compa-nies that focus on the domestic market and don’t have enough knowledge on cross-bor-der taxation and transfer pricing.

“Outbound referrals are increasing rap-idly to China, India, Brazil, Indonesia, Mexico and South Africa. They have been expanding there for the past five years and to China for the last 10 years.”

A&A Partners is seeing a rising number of Japanese clients investing overseas unde-terred by the weak yen.

“More and more Japanese companies are investing overseas in spite of the yen depreciation this year. The number of for-eign companies coming to Japan has not increased so much. They may believe that the consumption level in Japan will not increase so much in future,” Oka says.

“Japanese companies continue to invest abroad and the number of their overseas subsidiaries is increasing. As some of our clients have established overseas subsidi-aries recently, our outbound referrals have increased.”

Japan’s tax service industry, meanwhile, continues to operate in a highly competitive low-margin market. Individual tax practi-tioners continue to dominate the domestic tax market, notes BDO Japan’s Kitano, while Big Four and mid-tier firms domi-nate the market for international and cross-border tax transactions, including transfer

pricing engagements.“Recurring tax compliance engagements

continue to generate small margins whereas tax structure, cross-border and transfer pricing engagements generate higher mar-gins,” Kitano says.

“Upcoming changes in corporate taxes, increases in consumption tax rates and the increase in tax audits by Japanese tax authorities should provide opportunities for tax practitioners.”

BDO Japan operates a large tax practice which is about one-third to one-half the size of the three leading Big Four firms’ tax practices and four times the size of the next largest mid-tier firm’s tax practice.

BDO Japan’s tax practice has been aggressive in acquiring small tax practices outside of Tokyo, Kitano says, which has resulted in tax work revenues increasing 9% during the last financial year.

“Mid-size tax firms have taken an inter-est in expanding their operations overseas in Southeast Asia, establishing offices to provide tax compliance, payroll and book-keeping services to their clients with opera-tions in the region,” Kitano says.

“This trend should continue with Big Four and mid-tier accounting firms second-ing their professionals overseas to ensure the expectations of key global clients are met.”

Meanwhile, the Japanese government has still to decide whether to introduce the man-datory use of IFRS in Japan. The Japanese government and JFSA continue to monitor

developments in the US to see whether it decides to adopt IFRS before making a final decision for Japan.

Japanese companies have been permitted to apply IFRS, if certain criteria are met, since the financial year ending 31 March 2010.

According to Japanese accounting firms’ figures, the number of Japanese compa-nies voluntarily adopting IFRS rose more than fourfold to 36 companies during the 12-month period ending 31 July 2014, com-pared with the same period last year.

In addition to the 28 new companies vol-untarily adopting IFRS during the past year, at least 10 other companies have disclosed their intension to adopt IFRS in future.

Enterprises adopting IFRS voluntarily include companies with global operations such as trading companies, drug compa-nies, IT firms and automobile manufactur-ers. Some 44 of the 47 companies that have adopted or plan to adopt IFRS are audited by Deloitte Japan, KPMG Japan or EY ShinNihon.

“At present there are nearly 3,500 listed companies. We’re not sure how many com-panies will adopt IFRS if it is not made mandatory in Japan, but the Japanese gov-ernment anticipates 300 listed companies may voluntarily adopt IFRS by the end of 2016,” says Takahashi at KPMG.

“It’s very gradual. Many companies are still assessing what benefit they will get by changing from Japanese accounting standards to IFRS. Forty-four Japanese

■ JAPAN

ASSOCIATIONS – STAFF DATA

Rank Name



2014 2013 2014 2013 2014 2013 2014 2013 2014 2013

1 PrimeGlobal* 231 188 23% 20 18 170 154 41 16 8 8

2 Integra International* 120 111 8% 7 6 101 97 12 8 5 5

3 Praxity* 110 109 1% 9 8 92 93 9 8 5 2

4 INPACT Asia Pacific* 84 82 2% 24 24 46 44 14 14 9 9

5 CPA Associates International* 68 62 10% 5 5 34 35 2 29 3 3

6 DFK International* 55 59 –7% 8 8 38 42 9 9 2 2

7 AGN International* 49 53 –8% 11 12 36 40 2 1 3 3

8 Morison International* 46 48 –4% 15 15 26 28 5 5 3 3

9 MGI* 28 27 4% 14 13 12 12 2 2 3 3

10 MSI Global Alliance* 7 7 0% 1 1 5 5 1 1 1 1

Totals 798 746 7% 114 110 560 550 97 93 42 39

Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not includedSource: International Accounting Bulletin

IAB 542.indd 14 24/10/2014 12:42:43



JAPAN

companies have adopted IFRS so far, but maybe this will grow, so to cope we have strengthened our IFRS service team to pro-vide IFRS conversion services.

