The following text is based on a presentation given at INPACT International annual conference in Lisbon on 30 October.
Recently I was invited to share my thoughts on what the Accounting landscape would look like in 2020, and the first thing that spring to my mind was when I first started working for International Accounting Bulletin nearly three years ago, and I knew nothing about the accountancy profession.
For me accountants where the people in the small office at the end of the corridor that you see if there is an issue with your pay check.
Needless to say my view on this has greatly changed since then. But beyond my perception it is the profession as a whole that has moved away from a compliance role to a more prominent role as trusted business advisors, the catchword here is "trust".
The major change of the profession in recent years and a change that will only increase in the years to come is this move from compliance to active actors in the economy.
From there arise a number of challenges for the profession especially linked with the question of trust.
But going back to when I first started at International Accounting Bulletin, in order to conduct our country surveys, our magazine’s flagships, I was given a list of questions that I religiously read out in interviews.
In that list of questions one went along the lines: "what are you expectations for the next 3 to 5 years?"
And it did not matter who I talked to, I always got the same answer.
I could have been speaking to a partner, a CEO, an accounting technician. Someone working in audit, in tax, or in advisory. Someone based in Asia, Europe, Africa or Latin America, I always received the same answer: "Well I don’t have a crystal ball".
So remembering that, when the question was put to me I was tempted for a second to say: "Well I don’t have a crystal ball!"
But I tried to be a bit braver and do my best to come up with a more constructive answer. Looking at what the current drivers of changes are and how they might playout in the next five years. This hopefully shall paint a picture of what accounting and auditing will look like in 2020.
There are many drivers of course and I can only outline a few of the major ones. But first I need to outline the one certainty about the future, and that is it will be made of uncertainty.
It might sound like an empty and cliché sentence, but what I mean by that is that we no longer live in a world of controls: globalisation, market volatility, rapid advances in science and technology, costless communication, demographic shifts and new business models are driving new social values, needs and expectations.
Slowly but surely we are moving from hierarchical structures to more flat and inclusive societies – and by societies I mean the societies we leave in as much as the "societies" we work in.
One of the leading voices lately on this theory is Robert Phillips co-founder of Jericho Chambers, a progressive strategy consultancy, and a visiting professor at Cass Business School.
Earlier this year at a CIMA lecture he said: "Our future will be negotiated, not imposed. There is no longer an absolute right or wrong – just this permanent state of flux and chaos and a permanent – and challenging – fragility of trust."
To further understand this, he continued, we have to understand the mega-trend of individual empowerment. "This is the power shift from state to citizen; employer to employee; corporation to citizen-consumer. It is fuelled and accelerated by technology, costless communications and the rise of networks."
In short Phillips predicts chaos, but rather than being pessimistic, he believes the key for businesses’ success is to understand and embrace this chaos.
This has various implications for accountancy firms as it transforms the ecosystems of their clients and therefore their needs, and at the same time it brings challenges internally in terms of structure and culture of the firms themselves.
So a world increasingly uncertain made of flux and rapid changes is one of the drivers of change but there are others more traditional or obvious, like the economy.
Looking at the economy we see a continued globalisation. And when not so long ago globalisation or internationalisation was reserved to multinationals, or large corporations, more and more this is a reality for smaller businesses and even very small businesses who start to look at the international scene to counter the economic instability and uncertainties of local markets.
Consequently, accounting firm across the world will need to have a more global approach, even SMPs, those who do not enter into an international network or association structure will find it hard to survive.
Here I must make a parenthesis on networks and associations, since the 2008 financial crisis, it seems that the network structure has been favoured in the sense that it was painted as the golden nugget.
In my mind this differentiation is purely arbitrary, and the border between the two types of structure is very blurry – the main proof of that is the IFAC definition of a network which serves as the rule internationally is borderline incomprehensible and very unpractical
when trying to relate it to what is happening in practice.
