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April 30, 2008

New law tipped to generate growth

New law tipped to generate growth

The passage of Turkey’s draft Commercial Law through parliament in the coming months is about to have a large impact on the country’s accounting market. BDO Turkey managing partner Omur Gunel speaks with David Hayes about how the new law will benefit the mid-tier firm.

Designed to place the conduct of business and financial reporting on a modern, open footing, the introduction of a new Commercial Law in Turkey should result in an increased work load for many medium and large accounting firms due to the tightening of procedures for the conduct of statutory audits and other possible new legal requirements.

The introduction of the new legislation will confirm the adoption of IFRS and is being introduced to bring Turkish business, accounting and legal standards into line with international practice and to harmonise with EU legislation.

“It took some years to prepare the bill. It’s an entire commercial code, including company law for private sector, such as establishing a company, the way it’s run, and the way receivables and payables are treated,” explains BDO Turkey managing partner Omur Gunel. “The new bill is a complete overhaul of existing legislation. It also details things such as how cheques and promissory notes are prepared, and procedures for commercial law cases. A lot of changes are coming in. The draft Commercial Law should pass as the government has a majority in parliament.”

Meeting criteria Under the draft Commercial Law, companies meeting two of three specified criteria will be subject to an independent audit. The criteria are expected to be: assets exceeding TRY6 million ($5.1 million); a turnover of TRY12 million; and a payroll of 50 employees or more. Some SMEs are lobbying for the threshold limits to be raised to avoid having to comply with the statutory audit requirement.

In addition to extending the requirement for a mandatory audit to a wider section of the business community, the new law will aim to increase the effectiveness of the audit requirement by restricting the post of statutory auditor to suitably qualified professionals. Under present regulations, no formal qualification is stipulated for personnel holding the post. This has resulted in wide inconsistencies among different companies in the way in which the statutory audit is conducted and data recorded.

“Currently, all companies have to have individual statutory auditors but anyone can do that job now as no formal qualification is needed; but this will change,” Gunel remarks. “Big firms usually have an accountant or a lawyer in the statutory auditor post, but smaller companies often do not use a professional for statutory auditor so the position of statutory auditor has no real impact. The problem with this situation is that the statutory audit does not function.”

Under the present situation most SMEs do not carry out an audit unless they want to apply for international bank credit, for which an audit is needed. Applying to a local bank for a business loan does not always involve such rigorous approval procedures. However, once the draft Commercial Law is passed and it becomes necessary for SMEs to be audited, the status of the statutory audit will become enhanced.

“Banks and others will take the statutory audit more seriously and will ask for audit details before approving a loan,” Gunel predicts. “Changes are coming as accountants are putting on pressure. The government is supporting this and they have an election majority. The Commercial Law was the government’s own draft bill and as the government was recently re-elected, the bill has a good chance to go through.”

Depending on what level the threshold criteria for statutory audit are set at, the passage of the draft Commercial Law could swell the Turkish audit market substantially.

“The criteria for a statutory audit may still change as they are at the draft stage and some businessmen will lobby to increase the threshold level. But whatever criteria are used, large companies will be audited by auditing firms while small companies will be audited by individual accountants,” Gunel says.

“Individual accountants are capable professionally but there are not enough qualified accountants now so maybe the government will set a transition period and put an article in the new law to allow for a two to three year transition [to statutory audit while qualified accountant numbers grow].”

Accounting firms also will need to increase their qualified accountant head count to handle the new business the statutory audit requirement will generate for the local accounting market. BDO Turkey employs 115 staff, of whom 95 are professional staff; this includes 30 qualified accountants, among whom 16 are partners. The practice employs 65 trainees at various stages of training.

Gunel expects the new legislation to generate a substantial increase in audit work for the firm, especially in Istanbul where about 90 percent of the firm’s clientele is based. “BDO Turkey revenues may grow 30 percent because of the new law and demand from existing clients,” Gunel says. “For our audit clients, there will be no difference as we audit them already, but maybe there will be a legal procedure for adopting us as statutory auditor. We expect additional audit work from our tax clients – they will come to us as we work with them already.

“The true new market coming from the new regulations will be the large and mid-sized companies who do not do a proper audit now and will see it as prestigious to have a large audit firm auditing them.”

The expected passage of the draft Commercial Law coincides with a long period of economic growth driven by increased export revenues, rising earnings from tourism and greater infrastructure investment. Turkey’s economy has grown at more than 7 percent annually for the past four years. Inflation has been tackled and currently is less than 10 percent a year, well below previous damaging annual inflation levels of 40 percent to 60 percent. The government’s re-election in July is expected to ensure continuing political stability and confidence among the business community.