“If 200 to 300 other big Japanese com-panies decide to change to IFRS then many listed companies may move to change in a short period. We’re prepared already with our IFRS conversion service.”

Like KPMG Japan and other Big Four firms, EY ShinNihon also offers its clients IFRS support services, “from initial stud-ies and impact assessment to full-scale con-version support services” explains Akashi Kohno, leader of EY ShinNihon’s Japan area IFRS desk.

“Generally the more realistic it is for our client to adopt IFRS, the deeper our involve-ment becomes. We provide audit services for our clients that have already voluntarily introduced IFRS.

“There are currently no firm plans to make this mandatory. However, the ruling Liberal Democratic Party has made a pro-posal for a decision to be made on whether or not to make IFRS adoption mandatory within the next two years,” he says.

Mid-tier firms are providing advisory ser-vice support to clients considering the vol-untary adoption of IFRS, though no mid-tier practice client is believed to be using, or has announced their intention to use, IFRS so far.

“We see some of our existing clients considering the adoption of IFRS and we support such clients by our specialist team members in the course of advisory or audit engagements,”Grant Thornton Japan’s Endo says.

RSM Japan, meanwhile, has published a book on IFRS for Japanese clients, to assist those considering the voluntary adoption of IFRS. RSM Japan’s Murayama points out

that few of the firm’s clients are looking at adopting IFRS at present, though assistance was provided to the Japanese clients listing in Hong Kong where IFRS is mandatory for listed companies.

“For the IPO in Hong Kong, the Japanese company was required to file its audited financials under IFRS. We assisted the client in reviewing and by advising on the imple-mentation in a practical manner,” Muray-ama says.

RecruitmentMeanwhile, staff recruitment and reten-tion is a topical issue this year as account-ing firms look to hire experienced staff to expand their practices after cutting back on staffing during the economic downturn as part of cost-cutting exercises.

“Our recruitment team has plans to pursue new recruits and experienced hires aggressively in 2014 and 2015 to ensure we have the resources to service our current and prospective clients properly,” BDO Japan’s Kitano says.

Competition for CPAs is keen, according to Baker Tilly Japan’s Kida, as fewer gradu-ates have qualified as CPAs since 2008 after accounting practices reduced their newly qualified accountant intake.

“The number of people passing the CPA examinations has decreased in recent years, which makes recruitment more difficult as the talent pool is smaller,” Kida says. “However, we’ve been successful so far in terms of attracting new talent. We have had to make sure to stay focussed on retaining the existing talent we have.”

Language skills are important for CPAs wanting to work in international practice and salaries can be 50% higher for compe-tent linguist.

“Recruiting is active in the account-

ing and tax areas in Japan. It’s become a demanding market,” RSM Japan’s Muray-ama says. “In Japan, English speaking professionals with international communi-cation skills are very limited and have high value. It’s crucial to keep good staff.”

Hiring talented consultants to join their advisory teams is an important concern for the Big Four and other firms looking to develop advisory services. KPMG Japan, for example, aims to recruit more multilingual staff to serve the growing number of out-bound clients.

“We’ve a lot of cross-border opportuni-ties, so we expect to hire more bilingual people speaking Japanese and English,” says KPMG’s Takahashi. “As many study abroad they have foreign experience and know the country’s culture.”

With competition growing for advisory engagements, Takahashi notes KPMG’s staffing strength compared with strategy consulting companies.

“We have many staff who have grown up in accounting and auditing. Through audit-ing they have learned corporate risk man-agement, internal audit, financial control and business process through their ordinary audit work.

