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Comment: Alliance versus network debate

Graeme Gordon

By Graeme Gordon, executive director, Praxity Global Alliance

The International Federation of Accountants' Ethics Code offers a clear definition of alliances and networks. In my view, it's the difference between;

Keeping or losing your company branding and identity:

  • Embracing a proprietary platform for auditing/ technology/compliance/reporting or using your existing frameworks whilst accessing a central data hub with shared communication and reference tools as needed
  • Adhering to a stringent process for monitoring and quality control or retaining your own systems, but meeting a specific selection criteria and undertaking ongoing peer reviews
  • Inputting to a wider business strategy with imposed objectives and accountabilities or setting and controlling your own business direction
  • Paying fees for head office administration or spending less on a smaller support function
  • Being able to promote a 'local' name which may resonate better with clients or replacing it with an international one.

Advocates of networks may disagree with my sentiments, but then I'm unashamedly biased.

To be in a network you must co-brand and adopt a single organisation's name, logo and brand guidelines, including the colour, style and general 'look and feel' of the organisation. You also need to use the same methodology for all processes. In essence, you completely replace your infrastructure.

The rationale for a network is to ensure a partner from one firm in the network can pick up an audit from another network member and instantly know where everything is, what was done when, how and why. It's perceived as a seamless business model - after all if clients are working with differing offices within a network, they'll clearly be able to see the providers belong to the same organisation. It's all about seamless business transfers, but is it as transparent as we think?

Certainly, this approach has merits, however we're all human and so interpret instructions differently (unless absolute rules apply). So networks either have to impose inflexible rules or accept there will be differing interpretations.

I understand that in general, the Big Four + 2 tend to adopt the inflexible 'rule driven' model whilst the rest attempt to offer members varying degrees of autonomy. I believe the 'big brother' approach has two disadvantages; cost and bureaucracy, which as we know are inextricably linked.

IFAC rules require firms in networks to have internal monitoring processes that stretch across the network, which by their very nature involve extra layers of bureaucracy, and so increase costs. If you have rules, but you're not able to evidence they're being followed, the chances are they're not, so they have no value. Can networks really state they are transparent?

To police such rules, all the Big Four +2 and most of the rest of the top 10 networks, have significant numbers of 'Quality Control' personnel on their head office payroll. More bureaucracy and cost.

In an alliance system, all firms use their own methodology which works for them. Yes, they can and do share best practices, but there's no need to monitor the 'quality' of their bureaucracy and paperwork.

The onus is on firms to monitor the quality of work they complete for clients. Whilst clients may have peace of mind that work quality is 'double-checked' by head office personnel, this service accounts for a small proportion of the overall costs.

At Praxity, the true 'quality' (rather than bureaucracy) checking is undertaken before a firm is invited to join. Potential members must be PCAOB registered and able to maintain ISQC1 (or equivalent). They will be subject to peer reviews (in line with national or regional guidelines) and are required to present succession planning, governance models and client risk assessment policies for inspection.

We take up references where practical, undertake tri-annual reviews and crucially, source reports from partners in other firms who have referred work to or received work from potential members. Third-party endorsements are the most powerful indicators of a job well done and in my view, a more telling way to assess the true quality of work undertaken for clients.

Transparency, I would suggest, is in the eye of the beholder; both approaches have their merits - however one involves fewer people and costs.

I concede the 'name' issue - having one single recognisable name worldwide - encourages global recognition, as demonstrated by the top 7 or 8 networks. Clients are aware of the network's global reach and tend to believe a unified brand denotes a unified firm. The Parmalat and other high profile collapses serve to illustrate this is not always true and a consequence of such global branding is that if one part of the network suffers negative PR, it impacts others reputation and can rapidly go global.

In contrast, liability exposures are contained and cannot transfer. A network is a multiplicity of legally separate firms, with little or no cross liability so if a court finds in favour of a client against one firm, its counterparts in that network are almost certainly devoid of any legal liability.

Clients therefore may not have the level of 'insurance' or recourse against a network they think they have. And whilst the same applies to alliance members, at least clients aren't so easily drawn to the wrong conclusion.

Praxity members clearly highlight the liability issues at the outset of business. Having checked online, networks do have disclaimers setting out the same lack of cross liability, but they're hard to find.

Within the alliance we do have a global firm; Mazars. Mazars has a presence in 69 countries but is truly one firm. With full interdependence and cross liabilities, there's no lack of transparency across its business.

Where being in an alliance has caused members issues is not being able to tender for business with certain International NGOs and equivalents. The World Bank, International Monetary Fund and US Aid, for example, will only use companies that belong to, or are part of networks aligned with the Forum of Firms - a committee of IFAC. Only firms or networks can join the Forum, alliances aren't allowed.

International NGOs adopt this approach because they mistakenly believe membership of the Forum means firms meet a criteria for certain 'quality standards'. I counter that the mechanisms we have in place are equally, if not more robust to measure whether quality standards are met.

Alliances versus Networks? The title's misleading - we're not in combat against each other, it's more about freedom of choice and how businesses want to operate, what they do and don't want to adopt and whether they're keen to work on a global scale.

At Praxity we promote flexibility with fewer restrictions, global collaboration on assignments and the sharing of best practice without losing your identity and brand.

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