Associations it must be said have been very poor at marketing themselves and arguing on the advantages of an association structure.
This is changing and more and more a lot of associations, without moving into a network type of structure, are more active on working on their brands and marketing as well as the cooperation and communication between their members.
Some like Grant Thornton International Ltd general counsel Daniel Lichtenstein believes there might be a growing pressure on associations to become more like networks due to various regulatory as well as commercial factors.
He expressed this view at International Accounting Bulletin 2015 forum and among the commercial factors he cited the continued expectation of global clients to receive similar services and a similar experience from country to country and a common drive to reduce costs.
"There is a spectrum, with pure referral affiliations on one end and a single global partnership on the other," he argued adding that his own expectations are that there will be a drift towards the single global partnership side of the spectrum.
But I don’t think it is the case. This is a very audit driven view. The network structure might be beneficial or even necessary to conduct cross border audit of very large companies. But this is only a fraction of the market and there is and will continue to be a need to serve the smaller businesses especially as they become more international, advising them on their international expansion, helping them with tax consideration, and even in audit.
There are no needs for a network structure in those instances, only a wide geographical coverage and a greater communication and cooperation between member firms of an international organisation.
Still there is a threat for the smaller practices, as we see more and more the big players move in the mid-market and increase their offering to SMEs while cutting costs, this combined with the challenges of succession planning as the baby boomer are getting closer to the age of retirement if they have not already reached it, the accountancy market is bound to see more consolidation.
BDO International has been a great advocate of consolidation, sometimes even aggressively, and at BDO they believe that the accountancy market structure will evolve and that in a few years’ time, we will be left with a few truly global networks. Then they believe that there will be a few organisations that are really strong regionally, and then at local level the SMPs dealing with the national market’s needs.
There are some signs that seem to suggest that this is what will happen: nobody can deny that there is an ongoing consolidation of the mid-market as in all countries around the world we see mergers and acquisitions.
Looking at the evolution of our ranking tables, we see an increasing gab between the Big Four and the rest of the accountancy organisations as well as the top six accounting organisations and the rest of the networks and associations.
In FY09 the gap between KPMG, the smallest of the Big Four, and BDO was US$ 15.1bn, in FY14 the gap was US$ 17.8bn.
And in FY09 the gap between Grant Thornton, at the time the sixth largest organisation, and Baker Tilly was US$ 0.5bn. In FY14 the gap between RSM, the now sixth largest, and Baker Tilly was US$ 0.8bn.
And further done the ranking we go, the more this gap becomes apparent.
Equally, we see the development of regional forces. This is particularly the case in Asia Pacific. For example, the Chinese government as voiced its plan to foster three international china born networks and this has led to the emergence of networks such as ShineWing and Reanda.
But despite impressive growth this networks remain quite small internationally, while becoming important regional players and strengthening their Asia Pacific footholds.
So there are sign that might suggest that BDO’s vision might be true. But at the same time one has to look at clients’ needs. and in this area there is nothing to suggest that there won’t be international work for accountancy organisation that are smaller in size or less integrated in structure.
With the volume of international work increasing it is unlikely that only 5 or 6 organisations will survive internationally.
So in my mind we won’t see much change in the coming years in terms of the structure of the market or even the number of players internationally and we won’t see much change in the structure of accountancy organisations.
But what we will see, driven in large part by the economic developments is a need for wide geographical coverage on the part of international organisations and more cooperation and communication between member firms.
The response might be different from one organisation to another: some associations are looking into moving in a network structure, some organisations are moving to a more integrated single firm per country one brand internationally type of system, and others focus on building strong regional hubs within the international organisation.
There is no a winning formula; it will be down to the international organisation to demonstrate and convince existing and potential members of the advantage of the strategy it has chosen.
Another obvious traditional driver of change is technology. The technological improvements in the last decade have been tremendous, so much so that is a cliché to say it.