“Accordingly, our professional staff have better financial-related knowledge and expertise compared to strategy consulting firms,” Takahashi says.

“So the possibilities for expanding our advisory business are bright.”

Advisory staff are among the most mobile employees in accounting firms where most staff including CPAs still rarely consider moving to another competing firm.

Advisory consultants, in contrast, job-hop among accounting firms and consult-ing companies services, often on a project basis. <

■ JAPAN

FIRM MOVEMENTS

NETWORK/ASSOCIATION FIRM ADDITIONS, MERGERS & ACQUISITIONS

Baker Tilly International M&A: Daido Audit Corporation (Osaka)

Added: Nihombashi Corporation (Tokyo)

Lost: Kasumigaseki Audit Corporation (Tokyo, Osaka)

CPA Associates International Added: Komiyama & Co. (Tokyo)

Deloitte Acquisition: Deloitte Tohmatsu Property Risk Solution (Tokyo=)

KPMG M&A: KPMG BPA had been merged into KPMG FAS and KPMG AZSA LLC in June 2014. KPMG Management Consulting and KPMG Business advisory merged to become KPMG Consulting as of 1 July 2014


IAB 542.indd 15 24/10/2014 12:42:44

COUNTRY SURVEY International Accounting BulletinRUSSIA


T he crisis at the Eastern European bor-der remains unresolved. Six months after sanctions were imposed on Russia after the Ukraine annexation,

Western action is crippling Russia’s curren-cy, oil and banking industries, and Russian retaliation is causing angst among the many Western multinational corporations there. The EU and US have considered extending existing sanctions, a warning matched by the Kremlin’s threat to use legislation to crack down on foreign businesses in Russia.

Looking to the future, the geopolitical environment is one of the biggest unknowns facing the professional services industry in Russia, but it is far from the only factor and certainly not the sole risk facing most firms.

Among the most significant issues is the hangover from the demographic crisis that

followed the dissolution of the Soviet Union. Between 1990 and 1998 alone the Federa-tion’s birth rate plummeted by 35%, a dip manifesting itself today in a shortage of entrants to the workforce, including in the professional services industries.

Another challenge Russian firms are likely to face in the coming months is legislative intervention in the industry. A drive to pro-mote quality, crack down on some harmful tax practices and, it is rumoured, limit the influence of foreign networks and asso-ciations in the country, could significantly change the professional services landscape.

A shrinking economy adds to the pressure, as businesses exit the Russian market. Be it in response to sanctions or lack of business, competition is set to increase in the already cut-throat Russian professional services

market. Ongoing fee pressure remains a tell-ing sign of the conditions faced by both for-eign and home-grown players.

And as Russia prepares for its long winter, its professional services firms know the com-ing months will see the survival of the fittest.

An anchor of stability across the board remains audit. The traditional base for many of the country’s operators, the demand for audit looks to have remained sustained across the board.

PwC Russia managing partner David Gray says: “Audit has held up well. It hasn’t been growing, but broadly it’s flat.”

Increased demand for audit within the middle market has compensated for slipping demand for other services, which continues to shape the firm’s strategy. “We continue to expand our regional business in Russia,”

Shifting landscape as tensions mountAs tensions between Russia and the West persist, weakened currency and tough sanctions take their toll on the Great Bear’s economy and the professional services industry is no exception. As rumours circulate of a crackdown on foreign auditors, winter is far from over for the Russian profession. Isabella Grotto reports

■ RUSSIA

NETWORKS – FEE DATA

Rank NameFee income

(RUBm)Growth

rate

Fee split (%)

