The imminent introduction of compulsory audit and a new stock exchange promises a bright future for Cambodia’s accountancy profession. David Hayes profiles one of the nation’s leading firms and the story of a profession that, in fewer than two decades, has rebuilt from scratch.
Devastated by the Khmer Rouge regime and decades of civil war, Cambodia’s accountancy profession is preparing for much better times. This year, the market is expected to witness a sudden expansion following the introduction of statutory audits for large companies from the year ended 31 December 2007. There are also plans for the full adoption of international standards – fewer than two decades after the profession reopened its doors for business.
New audit regulation has come into effect as Cambodia prepares to establish its first stock exchange by the end of 2009. This is part of a government programme to accelerate economic development and catch up with more advanced neighbouring Southeast Asian countries.
“Statutory audit is being introduced to [improve] financial transparency. The Ministry of Economy and Finance is saying that statutory audit is preparatory to establishing [the] Phnom Penh Stock Exchange,” remarks Senaka Fernando, country director and director of assurance services at Price¬waterhouseCoopers Cambodia (PwC). “The Ministry announced this on 26 July 2007. When the stock exchange is established, accounting firms will have to be ready.”
Audit criteria Statutory audit is being introduced for certain categories of companies, including those involved in investments approved by the Council for Development of Cambodia, which generally are larger projects.
Statutory audit is required for other enterprises with Ministry of Commerce registration if the companies meet two of three criteria, which are: their revenue for the year ended 31 December 2007 was more than KHR3 billion ($750,000); the value of their total assets at the end of 31 December 2007 was above KHR2 billion; or the company employed more than 100 staff on 31 December 2007.
The government’s tax office estimates the new statutory audit requirement will involve about 400 additional companies, which should benefit the audit profession. Until now, only commercial banks, microfinance institutions and qualifying investment projects have had to undertake a statutory audit.
“The 400 new companies requiring a statutory audit can go to any of the 15 accounting firms here. It depends on whether they want their books audited by a Big Four firm, a mid-tier firm or a local accounting firm,” Fernando explains.
The accounting profession is small but growing as demand for accounting services rises each year. PwC is one of 15 firms registered with the Kampuchea Institute of Certified Public Accountants and Auditors (KICPAA), Cambodia’s professional body. Ernst & Young (E&Y) and KPMG are the two other Big Four firms registered to practice in Cambodia, while the two international mid-tier networks with local practices are Grant Thornton International and Morison International. “The rest of the registered firms are local Cambodian accounting firms though some have foreign partners and management,” Fernando observes. “These do bookkeeping, accounting and work for small non-government organisations.”
Starting from scratch Because of its tragic recent history, Cambodia is a unique accounting market where accounting laws, regulations and the profession itself have gradually had to restart from scratch since the mid-1990s. Cambodia is a developing country still traumatised by the brutal Khmer Rouge regime from 1975 to 1979, when 1.7 million people were murdered, and by the two decades of civil war and poverty that followed.
“Accounting staff development is an issue. The Khmer Rouge regime murdered all professionals including accountants, doctors and others. Considering what the country went through they have come a long way since then,” Fernando comments.
Cambodia’s present accounting market dates back to the mid-1990s when the United Nations took charge of ensuring national security as the international community provided food aid along with economic and technical support to restore civil and democratic rule to the country.
With relatively few Cambodian accountants having survived the Khmer Rouge years, Big Four accounting firms working with UN agencies and other humanitarian and development agencies began to open offices in the capital, Phnom Penh, in the mid-1990s.
The local offices supported international and domestic clients, which soon included government ministries. The World Bank and Asian Development Bank awarded Big Four firms consultancy and training contracts to train a new cohort of government finance officials and to oversee the introduction of modern government accounting systems.
Other accounting firms then began to set up in Phnom Penh employing foreign accountants and Cambodian accountants who began returning home from exile. The number of Cambodian accountants also grew as newly-qualified young accountants began to enter the profession.
Coopers & Lybrand set up in Cambodia in August 1995 and later bought the E&Y Cambodia practice in 2000. E&Y was the first major international firm to open in Cambodia when it opened its Phnom Penh practice in March 1994. Under the terms of the Coopers & Lybrand sale, E&Y was not permitted to return to Cambodia for five years afterwards. E&Y has since returned to Cambodia but serves the market from its Ho Chi Minh City office in Vietnam.
Today, PwC is the leading accounting firm in Cambodia though details of the firm’s revenue are not published, according to Fernando. The firm has 92 employees, including 68 professional staff.
“KICPAA membership fees are based on revenue. We pay the highest fee as we lead the market,” Fernando explains. “I don’t expect the international mid-tier market to grow here. It will be either Big Four firms or small local firms that clients choose.”
PwC Cambodia is part of PwC’s Mekong practice which covers four of the countries through which the Mekong River flows – Cambodia, Thailand, Vietnam and Laos. The Mekong practice is run out of the PwC Thailand office and was established with the trial merger of PwC Cambodia, PwC Laos and PwC Thailand on 1 July 2006. PwC Mekong was enlarged with the addition of PwC Vietnam a year later.