In audit the technological advance mainly means that there is more data at the disposal of auditors. They are no longer restricted to a
sample but to thousands of files and information. Technology speeds the audit process, and as we know time is money.
Nevertheless, there is a false idea about technology in the sense that it is assumed this new landscape of opportunities untapped by technology will in itself improve the audit quality.
Technology for accounting and auditing and most if not all field of life is an enabler, which used correctly can contribute to improvements and used incorrectly can be critically devastating
Outside of audit, technology represent as much a challenge as an opportunity for accounting professionals, many services especially low value-added or easily automated series, such as data entry, bookkeeping and simple tax returns will become less profitable and some believe it will even disappear.
The other challenge firms will face is that such services can be provided by other organisation, global IT providers like Xero who currently work with accounting firms could perfectly well go directly to the clients with automated software.
Equally, banks other financial services companies will be in a position to offer, and in some jurisdiction have already started to offer accounting and tax related products and services.
For this reason accounting professional will have to move away from the traditional compliance services to offer a broader range of services based on advisory support, forward thinking and strategic building.
This introduces another trend the move away from audit and the question of trust and relevance.
International Accounting Bulletin and sister publication The Accountant have started an audit monitor data set, where we compare
revenues in audit against global revenue. It is clear that in most market, audit is no longer where the growth is. And accounting firms, especially the larger ones are gearing up to this new normal.
At Deloitte the second largest network globally, audit only accounts for 27.8% of the networks revenue in FY15.
I take the example of Deloitte but this is true across the board and rarely do we see a Big Four whose revenues in audit accounts for more than 40% of total revenues. I’m not Big Four only focused but when we talk about audit we have to recognise that they dominate the market, and if they move away from audit building consultancy department and legal departments, that most of them had ditched after the Arthur Anderson scandal, while moving forward in time we might step back 20 years and face the same question: how can you offer audit and other services under the same roof?
At the same time, regulators increase their scrutiny on independence and audit quality.
The EU audit reform past last year and which will come into force next year, introduces audit firm rotation and limitation of non-audit services on audit client. Without being Eurocentric this reform will have a snowball effect on the rest of the world.
Because of the internationalisation of business previously mentioned. A business with operations in Europe and Africa for example will most definitely have an integrated and global strategy as to choosing, their auditors, tax advisors and consultants.
There’s a clear opportunity arising from regulatory changes – as mentioned advisory services produce more growth than audit in some countries, if not all countries. Firms will need to strategies on which services they want to focus on and some firm might decide to diversify more than others.
Firms who decide to diversify will have to face reputational risk linked with offering a wide range of services. The regulators scrutiny on independence and conflict of interest will continue to increase.
Other firms, and here probably at the smaller end of the market, will make the choice to become specialists. And cater on specific services in a specific sector of activity. And this could be quite an interesting strategy as if successful it can be highly profitable.
With regards to regulation, according to International Forum of Independent Audit Regulators (IFIAR) chair Janine van Diggelen the biggest challenges for regulators in the coming years will be "to resolve the underlying issues that so far have prevented a drastic improvement in audit quality globally".
For three years in a row, IFIAR’s Inspection Findings Survey Reports have shown persistently high levels of deficiencies in key areas of the audit.
She says the efforts from regulators (and also by legislators) which have been implemented by firms have not (yet) resulted in sufficient measurable improvements. "This must be changed. This requires a sound understanding and resolution of root causes."
And this she says may warrant changes at the level of governance, the business models, in culture in addition to measures that already have been implemented by the firms such as improved tooling, guidance and training.
Earlier this month during International Accounting Bulletin’s forum, I had the privilege to chair a roundtable with 12 leaders from different international organisations. As the discussion where held under Chatham house rules I can’t name the participants or their organisations.
But something really interesting happened, we were talking about audit quality and the various stretch of scandals that had hit the audit profession in the last few years. Someone raised the need for root cause analysis.
One of the participants replied: "Speaking of root causes we have to accept the fact that greed is innate in the business culture or even the economic culture globally. And therefore to improve audit quality there would be a need to rethink the entire economic system."
