Thailand’s plans for full adoption of IFRS in 2008 and the continuing growth of foreign inward investment in the manufacturing sector are driving the expansion of the kingdom’s accounting market. David Hayes reports that despite unfavourable trading conditions, the profession’s future appears bright.
Although a recent economic slowdown reduced the number of new annual listings on the Stock Exchange of Thailand in the past financial year, future prospects for the growth of the accounting market appear bright. Thailand’s return to democratic rule bodes well for investor confidence and economic growth.
The recent handover of political power to Thailand’s new democratically-elected government by the military regime that ran the kingdom since September 2006 is expected to lift the country’s standing among foreign investors. On the other hand, rising energy costs are hampering economic development due to Thailand’s energy import reliance. At the same time, a new generation of internationally-educated business leaders is emerging who value information from audits and other internal corporate sources more than the current ageing business leadership.
The International Monetary Fund estimates Thailand will experience GDP growth of more than 5 percent in 2008, however despite this growth, the high value of the Thai baht has affected export volumes in agriculture, garments, furniture, automobiles and other sectors. From a previous rate of more than 40 baht per US dollar, the exchange rate has dropped to 32 baht, causing Thai exporters to struggle against lower cost producers elsewhere in Asia.
“There have been a lot of [initial public offering – IPO] delays because of the economic situation,” BDO Thailand audit partner Anurak Lelapiyamit remarks. “IPO firms look for good timing. There could be more activity in 2008. The majority of IPOs are manufacturing-based. Also, some are involved in property development. There is a property boom in Bangkok, especially on the underground railway and overhead sky train routes.”
In the middle of this mixed political and economic climate, both the Big Four and mid-tier accounting practices are reporting growth while the number of small accounting practices is increasing.
The Big Four and all the leading international mid-tier networks and associations are present in Thailand. The Big Four firms are each estimated to earn annual revenues exceeding THB500 million ($16 million) and mid-tier firms’ annual revenues are estimated to be as high as THB100 million.
BDO Thailand is benefiting from the growing accounting market. “At BDO Thailand we are doing very well. We have double-digit growth every year,” Lelapiyamit tells the International Accounting Bulletin.
“We have a lot of inward referral work. Also, clients are transferring from Big Four companies because of fees and their service expectation. This has happened for several years, maybe because Big Four firms are concentrating on corporations.
“Mostly medium-size foreign clients are coming to us from Big Four firms,” Lelapiyamit continues. “They are from Europe, some of them are in the service sector and others are in manufacturing. Some already have been established here in Thailand for a few years, but with their head office located outside of Thailand. Big companies, including Thai companies, still prefer to use Big Four firms here. This is especially so for listed companies, while for foreign companies this may be a parent company requirement.”
Taxing times Statutory audit is required for listed companies, limited companies of all sizes and banks. Audit work represents 60 percent of BDO’s business, but the percentage is declining gradually while tax consulting, which at present represents 30 percent of revenue, is on the rise. Risk assessment and internal audit outsourcing, which are also growing, as well as corporate and personnel recruitment, and accounting work make up the remaining 10 percent of revenue.
“We are strong in tax work because we have two senior tax partners who formerly were with Big Four firms. The opportunity [to recruit them] arose after the Arthur Andersen and KPMG merger,” Lelapiyamit says. “We promote our tax work through public speaking engagements and articles in the local Thai press. New business is coming both from new and existing clients. Big Four clients are coming to us mostly for audit services. Fees are a very sensitive issue. We have a yearly fee adjustment – sometimes up and sometimes down. In 2007, it was double-digit growth.”
BDO is attempting to develop business by penetrating the outsourced internal audit market. Most potential clients are Thai companies, some of which are required by the Stock Exchange of Thailand (SET) to have an internal audit function.
“Some companies prefer to outsource this function while others want an internal audit review by an independent firm to make sure the function is working properly,” Lelapiyamit explains. “This is a new trend. It may be due to the client’s shortage of qualified staff or certified internal auditors. A lot of public companies require this service now.”