Year-endAudit &

AccountingTax

servicesManagement

consultingCorporate

finance

Corporate recovery/


support Other

1 PwC* 10,274.1 1% 46 - - - - - 54 Dec-13

2 KPMG* (1) 9,341.9 -1% 64 - - - - - 36 Sep-14

5 HLB International* 4,554.6 10% 29 2 1 8 - 3 57 Dec-13

6 BDO* 2,925.7 -13% 46 4 46 4 - - - Dec-13

7 Grant Thornton Russia* (2) 1,754.7 211% 54 7 6 20 2 8 3 n/a

8 FinExpertiza* (3) 1,547.3 1% 45 10 5 - - 1 39 Jun-14

9 RSM International* (4) 953.0 -1% 37 4 27 3 - - 29 Dec-13

10 Kreston International* 793.4 17% 39 7 5 2 8 - 39 Oct-13

11 Crowe Horwath International* 765.5 38% 71 3 5 17 - 4 - Dec-13

12 Nexia International* 686.3 -5% 62 9 12 3 1 6 7 Jun-14

13 Mazars* 453.7 31% 90 5 - - - 5 - Aug-14

14 Baker Tilly Russaudit* 386.8 12% 65 8 1 7 - - 19 Jun-13

15 Rödl & Partner* 347.1 29% - - - - - - - Dec-13

16 Moore Stephens Russia* 265.8 -11% 80 1 3 9 - - 7 Dec-14

17 Reanda International* 35.7 -2% 32 - 36 - - 1 31 Dec-13


Notes: (e) IAB estimates. Made on the besis of staff growth informtion provided to the IAB. (1) Source: Expert RA Top 10 ACGs by Revenues from Audit and Consulting Earned by the Leading Audit Organisation and Affiliates Only (2) Grant Thornton year-end is the most recent available for participating firms. (3) FinExpertiza fee income does not include alliance member firms. If it did, fee income would equal RUB2,500.8m for FY2014. (4) RSM International fee income are for year-end 31 August 2013 to 31 December 2013. *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. EY Russia and Deloitte Russia declined to participate in the survey. Data relating to correspondent and non-exclusive member firms is not included


IAB 542.indd 16 24/10/2014 12:42:44

COUNTRY SURVEYInternational Accounting Bulletin RUSSIA


explains Gray. “We now have 10 offices across the country. Last year we opened an office in Voronezh; this year in Rostov-on-Don. Much of the growth we see in the econ-omy is actually in the regions. That’s where the opportunities are for us, which is why we are expanding our regional presence.”

A steady audit market is confirmed by the mid-tier players. Baker Tilly Russaudit chairman Alexander Sirous says: “Audit has been stable; we’ve seen 2% growth in audit in rubles and I see this as, if not good, an okay result for last year.”

Crowe Horwath added member firm Rosexpertiza to its network in September, replacing CJSC Audit-Consulting Group Business Systems Development. The new addition currently makes up 98% of Crowe Horwath’s business in Russia, with the remaining 2% accounted for by Horwath HTL, a specialist in the hotel, tourism and leisure industry.

Audit remains central to the network’s presence in the region, explains Bernard Deloménie, regional director EMEA at Crowe Horwath International, and indeed the service line made up 68% of newly added firm Rosexpertiza’s revenue over the past year. He says: “Rosexpertiza started as an audit and accounting firm in 1993, in particular by beginning to audit some impor-tant companies in Russia, so it has developed

audit as its speciality for the past 20 years. Rosexpertiza audits some large Russian companies and some large international companies. These clients are very big today.”

As a firm based in audit, with consulting and tax being later additions, Rosexpertiza is an exception, says Deloménie, and this dif-ference may well be a competitive advantage. “Many Russian firms started in consulting and not audit,” he explains. “It was the other way around with Rosexpertiza and as a con-sequence it’s very well-known as an audit and accounting firm, mainly in Russia.”

Audit also remains a central service among smaller firms. Sergey Kharitonov, manag-ing partner of Marillion, a member firm of Kreston International, attributes his firm’s positive performance of audit to sustained demand from local companies. Further, as a local firm, Marillion has been able to step in to fill some of the gaps caused by geopolitical unease, particularly in the insurance sector.

According to Kharitonov, a lack of profit due in part to Western sanctions aimed at the banking sector has pushed many Euro-pean insurance firms to close. “Not all of them, but some of them are leaving and the new owners, of course, want to change the auditor,” he adds. Many of the outgoing, particularly European, companies were tra-ditionally audited by the Big Four, explains Kharitonov, but incoming managers tend to

favour national firms when they take over. “So currently we have three negotiations

to do international audits for these compa-nies,” he says. “We started these negotia-tions two weeks ago.”