Buoyant market Accounting firm revenues are thought to be growing in Turkey’s buoyant market conditions, where traditional business secrecy prevails and accounting firms do not publish annual results.

“We are aiming at 15 percent annual growth. Audit may have a higher growth rate when the new Companies Act comes in,” Gunel comments. “Fees are going up in general and clients accept this. Fees are up 10 percent a year in real terms or 20 percent including inflation as we have 10 percent inflation here. Almost all mid-tier accounting firms are here in Turkey. They also deal with large companies in audit, but for tax work we and other mid-tier firms have large, medium and small clients.

“We see ourselves as number five in this market after the Big Four firms. It’s difficult to reach the size of the Big Four. Even if we have high growth they also will be growing. For our clients the advantage of BDO Turkey is that there is more partner involvement, while with the Big Four they deal more with managers and junior staff. Our clients appreciate the partner contact.”

Gunel says client numbers continue to grow, including referrals from the BDO International network. Existing clients will be the practice’s main targets for new business once the new Commercial Law takes effect.

“We get some BDO referrals for the manufacturing and service sectors. Referrals out are starting, but not much; it’s more inward referrals. Outward referrals are to the Middle East and Romania,” Gunel says. “We have 15 listed company clients. The main sectors we serve are textiles, retail, construction and energy. Türkiye Petrol Rafinerileri, the former state-owned oil refinery, is our client.

“Our client market is the same as the Big Four. Most mid-size companies in Turkey are not looking for professional services so most of our clients are the same as the Big Four. The situation may change with the new Companies Act but we are happy having large companies as clients. We will continue to aim at large companies but with the new Commercial Law, but if mid-size companies become clients it will help to grow the business. We have some tax clients that are not audit clients and they will be our first target.”

Tax, audit and hospitality (tourism) consultancy are BDO Turkey’s main service lines. Tax work represents 60 percent of revenue and audit 35 percent. The rest, including hospitality consulting and publishing, is 5 percent of revenue.

“Tax laws are complicated and can be interpreted in different ways. Clients rely heavily on us because of this. Our BDO tax practice is very well known in Turkey and so we are respected by the government tax authorities,” Gunel remarks. “The audit share of business has been growing faster than tax work for the last four years. Audit has been developing gradually over the past 20 years while tax has always been a major item.

“Mandatory audit for listed companies started in 1988, followed by banks in 1990 and for insurance companies in the mid-1990s. Companies in the energy sector, that is electricity companies and gas companies, have required a mandatory audit since early after 2000.”

Talking about the practice’s other activities, Gunel explains that BDO Turkey has established an individual entity to provide hospitality or tourism-related consulting services. “This consists of one partner and one assistant that use outside specialist consultants when needed as this is not an ongoing business,” he says.“We also publish professional books on accounting and tax, including VAT, corporate tax, inheritance tax, and also books on financial statements and accounting. Private companies and other accountants buy these books.”

Recruitment programmes BDO Turkey is expanding its accountant trainee recruitment programme to staff its growing practice and to cover the number of newly qualified staff who leave for jobs with private sector companies, often BDO clients. “We recruit direct from university as it is easier for them to adopt our philosophy and style of working,” Gunel says. “We take ten graduates a year. There is high staff turnover in audit as there is always demand for audit staff. We have to recruit every year. We are growing by about ten staff a year.

“For new graduates, training starts in October as it is the low season. We recruit in July then it is on-the-job learning until they start training in October. Trainees must work under supervision of a certified public accountant or a more senior sworn-in certified public accountant. We give them BDO Turkey course work and they take the Turkish accountancy chambers’ courses as they are more directed at their exams.”

English skills In addition to selecting accountancy graduates as trainees, BDO Turkey insists that all trainee recruits have a reasonable working knowledge of English.

“We take care that people we hire speak at least average English as most of BDO training is in English,” Gunel explains. “They deal with our clients in Turkish but audit reports are written in Turkish and English as clients need to use the audit reports for international business. English is taught in all schools here from secondary level onwards.”

In addition to providing BDO internal training, the practice sends staff for BDO international training. Gunel notes that there have been no recent staff secondments to BDO offices in other countries as the firm currently is short of staff. Such shortages are expected to rise as the introduction of the Commercial Law and the rise in demand for accountancy firms takes full effect.

Despite the challenges, investor confidence in Turkey is strong, helped by firm supervision of the financial sector.

“There have been no major scandals here recently, but ten years ago there were problems with small banks – a lot of them shut down as deposits were misused,” Gunel recalls. “After this the Banking Regulatory and Oversight Board was set up and has worked well. Our banking sector is very healthy in Turkey. We have sizable banks and proper supervision.”

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