Whether this is true or not is not is to each one to decide however from a European perceptive, not necessarily applicable to all jurisdiction across the world, but again this could have a snowball effect globally, but in Europe it seems we have reached the point where the regulators have done there bit.
The changes that have been brought by the EU audit reform might not be the right ones, or might not go far enough, or might not have much impact on quality, independence and competition, but those are the changes they are here and they are here to stay.
And so in Europe we are now entering a new phase, where rather than talk about rules and regulation, we will start talking about culture – and this will be market led.
The leading example of this is the Netherlands. Where pushed by the parliament to react, the profession under the guidance of the Dutch professional body NBA, has set a taskforce, of young professional from Dutch audit firms.
These professionals have come up with a report of 53 measures to change the profession and improve audit quality. From partner remuneration based on quality rather than amount of work, to the creation of an oversight board, these measures aim at changing culture and behaviour within the firms.
And again this links with the audit vs advisory debate. There is a clear trend at the moment that while regulators increase their scrutiny to create a clear divide between audit and non-audit services for audit clients, firms are increasingly setting up multidisciplinary structures, how can those two trends be reconciled in the coming years is a major challenge for the profession?
Van Diggelen at IFIAR says that regulators have identified this trend and monitoring it. The questions are: Will the regulators act? Will accounting firms and professional clearly communicate to the wider public what their profession is about, and how while providing a wide range of services they ensure audit independence and quality?
I do not have the answer to the first question. But for the second one, it is a necessity: the risk is – this was raised by one of the participants at the round table I just mentioned – but if firms do not explain and in all appearance seem to move away of audit to more profitable services like advisory, I believe regulators and legislators would be tempted to say: why should we issue you an audit licence.
Moving away from audit and regulation, another perspective on the future is the view of the investor community who is often disregarded in analysis but investors after all are the main target audience of corporate reporting and therefore of accounting professionals.
Corporate reporting is at a tipping edge. The financial crisis has raised the question on whether financial reporting, which is the main part of corporate reporting at the moment, is still fit for purpose. There are numerous debates and initiatives on disclosure and if it should be increased decrease, simplified or not…
We mentioned technology earlier and it is clear that technology will act as enabler for companies and not only to produce more information, but to instead produce information that is more relevant and timely.
But the major driver for change in corporate reporting rather than being technology, I think, will be the widening of the audience it serves.
This is well discussed in a paper by the European Federation of Accountants (or FEE), which looked at what corporate reporting would look like in the future.
Currently as described in the FEE paper, corporate reporting is still mainly about financial reporting for a very specific audience: existing and potential investors, lenders and other creditors (capital providers).
However FEE argues there is an increased interest in corporate affairs and this resulted in the emergence of new stakeholder groups (e.g. NGOs) consequently companies need to reassess the whole reporting process.
On one side there is financial reporting where we have seen a great push for a global set of standards, in the form of IFRS. This push will have to continue, only because of the internationalisation of the economy.
Talking with Vincent Papa director of financial reporting policy at the CFA Institute about the fact that the convergence process between US GAAP and IFRS was dead, and would probably not be revive in the next lifetime, he said that in the interest of the investor community, the International Accounting Standards Board (IASB) would have to continue its work on two main area, first to strengthen the use of IFRS in the jurisdiction which have adopted or pledge to adopt the standards.
And two to continue collaborating and discussing with jurisdictions which have not, like the US, to build as many commonalities as possible. Talking on US GAAP and IFRS, Vincent said: "Even if they have the label as being different I still think they can endeavour to make them as similar as possible."
As business become more global, it seems only natural that reporting should be done on a consistent basis in order to enable comparability for investors.