This trend is confirmed by Victoria Salamatina, head of audit and international liaison partner at HLB International firm Energy Consulting. She describes the audit across the market as having witnessed a “sustainable but quite moderate increase in revenue” and adds: “In recent years the increase has been about 5%, mostly because of changing basic trends in audit business in the country and income stagnation of the Big Four companies. Many clients are moving among audit firms, and mid-tier audit com-panies have been starting to provide audit services to former Big Four clients.”

As competition continues to increase, so does pressure on firms to outbid each other on price. “It’s a wonderful thing, the capital-ist system” laughs PwC’s Gray, “I’ve been in the business for 27 years and competition is a reality. For all the years I’ve been in busi-ness I’ve always faced great market competi-tion, which means fee pressure continues.”

Indeed, Gray says he’s not seen pressure increase particularly over the past 12 months and remains confident in PwC Russia’s abil-ity to continue to provide value for money. “There will always be a premium on quality

■ RUSSIA

ASSOCIATIONS – FEE DATA

RankFee income

(RUBm)Growth

rate

Fee split (%)

Year-endAudit &

AccountingTax

servicesManagement

consultingCorporate

finance

Corporate recovery/


support Other

1 EuraAudit International* 2,948.4 19% 24 11 64 - - - 1 Dec-13

2 Morison International* 2,719.4 0% 29 4 3 20 7 9 28 Dec-13

3 MGI* 1,212.0 14% - - - - - - - Jun-14

4 MSI Global Alliance* 1,125.0 24% 1 92 - - - - 7 Dec-13

5 Praxity* 566.0 29% 86 6 1 3 - 1 3 n/a

6 CPA Associates International* 435.5 25% 45 10 5 - - 1 39 Jun-14

7 GMN International* 275.3 -10% 20 80 - - - - - Sep-13

8 PrimeGlobal* 163.3 -36% 89 4 1 2 - - 4 May-14

9 AGN International* 108.1 -11% 49 17 - - - 1 33 Dec-13

10 Integra International* 81.4 -36% 55 35 10 - - - - Jun-14

11 KS International* 64.6 -33% 68 5 11 6 - - 10 Dec-13

12 INPACT* 16.7 10% 96 4 - - - - - Dec-13


Notes:. *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not included.Source: International Accounting Bulletin

IAB 542.indd 17 24/10/2014 12:42:45

COUNTRY SURVEY International Accounting BulletinRUSSIA


services and people will always come back and buy from you again if they’re happy with the value your services deliver.”

Nevertheless, he acknowledges the Rus-sian market remains a particularly competi-tive one: “Not just the Big Four, but mid-tier firms as well still see Russia as a market where it’s important to have a footprint, so there’s even stiffer competition than there might be in markets with less opportunity.”

As such, simply being a Big Four firm doesn’t eliminate the threat of competition, he explains: “People talk about the Big Four, but the reality is for us competition is not just the other three; there’s very heavy competition from the middle market to mid-sized firms which are part of global networks like our-selves, as well as local domestic suppliers.”

Further, he adds: “In terms of our advisory business and our tax business, we also face competition from law firms and other advi-sory houses, like Accenture, BCG etc, so it’s a very competitive market”.

Baker Tilly Russaudit’s Sirous agrees com-petition has long been a feature of the Rus-sian market. “Fee pressure on audit services in not new,” he explains. “I think serious pressure has already been here for at least three years and so comparing it to previous

years I don’t think we’ve seen any further strengthening. It’s more or less stable at a high level.”

One difference, he admits, is the increase in high-quality competition: “There are new, stronger entrants into the market for audit services, where clients are seeking to buy the services of a firm belonging to a network and we’ve seen an increase in stronger members of international networks and organisa-tions.”

At the smaller end of the market, Khari-tonov at Marillion reports a tighter fee chokehold: “We’re witnessing [fee pressure] now. Sometimes we even have to decrease our fees for existing clients as well, not because of issues with our work, but because of the financial situation of a particular cli-ent.” He also suggests confidence at the top might be misplaced, as higher fees demand-ed by foreign providers could drive Russian businesses towards smaller, local firms.“It could be because of the political situation, sometimes because of the size of the fee,” Kharitonov says. The Big Four don’t want their fees to go down, he adds, “that’s a problem sometimes”.