Audit services are valued more by the new generation of business managers than older business leaders who are now retiring. Lelapiyamit says: “The new generation appreciate the services of auditors and the advice given. The new generation have a changed management style – they need more information. They want feedback on internal controls to know whether there is any weakness. Management may be decentralised under the new generation of owners who allocate authority and responsibility to others while the older generation prefer centralised control. Delegation of responsibility is more common now.”
Meanwhile, future business expansion by large Thai companies is expected to create growth in outward referrals by Thai accounting practices. The move will follow business expansion and the growing influence of the more internationally-minded new generation of senior managers. “Outward referrals are not much now, mostly to nearby Southeast Asian countries like Cambodia and Vietnam,” Lelapiyamit observes. “We expect more outbound referrals as more companies expand overseas, led by their new generation of owners and managers.
“We should do well for the next year or two as there is a lot of BDO support internationally. Also, we have to keep up with the BDO global business expansion plan. We have to position ourselves somewhere different to other mid-tier firms.”
Outbound competition BDO and other mid-tier firms have to compete with Big Four practices for outbound Thai companies looking to develop international business opportunities.
“The Thai accounting market is different for the Big Four firms compared with mid-tier firms,” Lelapiyamit says. “Growing medium-size client companies should prefer to work with mid-tier firms as fees are reasonable, but if they expand overseas then they may work with Big Four firms. I do not think any more mid-tier firms are coming into this market. The top 15 international accounting firms already are here.”
BDO employs 150 staff, of which about 20 are CPAs. There are six partners. By comparison, Big Four firms in Thailand employ more than 500 staff. PricewaterhouseCoopers and KPMG employ more than 1,000.
About 30 percent of BDO’s 150 staff are trainee accountants. Recruitment drives are organised two or three times a year to ensure a sufficient inflow of trainees. Lelapiyamit notes that while it is easy to attract trainees, it is difficult to hire more able candidates who tend to work for Big Four firms or join big companies where salaries are higher.
Accountants intending to qualify as CPA members of the kingdom’s Federation of Accounting Professions (FAP) require an accounting degree from an approved university in Thailand or overseas. Trainees then are required to pass six additional exam papers issued by FAP during a two-year training period with an accounting firm. Qualification as an auditor requires 2,000 hours audit practice with an audit firm.
“We hire less than ten new CPAs a year. The number staying with us changes each year,” Lelapiyamit says. “We try to retain our new CPAs. They get more responsibility and receive extra holiday leave. Our staff shortage is at senior level, so we try to improve our training programme to improve staff quality and meet client expectations.”
Most accounting practices in Thailand have a staffing shortage and the Big Four firms also face staffing turnover issues. More accountants are leaving firms to set up their own practices than are hired by other companies or accounting firms.
“There needs to be more qualified accounting staff in Thailand. There is a lot of IFRS work and updating of standards. This is creating new work for us,” Lelapiyamit remarks. “International Accounting Standards [IAS] were introduced after the 1997 financial crisis. The work is still the same but there are some new disclosure requirements that we have to comply with. In addition, American client companies here require a [Sabanes-Oxley Act] audit. Also, our Japanese clients may need a [Sabanes-Oxley Act] audit from 2008 onwards.”
Leading the way Thailand is preparing to complete full adoption of IFRS by mid-2008, when it will become one of the first countries in Asia to do so, Lelapiyamit notes. The kingdom’s programme to adopt IFRS is running parallel to the adoption of International Standards on Auditing, which has also been scheduled for adoption later this year. There are 37 IFRS and IAS in total and Thailand will adopt 21 of these midway through this year. This follows two standards that became effective in 2006 and 13 standards in 2007. Another standard is at the exposure draft stage.
Meanwhile, standards of corporate governance have improved in Thailand recent years and do not present any difficulties for the accounting profession.
The governance of listed companies, for example, is overseen by the Stock Exchange Commission (SEC), the SET and the FAP. Both the SEC and SET have been involved for more than 20 years in issuing rules informing listed companies how to comply with corporate governance requirements.
“Corporate governance is a requirement for publicly-listed companies but not for non-public companies,” Lelapiyamit says. “The current standard of corporate governance in Thailand is good… There still are some scandals such as insider information by management and by stock brokers, but it is not an issue for the accounting profession.”