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The big five comment on practice
and market issues
A selection of leading managing partners comment on regulation, the economy, practice management and the distinctiveness of culture
John Hogan, Managing Partner,
Ernst & Young.

Pat Kenny, Managing Partner,
Deloitte & Touche.

Jerome Kennedy,
Managing Partner,

Donal O’Connor,
Managing Partner,

Roddy Ryan,
Managing Partner,
Arthur Andersen.

What are the main changes you see ahead for practice management if the recommendations of the Audit Review Group are implemented?

Hogan: If the Recommendations of the Audit Review Group are implemented, a number of practice management changes are necessary. It will be particularly necessary to ensure that the procedures regarding all relationships with particular clients are put in place. This will mean a much more inter-connected office and greater communications between those members of the firm who are dealing with particular clients. In addition, all practices will have to put in new procedures regarding the risk to audit independence. Currently in Ernst & Young we do have procedures to ensure that our Audit Independence is not impaired. We will need however to strengthen these procedures and also we will need to develop even closer contact with the Audit Committees of ‘Public Interest’ clients on this matter.

O’Connor: The Audit Review Group has made about 80 recommendations, so obviously we will have to assess how to implement them, especially where clients are affected. For example, one of the recommendations on financial institutions is as follows:

‘There should be increased liaison between the Central Bank and the external auditors of financial institutions. To facilitate this, a protocol concerning the exchange of information should be agreed between the Central Bank and the accountancy profession. If necessary, legislation should be enacted to permit this exchange of information.’

There is also a wide-ranging recommendation made in the report which imposes new duties on directors of any company. It reads:

‘Directors of a company should be required to report on an annual basis to the shareholders on the company’s compliance with its obligations under company law, taxation law or other relevant statutory or regulatory requirements. The report should confirm that any instances of non-compliance have been reported to the relevant regulatory authority and that in all other respects the company has complied with its obligations under company law, taxation law and other relevant statutory or regulatory requirements. The report should be appended to the annual financial statements.’

This recommendation applies not just to plcs, financial institutions and other public interest companies but also to medium sized companies, small companies and those which are exempt from audit altogether.

It would seem likely that directors will wish to put in place information systems, procedures and controls designed to give them reasonable assurance about their company’s compliance with laws and regulations. While many companies will already have such systems designed to ensure that their operations are conducted in a way which respects their legal obligations, they are not usually designed to support such a wide ranging positive public reporting assurance to shareholders and regulators.

As auditors, we will have to report on the directors Report on Compliance, so we will need to put in place our own additional procedures to undertake our own part of this process.

Ryan: Many of the recommendations of the Review Group are welcome and indeed were sought by ourselves and the ICAI in our original submission. Whilst it remains to be seen what recommendations are implemented into law, many of them would go some way to redeeming the image and reputation of the profession after a lot of negative publicity.

We do have some reservations nevertheless about some of the recommendations and the impact that they may have if enshrined into law as currently drafted. Specifically, the proposals to limit the scope of non-audit services which firms can offer to audit clients, either explicitly or implicitly by placing an indicative cap on fees, could have long term implications for audit quality and indeed for the profession. We are watching carefully what the outcome will be in the US of the SEC’s deliberations on auditor independence.

Kenny: We are currently developing our considered response to the recommendations of the Review Group and Auditing. We welcome the general thrust of the recommendations, which should help reinforce public confidence in auditing and corporate governance in general. We do not anticipate any difficulties from the practice management stand point in responding to the implementation of the recommendations, though we would be concerned that there may prove to be cost implications for Irish business.

Kennedy: The future development of KPMG in Ireland will be defined primarily by development internationally in our clients’ businesses, the changing environment in which they operate and the value added services they will look to us to provide to assist them in achieving their strategic objectives. The drivers of change for our clients are increased globalisation of business, the impact of technology and the resulting increased competition from existing and new players. All of this provides a challenging business environment in which professional services firms must respond to.

The Report of the Audit Review Group is a very comprehensive document which can have significant implications for the providers and users of audit assurance in Ireland. There is a need for well-informed debate on the 21st Century business needs for audit assurance and the public perception and understanding of audits. There is a need for careful consideration of the respective roles and obligations of shareholders, directors, management and auditors.

The Irish Government has over the years provided a well regulated but not overly regulated business environment and that has been important in attracting overseas investment. The implementation of the recommendations of the Audit Review Group Review will require careful handling to preserve the international outlook of the Irish marketplace and provide a similar look and feel to other well-developed economies and capital markets.

As a business services provider, how do you now see the Irish economy? How robust or how vulnerable is it at its fast growth rate?

Hogan: Clearly we still have a growing Irish economy. There are signs that there are problems on the horizon. However, at the moment there is no sign of any significant slow down in the demand for our services. On the contrary demand continues at a very high level. Clearly unless inflation is brought under control the economy could be vulnerable to slowing down or in a worse case scenario hitting a recession.

O’Connor: The Irish economy has performed strongly and has enjoyed significant above EU average growth rates over the last number of years. This growth has impacted on all industry sectors, in particular the high-tech and internet sectors.

However, some strains have emerged as a result of this economic success giving rise to fears of overheating in our economy. Some of these strains include rising inflation, continued rising house prices and labour shortages.