The reality of forcibly lowered prices among smaller-tier firms is echoed by Salam-

atina at Energy Consulting. “The increasing fee pressure we now observe leads to tougher competition among audit companies and as a result to lower service prices,” she explains.

Another change signalled as significant by respondents to the survey is the Russian government’s current drive towards so-called “deoffshorisation”. In March this year, the Russian Ministry of Finance released a draft version of legislation aimed at limiting the use of offshore companies for tax avoidance.

“Basically, it’s the government fight against offshore using various legislation that is now being put into place,” explains Sirous. “It’s not there yet but the government and parliament are working hard on it and chances are it will be introduced from the beginning of next year. That will obviously trigger tax services,” he added.

Improvement in tax services is already being witnessed by some. “We’ve had dou-ble-digit growth in tax; it was our best per-forming line of service last year, particularly around transfer pricing, where there has been a lot of demand from Russian clients,” explains PwC’s Gray.

“We’ve experienced very high levels of demand for transfer pricing advice this year and because of the changes around deoff-

■ RUSSIA

NETWORKS – STAFF DATA

Rank Name



2014 2013 2014 2013 2014 2013 2014 2013 2014 2013

1 PwC* 2,691 2,400 12% 109 90 2,191 2,226 391 84 10 8

2 KPMG* (1) 2,555 2,452 4% 76 77 2,374 2,398 562 568 9 9

5 BDO* 1,329 1,466 -9% 20 21 1,097 1,239 212 206 12 9

6 HLB International* 1,287 1,230 5% 37 32 1,071 1,037 179 161 14 14

7 FinExpertiza* 1,059 1,055 0% 35 31 848 849 176 175 20 19

8 Nexia International* 788 630 25% 45 37 511 375 232 218 19 17

9 Grant Thornton Russia* 718 262 174% 27 12 548 216 143 34 4 3

10 RSM International* 543 544 0% 11 11 400 399 132 134 46 46

11 Kreston International* 398 391 2% 8 8 309 299 81 84 5 5

12 Crowe Horwath International* 343 268 )28% 16 24 266 182 61 62 5 9

13 Moore Stephens International* 227 239 –5% 25 21 144 189 58 29 15 15

14 Rödl & Partner* 211 191 10% 3 2 145 129 63 60 2 2

15 Mazars* 203 190 7% 3 3 173 159 27 28 2 2

16 Baker Tilly Russaudit* 202 197 3% 9 9 154 149 39 39 3 3

17 Reanda International* 28 30 –7% 2 6 16 18 10 6 4 4

Totals 12,582 11,545 9% 426 384 10,247 9,864 2,366 1,888 170 165

Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not included. EY Russia and Deloitte Russia declined to participate in the survey. (1) Source: Expert RA “Top 10 ACGs by Revenues from Audit and Consulting Earned by the Leading Audit Organisation and Affiliates Only Source: International Accounting Bulletin

IAB 542.indd 18 24/10/2014 12:42:46

COUNTRY SURVEYInternational Accounting Bulletin RUSSIA


shorisation we’re seeing that continuing in terms of a very high demand for tax and legal services. We see things like the deoff-shorisation as a big opportunity for us.”

Deloménie says attention to emerging tax demands was an important factor for Crowe Horwath when the network added Rosex-pertiza: “We explained to Rosexpertiza that, because of our client base, tax and interna-tional taxation are critical. That is the reason why we’ve asked [the firm] to develop its tax practice more.” As part of this conversation, he adds, Rosexpertiza has already recruited someone in Moscow to help with the estab-lishment of the tax practice.

On the basis of the current changes occurring in Russia’s tax landscape, Salam-atina at Energy Consulting adds: “It may be assumed that in the future tax dispute man-agement will become quite a promising area of business.

“As expected, the market for transfer pricing services in Russia will go up, with the highest growth rates residing in the ser-vices challenging the tax authority’s claims connected to price control,” However, she cautions: “The future development of inter-national taxation services depends, in our opinion, mostly on the international politi-cal environment and is closely related to its trends.”

