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Leading accountants believe economy is ‘robust’ but are concerned over public spending Back  
Managing partners from four of Ireland’s foremost accountancy firms share their views on how the industry is performing.
Commenting on regulation, the economy and practice management issues the participants in Finance’s forum are:
Jerome Kennedy from KPMG, Donal O’Connor from PricewaterhouseCoopers, Pat Kenny from Deloitte & Touche and Paul Smith from Ernst & Young.
Q. How have the events of the last year - September 11th, increased consolidation within the industry and the Enron scandal - impacted on your business?

O’Connor (PWC): September 11 has brought hesitance to business and this, compounded by the IT downturn, has resulted in a challenging environment over recent months. This has impacted negatively on certain parts of our business such as corporate finance and some areas of our consulting practice. However, other parts of our business such as tax and legal, corporate recovery and insolvency, assurance, regulatory, investment management, business strategy and security and risk services have continued to increase.
While consolidation has taken place in the industry, it has not had a significant impact on our business. We do however plan to separate our management consulting business in the near future.
One impact of Enron is that it has highlighted that Ireland is at the forefront of development in corporate governance and in supervising and regulating the role of the auditors.

Kennedy (KPMG): KPMG had a good year in a tough and very challenging business environment. The slowdown of the major world economies which was exacerbated by the terrible events of September 11th created an uncertain economic environment where business planning was very difficult and a lot of growth activities and investment projects were put on hold. We are well pleased to have continued our revenue growth in this environment.
Post Enron questioning of accounting and auditing standards is of course continuing. I believe we have in Ireland standards that challenge both preparers and auditors of financial reports and that are a robust defence against the issues we have seen arise in the US. As a firm, we have sought and will continue to seek to contribute to the further improvement of those standards in the interests of robust reporting.
Kenny (Deloitte & Touche): There is little doubt in my mind that in general terms the Irish economy is much slower than it was prior to the last twelve months.
We can sustain short-term downturns, which we could not have sustained ten years ago, however, it is important to the economy, which is a robust economy, that these downturns are not prolonged, or frequent.
Our own business has continued to grow because we continue to invest in excellent people, new products and quality service. In the current economic lull it is essential to obtain new clients and we have succeeded in doing that. Business is buoyant, but there is no doubt that in certain industries and in technology investment there is a slowdown, or delay, in clients making new project decisions.
Inward investment, particularly from the U.S., which would be a September 11th and a U.S. economic condition, has slowed down and this has a pronounced affect on Ireland because of the volume of U.S. investment into Ireland. Certainly the slowdown in the Irish economy is more pronounced than at first expected.
The fundamentals of the Irish economy are very strong, but we are absolutely well positioned, and better than most, to participate in and benefit from the anticipated upturn in the second-half of 2003.
I think one of the threats is that we must control inflation and public expenditure, while at the same time continuing to invest in infrastructure, science and technology, education and health. This is a major pre-condition to participation in the recovery on a world economic basis.

Q. How has the position of audit within your group changed or grown over the last year? To what do you attribute this growth or change?

O’Connor (PWC): Despite the difficulties in the market place, our audit practice has grown over the last 12 months and we anticipate further growth in the future. The heightened awareness of good corporate governance and the importance of an independent audit as part of that process will provide opportunities to PricewaterhouseCoopers with our reputation for high quality assurance services.

Kennedy (KPMG): Our audit and assurance practice performed very well during last year. It is a major part of our business and we continue to invest heavily in the development of our core audit process and other assurance and risk management products. The high profile corporate failures in the United States have posed questions about the role of external auditors as well as the roles of non-executive directors, audit committees and senior management. These corporate failures and the need to rebuild confidence in the capital market system also point to the challenge and opportunity for external auditors to play a vital role in meeting the investment needs of the international investment community.

Kenny (Deloitte & Touche): Certainly our audit has grown in the last year. The firm has grown by 16 per cent and audit would reflect growth only marginally lower than the overall firm growth. We attribute it to new clients and to a high quality service on the audit front.
The audit service is an essential part of what we do and one of the core services of our practice. In order to be productive and successful everything must be carried out by high calibre, suitably qualified professionals who are totally familiar with auditing standards, best accounting standards, best presentation standards and all of the legislation, national and international, governing the role of the auditor. The firm has also invested heavily in modern technological methods to assist in the production of audits.

Smith (Ernst & Young): Investors have a huge interest in ensuring the reliability and usefulness of financial statements. The value that the auditor brings to the company and all its stakeholders has never been subject to so much challenge and scrutiny. Audit has never been so important.

Q. As a business service provider how do you see the Irish economy performing over the next year? How robust or vulnerable is it now?

