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April 30, 2008

To be or not to be?

To be or not to be?

As the network definition debate comes to a head, one international accountancy group has taken steps to change its name in order to clearly distinguish itself as an association. MSI Global Alliance chief executive James Mendelssohn explains why.

For many years, accounting firms in different cities and in different jurisdictions have worked together within varying legal structures. While they may often have had very diverse objectives, will certainly have had wildly differing expectations of what the organisation might provide and used a broad range of descriptions to explain to the outside world exactly what their organisation was all about, it all seemed to work fairly well. Until, of course, all those well-publicised scandals that we all know too much about.

In the new regulatory environment, one of the key drivers in both the International Federation of Accountants (IFAC) Ethics Code and the EU 8th Directive is the need for transparency. Organisations cannot present themselves as a closely knit, internally regulated, global organisation unless there is some substance to those claims. If an outside observer could be forgiven for thinking that different firms in different jurisdictions are all part of the same organisation, and therefore working to the same standards, because of the impression that those firms create, then that observer should be able to rely on that assumption.

If organisations are less closely knit, and are not able to provide the reassurance on a global basis that external stakeholders may be looking for, that is not necessarily a problem per se, but it is a different scenario, and one those external stakeholders should be able to understand. And therein lies the distinction between a ‘network’ and an ‘association’.

Organisations, and individual firms within those organisations, may complain about the increased regulatory burden being placed upon them, but they certainly shouldn’t be complaining about the rationale behind the decision to create this distinction between ‘networks’ and ‘associations’. It is impossible to argue against transparency, which has to be at the root of any regime of strong corporate governance.

Many of the mid-tier organisations are facing some difficult choices. Most of them have certain characteristics that would lead them into the definition of being a network, and others that would suggest that they might be an association. And, perhaps more worryingly, the same organisations have certain member firms that would prefer to be part of a network, believing that the benefit to them of being part of a more closely knit and globally recognised organisation would outweigh the practical, regulatory and liability risks that come with network status – and others who believe that with the majority of their international work being bilateral, being part of an association rather than a network, gives them all that they need.

Time to choose

Some tough choices will need to be made, both by organisations and by individual member firms. One ‘former network’ has already disappeared. There will be other mergers and amalgamations – but how such deals are best struck between disparate, worldwide bodies, often with broad ownership and rules of exclusivity, is an interesting debate. There will be changes. There is already evidence of larger firms in organisations that have decided to become an association looking to jump ship to a network, and vice versa.

This level of change, though, is healthy. Firms will end up being linked with more similar and therefore appropriate firms around the world. Clients will be serviced by firms around the world that are more similar to the firm that they know in their own country.

From the MSI perspective, we have decided to go down the association route and have taken the opportunity to rebrand as MSI Global Alliance. We were previously known MSI Legal and Accounting Network Worldwide. With law firms and accounting firms in the same organisation, in reality we had no choice. But even if we had, we almost certainly would have followed the same path. Our belief is that for the strong owner-managed business client, respected, fiercely independent, local firms can often provide a more appropriate service than a larger firm in a more closely regulated environment. And such firms are more likely to be found in an association than a network.

At the end of the day, it’s all about choice. There is no wrong or right route for organisations to take. But by creating this distinction between networks and associations, and hopefully ensuring that clients can understand this distinction, the hope is that partners, staff and indeed firms will end up in the right type of organisation and, as a result, they will not only provide a more appropriate service to clients, but they will enjoy life too. With a fair wind, clients might get a better deal as well.

Ethics and regulation

In 2006 the International Ethics Standards Board for Accountants, an independent standard-setting board within the International Federation of Accountants, revised the Code of Ethics for Professional Accountants by updating the definition of a network firm in a bid to provide auditors with clear guidance on matters of independence. The EU 8th Directive deals for the first time at EU legislative level with the concept of the audit network by including a definition of network.

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