According to Gray, performance in advi-sory has been mixed, with a flagging trans-

actions market offset by demand for other services. “In advisory we’ve seen a high level of demand across all the lines of ser-vice. Those that are involved in deals and transactions have been lower than the oth-ers because of the impact of the economy, but we’ve seen good growth across many of the other areas.”

Looking at the next 12 months, Gray says: “I think it’s a little bit like the Rothschilds used to say: ‘buy when the cannons roar’. People are calling the bottom of the market at the moment and saying that, if not now, probably in the next six months the market will bottom out and now’s the time to be a little bit brave.

“Buy when other people are fearful,” Gray adds. “Now is the time to be in the market looking for deals, because you’ll get a bet-ter deal than you will in a year’s time, for example.”

A similar, cautiously positive outlook is espoused by Baker Tilly Russaudit’s Sirous. In fact, he says, the network is already invest-ing in the area: “About a year-and-a-half ago we launched lead advisory services basically to help business owners raise private equity, do M&A transactions and acquire firms, or sell their businesses or parts of their busi-nesses, and that’s primarily for smaller com-panies.”

According to Sirous, the addition meant Baker Tilly Russaudit was “one of the very

few companies in the audit market that pro-vide lead advisory services”, a fact he believes has helped the firm grow. His predictions for next year come with restraint, however: “I dare say [the advisory market] will not go down. I don’t think it will improve that much, but I do hope it will stay the same.” Conversely, Crowe Horwath seems to have opted for a different direction. “We are focusing more on accounting, auditing and tax, rather than consulting,” explains Delo-ménie. “We are pleased that Rosexpertiza is important in consulting, although it’s not the main focus of Crowe Horwath Interna-tional, outside risk consulting and corporate finance.” However, he adds: “I’ve been very surprised over the past three months that despite the political crisis there’s still signifi-cant interest for Russia from our clients from across the world, including the UK. A major concern for players of all sizes has been the set of regulatory changes recently introduced by the Russian government.

As well as the deoffshorisation, another is a new regulation introducing criminal liabil-ity for cooking the books of financial institu-tions. Effective August this year, the newly introduced article 172.1 will build on the pre-existing criminal liability for tax evasion, by introducing a specific penalty for falsify-ing financial statements of financial institu-tions. Accompanying this are other proposed measures aimed at increasing transparency

■ RUSSIA

ASSOCIATIONS – STAFF DATA

Rank Name



2014 2013 2014 2013 2014 2013 2014 2013 2014 2013

1 EuraAudit International* 757 621 22% 76 70 586 465 95 86 25 25

2 CPA Associates International* 630 570 11% 14 10 526 472 90 88 20 19

3 Praxity* 317 285 11% 6 4 260 231 51 50 5 4

4 Morison International* 292 298 –2% 20 21 229 232 43 45 9 10

5 MSI Global Alliance* 249 243 2% 4 4 189 186 56 53 3 3

6 MGI* 139 139 0% 25 25 85 85 29 29 2 2

7 PrimeGlobal* 127 169 –25% 8 11 86 126 33 32 3 4

8 AGN International* 117 136 –14% 6 6 96 112 15 18 1 1

9 Integra International* 112 110 2% 6 8 87 81 19 21 3 4

10 GMN International* 38 100 –62% 3 9 20 61 15 30 1 4

11 KS International* 37 49 –24% 5 5 22 31 10 13 2 2

12 INPACT* 35 36 –3% 8 8 22 23 5 5 4 4

Totals 2,850 2,756 3% 181 181 2,208 2,105 461 470 78 82

Notes: *Disclaimer = Only data from the named member firm or the exclusive member firms within a network/association is included. Data relating to correspondent and non-exclusive member firms is not included.Source: International Accounting Bulletin

IAB 542.indd 19 24/10/2014 12:42:46



RUSSIA

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among firms, including the mandatory provi-sion of online reports for those auditing listed, financial or public sector entities. Although it has yet to be passed into law, Sirous says he welcomes a development he thinks will help both compliance and fairness in the Russian market.

“Partly it will affect fair competition,” he explains, “because with a lot of companies, what happens is they artificially increase the rating, the amounts they publish in national rankings and that’s been going on for many years and in this report you also need to file your fee revenue and the split of that revenue.