“The trial went well as Cambodia and Laos are small territories. It was a matter of time before the PwC Mekong practice got together, which includes all service lines,” Fernando comments. “The four Mekong practice countries are different but our work approach is common.”
Bread and butter Audit is PwC Mekong’s main service line followed by advisory, which includes transaction services such as M&A services, enterprise risk management and performance improvement. Other service lines offered include tax and consulting.
Fernando explains that assurance services represent about 70 percent of the fee split, while taxation and advisory work makes up the remainder. “We have seen business grow here over the years. Year-on-year there has been 8 percent to 10 percent growth for the past five years,” Fernando says. “Advisory work is done by PwC professionals from Thailand who come here on a project basis using our local staff support because of the language requirement.”
Economic development and social stability during the past decade has encouraged a steadily increasing number of multinational corporations to establish a presence in Cambodia as domestic spending grows and tourism blossoms. PwC’s client mix has grown as multinational clients establish local operations after initially serving Cambodia from other regional bases in Singapore and Bangkok.
“Our clients include a mix of global clients such as British American Tobacco, Coca Cola, Asia-Pacific Breweries [and] tele-communications company Mobitel,” Fernando says. “Other clients include Telekom Malaysia, the National Bank of Cambodia, power company Électricité du Cambodge, also the World Bank, Asian Development Bank and EU-funded projects. All the major aid donors are here too, so our client base is a mix of commercial enterprises, local non-government organisations funded by foreign donors and multilateral development loan project clients.
“Inward referrals are common. These could become some of the new statutory audit clients. There is no specific trend in new clients. It’s a steady growth across the board in audit, tax and advisory work. Normally new clients start with company registration then tax advisory services. When they are up and running they go for audit. Company registration work here usually is for a global client.”
Led by South Korea and China, foreign direct investment in Cambodia rose from $121 million in 2004 to $475 million in 2006, according to data from the National Bank of Cambodia and the International Monetary Fund. This has helped push annual GDP growth up to almost 10 percent.
Cambodia’s most important sources of foreign exchange at present are tourism and the growing garment export industry. Most clothing factories are locally owned. More than 260 factories have been established so far, producing a wide range of garments for export worldwide.
Potential oil and gas exports are expected to bankroll further economic development and Phnom Penh already is beginning to experience the rumblings of its first property boom. Cement consumption, for example, grew more than 37 percent in 2007, double the rate of growth recorded the previous year.
Fast paced The development of the accountancy profession is also accelerating. The government continues to work towards the introduction of International Accounting Standards (IAS) although it is keen to exercise national control over accounting policy and regulations.
PwC has been involved in the development of professional services in Cambodia and assisted the government to prepare the Accounting Law (2002). More recently, Fernando notes: “Cambodia adopted 15 accounting standards based on International Accounting Standards, which were [then tailored to the Cambodian market]. The World Bank with the Ministry of Economy and Finance came up with 15 standards that were most relevant. They did the same to introduce ten Cambodian audit standards based on International Standards of Auditing.
“Currently if a company has a transaction and there is no Cambodian standard… then the path we use is the latest [international] standard. That works well at the moment. Eventually Cambodia will go to full blown IAS and IFRS, but it’s not a pressing issue.”
Since the Accounting Law came into effect in 2003, all firms need a licence from the government and require registration with KICPAA to operate legally. Although the number of accounting firms is expected to grow in future, it remains to be seen how the accounting market will develop.
“The accounting profession will expand here as the Stock Exchange is due to be established in 2009. The government is pushing for this and the Korean Stock Exchange is providing the technical assistance,” Fernando says, noting that although the stock exchange will create additional work for accounting firms, the volume of new business generated remains to be seen.
Although it is unclear how many companies will list, work to prepare for the Stock Exchange could begin as soon as this year. Regardless, Cambodia’s young accounting market is poised to flourish.
EDUCATION Cambodian’s global path to qualification Cambodia does not have its own CPA qualification process. The Kampuchea Institute of Certified Public Accountants and Auditors (KICPAA) recognises qualifications from various foreign institutes, including the Association of Certified Chartered Accountants (ACCA) and bodies in Australia, New Zealand, Thailand, Hong Kong and Sri Lanka. All Cambodian members of KICPAA have studied the ACCA programme.
PricewaterhouseCoopers (PwC) Cambodia was the first accounting firm to use the ACCA programme to train local staff, according to the firm’s country director Senaka Fernando. PwC Cambodia recruits from ten to 14 graduates a year who start training in July. After completion of the ACCA programme, PwC Cambodia sends some staff on overseas secondments.
“Accounting is one of the popular professions here. PwC Cambodia is considered a training ground for accountants,” Fernando remarks. “Staff retention is always an issue when the job market is expanding. Staff poaching is mostly by clients and non-clients. Losing staff overseas is mostly because of scholarships, such as studying for masters degrees.”
Source: PricewaterhouseCoopers Cambodia