O’Connor (PWC): In 2001, the events of September 11th compounded a slow-down in levels of business activity that had been evident across many sectors of the Irish economy since the spring of last year. The forecasted pick-up in levels of economic activity for the first quarter of this year failed to materialise and reflected the slower than anticipated recovery in the United States and other major global economies. Recent months, however, have seen an uplift in demand for the services offered by professional services firms such as PricewaterhouseCoopers in Ireland.
It is difficult to forecast the medium-term outlook for the Irish economy with any degree of precision as our dependence on foreign direct investment and non-euro zone markets for exports makes us particularly vulnerable to developments in the global economy.
Notwithstanding this, we are hopeful that Ireland will remain to the fore in the league of top-performing European economies.

Kennedy (KPMG): There are indications of cautious optimism regarding the outlook for the US economy. This can benefit the Irish economy if we successfully manage some of the current warning signs including a shortfall in tax revenue and government spending running some 27 per cent ahead of last year. These factors point towards a significant exchequer deficit and the necessary corrective action will need to be carefully administered to avoid a negative impact on economic growth which is not that well established. The risk of overheating in the economy has receded but the concerns about the erosion of our competitiveness by excess cost increases and the need to overcome the infrastructure deficit are even more pronounced.

Kenny (Deloitte & Touche): The first thing to say is that the Irish economy now is a very different economy from ten years ago. The volume of people now employed in the economy, the strength of economic activity and the investment made in the Irish economy all makes it a very different economy. It is a robust economy vulnerable on the cost side, but if it could have continued to grow for another three years to sustain itself totally that would have been great.
However, in real terms the Irish economy will perform relative well for the remainder of 2002 and for the first part of 2003. If the recovery then happens I do believe that we are well positioned to participate and gain.

Smith (Ernst & Young): Obviously a slow-down in growth is a major issue. While there are still strong performances to be seen in many sectors that continue to plan and invest carefully, there is vulnerability in particular sectors that are internationally exposed, e.g. technology. I don’t think the full effects of market turmoil have yet been felt, but this cannot be positive for an open economy. Also, government finances are casting a significant shadow over short-term conditions.

Q. What are the greatest challenges for you in managing your company in 2002?

O’Connor (PWC): Our key challenge will be to continue to retain our highly valued and skilled staff, as they are the key component in our working with clients in solving the increasingly complex issues they need to address.

Kennedy (KPMG): The biggest management challenge and opportunity for me in 2002 is a successful integration of KPMG and Andersen in Ireland. This will include maximising the opportunities for all our people and maintaining the focus on delivering outstanding business solutions to our clients. This transaction is currently subject to regulatory approval, which we hope to receive in the near future.

Kenny (Deloitte & Touche): Obviously the economy and its current state is important. Having regard to the business that we are in the management of risk, as it affects our business, is important.
The most important thing of all is to keep optimism at its current level. The firm has performed extremely well in recent years, as has the Irish economy, but we need to keep all our excellent people fully occupied with high quality work and also to ensure that we continue to invest in high quality people at all times.
It is necessary, particularly when one comes to the audit product, to ensure that we invest in technical support within the firm, and internationally, to support the best practices and best audit quality in our people. By investing in people of excellence and becoming employer of choice it is, in my estimation, the most important challenge to ensure that we offer, and continue to offer, high quality services right across the board in all of the specialities and products that we deliver in the Irish economy.

Smith (Ernst & Young): Providing careers, which are rewarding, professionally and financially. Providing the training, stability and support for a rapidly changing business and professional environment.

Q. What aspects of Irish accountancy legislation do you believe needs to be addressed by policy makers and why?

O’Connor (PWC): Ireland is already well ahead of most countries not only in terms of existing legislation, but also proposed legislation. The draft Audit and Accounting Bill addresses important aspects of corporate governance, accounting standards, directors’ compliance with legal requirements, as well as auditor regulation, and we intend to continue to play our part in the development of the legislation. We believe that the ensuing phase of legislative change should be greatly influenced by the need for harmonisation of the company law framework throughout the EU. For example, the recent EU Regulation on using International Accounting Standards in 2005 should help toward the creation of an integrated capital market in the EU.