“If companies do that they probably need to be a bit more transparent on what they dis-close, hopefully.”

Not everyone is pleased with the increased regulatory pressure, however. Kharitonov says: “I would say all of these new regulations have the intention of exerting greater regulato-ry pressure on Russian accounting firms. This is also a problem because every new regula-tion that has been introduced requires a new expense, new investments.”

Another pressing concern for foreign firms operating in Russia has been the development of legislation seeking to limit the participation of firms “controlled or significantly influ-enced” by foreign entities or people. A recom-mendation was issued on 6 June by the Duma Financial Markets Committee, advising the lower house of Parliament to introduce a pro-vision to that effect.

A Bill is under review, with the next hear-ing set for the end of the month. Were it to pass, it would allow the Russian government to set barriers against foreign firms participat-ing in open tenders for contracts involving the audit of State and municipal offices, as well organisations deemed to be of strategic impor-tance for “the national defence and safety of the State”. Salamatina of Energy Consulting describes the move as part of “a significant statutory tendency which has arisen of late to equalise the abilities of companies from “dif-ferent leagues”, which is especially well per-ceived with respect to foreign Big Four com-panies.” In particular, she explains, the draft law limits “the range of companies that may audit organisations with over 25% of author-ized capital held by the government (public corporations, government companies and uni-tary enterprises) to those audit firms that do not have any foreign legal entities or natural persons among its members [shareholders].”

The measure is not a one-off, Salamatina

adds: “A more recent initiative from the same group of members of the State Duma requests to restrict admission to the Audit Council for experts who worked in foreign audit compa-nies.”

Such regulatory threats have sparked rumours that the Big Four’s position as audi-tors to some of the government’s biggest offic-es, and the defence sector in particular, might be in trouble. Some speculate that the ban will cause a bidding war among those firms allowed to apply for the newly available con-tracts and there’s talk of a generalised market shrinkage ensuing, as domestic companies step up to the plate.

Addressing the threat to the Big Four alleg-edly posed by the regulation, Gray suspects there is indeed likely to be some form of regu-lation passed around national security.

“It’s certainly something we’ve been keeping an eye on,” he says. “But we feel it’s somewhat ironic because we’re a Russian business. We’re owned by Russians, we employ Russians, 95% of our workforce is Russian, two-thirds of our partners are Russian, even among the third of our partners who are non-Russian, many are like myself and I’ve been in Russia for 20 years.

“We’re part of an international network, but the international network does not own us; we are a Russian, domestic network working with other Russian domestic businesses.

“We bring to Russian business the benefit of access to that global network, just as we bring to international business the benefit of access to the Russian market, so we help our interna-tional clients to invest in Russia.”

Consequently, he says: “We think we’re a very strong positive for the Russian econo-my, so we think the logic therefore is that we shouldn’t be significantly at risk.”

“Until we see the legislation in detail and it is actually passed,” adds Gray, it will be dif-ficult to predict the impact. Even so, he says he’s optimistic: “Even when it’s passed, it will all come down to how it’s applied in practice. PwC Russia was founded 25 years ago; as long as we continue to work in the best interests of our Russian clients, I’m sure we’ll continue to thrive for many more years.”

Regardless of the outcome, the coming months promise to be ones of change. As the Russian professional services industry pre-pares for whatever geopolitical and economic challenges comes its way, firms of all sizes will be keeping a steady eye on their uncertain landscape. <

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IAB 542.indd 20 24/10/2014 12:42:54

WealthInsight provides detailed data and insightful analysis on the world’s High Net Worth Individuals (HNWIs) and wealth sector. With decades of experience providing business information, WealthInsight helps organisations make informed decisions and win new business.

AAt WealthInsight’s core is our proprietary HNWI Database of the world’s wealthiest individuals. Around this database we have built a number of valuable research based products and services that make WealthInsight much more than just a rich contact list.

We work with and provide solutions for: Wealth Managers Private Banks Family Offices Technology Providers Professional Services – Consultants, Accountants, Lawyers, Real Estate Professionals Fund Managers, Asset Managers, Venture Capitalists Non-profits and Educational Institutions

For more information contact us at [email protected]: +44 (0)207 406 6553

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