But the most important change in the corporate reporting arena will come from non-financial reporting . Despite what is often said non-financial reporting is not a new idea, but it has gained traction in the last few years through a series of initiatives, for example:
- the Global reporting Initiative,
- the International Integrated Reporting Council
- the Sustainability Accounting board,
- climate disclosure standard board,
- Carbon Disclosure project,
- extractive industries transparency initiative
- a series of United Nations driven initiatives,
Even the pope recently released an encyclical on climate change!
Vincent Papa said: "There are so many initiatives sometimes it’s hard to keep up. There is a battle, one group may be focusing on one niche here and another on one niche there, there is almost an aspect of saying ‘hey get your act together’."
The IIRC has been trying to present itself as the umbrella group that would bring together all the other initiatives but there is still a long way to go.
And therefore the results as highlighted in the FEE paper are confusion, disengagement and other adverse reactions among preparers and stakeholders.
Nevertheless, Vincent Papa, as well as FEE in its paper, believe that non-financial reporting is bound to play a crucial part in corporate reporting of the future.
Non-financial reporting is still at a very early stage of development, and as such faces many challenges. But there is no doubt that there is a consensus in the making that financial information alone can no longer represent a complete picture.
This is in particular driven by the widening audience of corporate reporting which has a growing and pressing demand to have a better understanding of a company’s longer-term value drivers, prospects and risks, including its impact on the environment and on society.
Ultimately all information, even what is deemed to be non-financial, should have financial consequences.
And therefore the real challenge is for the non-financial reporting initiatives, to come together, offer a more consistent and unified front to the goal they aim for and better establish the link between the so-called non-financial information and extracting what the financial consequences would be.
In other words the economic impact of that information.
This will happen, maybe not in the next five years, maybe in the next 10 but this will happen and what is so far a market-led initiative will soon be picked up by regulators and standards setters. And from the reporting will derive the need to give assurance on this information.
Therefore there is a tremendous opportunity for accounting firms to move ahead of the wave and start investing in the skill and know how required for this type of work.
Because there is a risk: if the accountancy profession rest on its laurels and do not prove early enough its relevance in terms of non-financial reporting it might lose out to another profession.
This has happen in the past. And not so distant past. If you look at the case of public finance accounting and in particular the case of Greece
Under IPSAS, Greece’s gross debt is at 68% of GDP and its net debt is 18%, but to loan money under the Maastricht Treaty’s face value definition of debt, Greece debt is at 175-180%
So what exactly is Greece’s debt? And how can you bail out a country without knowing its real debt? In the case of Greece, apparently the answer is that the lawyers took ownership of the negotiations.
The accountancy profession has a lot of work to do to prove its relevance in the area of public finance accounting and non-financial reporting in order to have a say in what is essentially its bread and butter.
These are two areas, public finance and non-financial, which are highly disregarded by the profession at the moment, but there will be two major sources of opportunities in the coming years.
I’m conscious that I’ve gone a bit in all directions, but as you well know the accountancy profession is vast, and is undergoing change in most if not all aspects.
In conclusion and to summarise the main point I would like to make.
- The international accountancy organisation of tomorrow will be more integrated in the sense of cooperation and communication amongst their members rather than structurally and will need a wide geographical coverage.
- Accountancy firms will be more inclusive of their staff through flatter management systems and will undergo tremendous cultural change in a bid to foster quality and relevance of their work.
- In turn professionals will increasingly come out of the compliance function to become trusted economic players.
- A trust they will need to earn from their clients, but also the public at large.
- To earn it, the profession who is now out of the room at the end of the corridor and standing in the spotlight, will need to clearly communicate what accounting is about, the purpose it serves, and how a professional go about doing it.
- Firms will need to demonstrate, not explain, but demonstrate how they reconcile their profit driven objectives with their mandate in acting in the public interest.
- All this will happen in the backdrop of technologic developments, further consolidation of the market, increased regulatory pressure, and emergence of new competitors coming from other professions.
Last but not least, if in five years’ time, it turns out that all my predictions were wrong, please forgive me because after all I don’t have a crystal ball.