Kennedy (KPMG): The key issue is to ensure that we have a structure for financial reporting that is capable of achieving the right communications between businesses, shareholders and the markets in a way that meets the needs of the 21st century. Company law as a whole urgently needs consolidation and rationalisation. The Company Law Review Group should make the creation of a clear, rational platform for economic activity its main aim. It is a truly enormous task, given the almost 40 years’ worth accumulation of detailed requirements placed on a 19th century framework that current exists.
On accounting more specifically, June this year saw the issue of the expected the EU Regulation applying International Accounting Standards to listed companies in member states by 2005. Ireland needs to think clearly and carefully about the impact of this change. How do we fit International Accounting Standards with our current framework for accounting in company law? What happens to smaller companies? Are we going to see two accounting frameworks applying, one to our listed companies and another to un-listed companies? As these questions are answered, we should also review the amount of detailed accounting rules that are embedded in statute. We need less accounting rules embedded in law in the future but a stronger link between law and accounting standards that are set on a proactive basis with a clear public interest remit. This is the best way to ensure that accounting rules react swiftly to changing business environments in the future - preferably before rather than after the horse has bolted.
Another key area is how companies communicate to shareholders. Ireland presents itself as leader in eCommerce but current law on accounting does not clearly allow for companies to communicate to shareholders by electronic means. If we are to keep and build on the success of recent years in placing Ireland as a competent and respected player in global economy, we must make sure both our standards and processes for financial reporting are second to none.

Kenny (Deloitte & Touche): I think the first thing to understand here is that there is a clear distinction between the role of the auditor and corporate governance. In the corporate governance arena it is vitally necessary that company law, the new legislation governing the Office of the Corporate Enforcer and the modernisation of other pieces of legislation goes ahead. The Minister for Trade, Enterprise and Employment has produced a substantial volume of modern legislation all needed. We should now attempt to integrate it on the corporate governance side and re-visit it every two or three years to ensure that it incorporates experiences and best practice on a continuous modern basis and we have regard to related costs of application of legislation.
On the auditing side it should be clearly understood that the auditor and the purpose of an audit is not in itself to detect fraud, but to ensure that proper good accounting standards are applied on a consistent basis to the annual accounts of a company and that they show a through and fair view and are representative of good accounting practices. A good audit may well and could detect fraud, but that is not its primary purpose.
In Ireland again on the legislation side we will have in the autumn the legislation governing the Oversight Board on Auditing arising out of the review group on auditing.
If I had anything to say about legislation it would be that we now possibly have the legislation we need, but we need probably to consolidate it and ensure that it cross-references itself appropriately to pick up any weaknesses. It is a pre-condition of good governance and good operation of financial management that we have modern legislation.

Q. What impact do you feel the move by the International Standards Board to change its current IAS19 to conform to FRS17 will have on your business?

O’Connor (PWC): Through our close contact with both the IASB and the UK ASB, we are keeping fully abreast of the current drive to converge accounting standards in advance of 2005. We believe that it remains to be seen whether IASB will move toward FRS17 in the short term. We support this drive toward convergence as it will ease the transition to IAS in 2005, as well as increasing the level of international harmonisation. With particular reference to FRS17 and IAS19, we believe that Irish and European business will be best served by eliminating the existing accounting differences. Accordingly, we strongly urge liaison on this issue between ASB and IASB in their common endeavour to set high quality and transparent accounting standards.
Kennedy (KMPG): Our main concern with FRS 17 is not its impact on our own business but on helping directors and others involved in preparing financial statements understand its impact and the steps they need to take to meet its requirements.
What will be the impact of FRS 17 and its eventual international successor is not at all clear as the ASB have announced an exposure draft of an amendment to FRS17, which will delay the full adoption of the standard for some time and allow for further and necessary consultation. Some blame it for making defined benefit schemes too risky for companies to offer; others point out that it is merely an attempt to measure a reality that exists in any event. It certainly sets a challenging standard for financial reporting and its insistence on showing a scheme’s overall assets - or liabilities - on the related company’s balance sheet each year has given rise to many calling for change - and some hoping that IAS 19 might provide a solution! But the IAS has its own problems and is currently under review by the IASB.

Kenny (Deloitte & Touche): As you are aware FRS17 was due to be introduced for the accounting periods after the 22nd June 2003. The full introduction and impact of FRS17 has been deferred. The only reason being is that the International Accounting Standards Board are currently looking at IAS19 on accounting for pensions to see what change they would intend to make. I believe that the Accounting Standards Board are correct deferring the total application of FRS17 until it concludes its work, as we should have one standard absolutely across the spectrum, specifically in Europe and particularly when one has regard to the E.U.’s attitude on international accounting standards.
I do fervently believe in appropriate, proper and complete information being made available to users, and in particular to employee groups whose pensions are in question.
I think it is important in the application of FRS17 in full and IAS19 hopefully when they harmonise is that distortion in balance sheets don’t occur violently as a result of re-statement on an actuarial basis one assumes of assets and liabilities and pension schemes each year. I have no doubt that this can be addressed and properly dealt with.
While we are waiting for the full application of FRS17, of course, published accounts will continue to make all of the notes necessary for the interpretation of pension schemes and the understanding of the assets and liability profile.
It is essential that the matter be dealt with as soon as possible and that a comprehensive disclosure be incorporated in accounts.

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