As a result of our Government’s strong focus on inward investment and enhancing taxation measures conducive to business, the Irish economy remains in a strong position and is still an attractive market for indigenous and foreign investment.

Ryan: Obviously very strong. Principal risks are price growth and capacity constraints, and the principal challenge is implementation of necessary infrastructural projects.

Kenny: While the current level of growth is very high, we believe that the government and Irish industry has taken a longer-term perspective in creating an environment in which businesses can thrive.

Kennedy: I believe that the growth prospects for the Irish economy are good over the next 2 to 3 years and then will taper off somewhat. The threats to the Irish economy are inflation in the short term and infrastructure in the medium term. Both of these are capable of being managed and we in KPMG are very positive about the outlook.

In which areas do you see most growth in the year ahead?

Hogan: In the year ahead we see continued growth in our specialist services particularly those relating to our Advisory Business Service practice through things like initial public offerings, business security evaluation, etc. In our tax practice the continued growth of wealth is generating significant growth in demand for services towards advice both on taxation and otherwise helping clients handle their newly found financial strength. Finally, on corporate finance we see continued growth in the area of advice on public private partnerships and private placements for growing companies.

O’Connor: We see strong growth in all areas of business. In the year ahead specifically, we expect growth to be particularly strong in the following areas:

• Financial Advisory Services (banking, insurance, funds);
• Technology and internet services;
• Human resource consulting;
• Enterprise Development Services;
• Taxation Services generally.

Ryan: All areas have grown very markedly over the last year. We see no reason why this growth should not continue.

Kenny: We see e-business, IT consulting, corporate finance and tax consulting as the main growth areas.

Kennedy: We are currently experiencing strong growth across all areas of our practice and we are continuing to invest in a broad range of business advisory services. The most significant areas of growth are e-business consulting, transaction services related to mergers and acquisitions and IPO advisory services.

Can audit continue being a low margin area of practice?

Hogan: Audit cannot continue to be at the low margin area of the Practice. Further demands on auditors will inevitably need increased fees to compensate for additional work. Increasing Regulatory demands on auditors through both previous regulation and now the Audit Review Group will present greater challenges and greater costs in audit fees.

O’Connor: We make a satisfactory return on all of our practice areas.

Kenny: Assurance and Advisory Services, which include our audit services, continue to be a key and growing element of our business. We can see major opportunities for further growth of these services, which are typically based on long-term client relationships. We anticipate as expectations in relation to corporate governance continue to rise, the need for a diverse range of assurance services will grow. Taking these factors together with our constant drive for technology based efficiency we are satisfied that this area will continue to be attractive.

Kennedy: Quality of service is a fundamental issue for us at KPMG and we are opposed to low-balling on fee proposals. Low margins will overtime influence the quality of service and make it difficult to attract and retain high quality people. This is not in the best interests of business or Government and I expect that overtime commercial logic will prevail and realistic margins will be re-established for audit services.

What are the greatest challenges you face in managing a now faster-growing group of professionals?

Hogan: The greatest challenges that the management of a professional practice now faces is finding the right people. It is increasingly difficult with so many counter benefits in other areas of the economy to make a career in professional practice an attractive proposition and finding the professionals to cover the increasing demand for our services.

O’Connor: Our greatest challenge is retaining our highly valued and skilled staff.

Ryan: There are numerous challenges; getting and retaining the right level of human resources is a challenge, as is responding to the challenge of the new economy.

Kenny: The key management skills are managing people and maintaining a culture of mutual respect and an environment where people are happy and see clear prospects.

Kennedy: The greatest challenge in the current business environment is the attraction, retention, training and development of high quality professionals. In KPMG we consider this to be a priority for the future success of our business and are investing a lot of time and resources in the management of HR issues with good success to date. One of the advantages of the current level of growth in our firm is that there are more senior positions, more promotions and more upward mobility than ever.

How important is it for your practice to feel, and be, distinct from others? What is the distinctiveness of your practice?

Hogan: We believe in Ernst & Young that it is important for our practice to feel and be distinct from other firms. We are distinctively known for our solid service delivery, the good opportunities we offer our staff and our specialisms in a number of areas especially IPOs of high-tech companies on the US NASDAQ and the German Neuer Markt.

O’Connor: Very important. Our distinctiveness is our people and our brand. We pride ourselves on having people of the highest quality so that our clients receive service of the highest quality, and we believe that this is reflected in our unrivalled market position. The investment we make in our people continues to set us apart, and is a key distinguishing factor which helps us attract and retain the brightest and best.

Ryan: Being distinct from others is not, per se, an objective. The key is to have a working environment where people are happy and challenged and feel that they can achieve their potential. We’ve made a number of changes over the last year or so with that in mind.

Kenny: We are a remarkably diverse organisation united by an excellent group of people. We are working to globalise our practice, to lead in growth, to exploit new technologies and to launch innovative new services. However, it is our people who make the real difference to our practice - and to our clients. We pride ourselves in the human element.

Kennedy: Our distinctive KPMG culture flows from a combination of being Irish and knowing the Irish business scene and being international in outlook and reach. Through the global reach of KPMG International we bring international issues, developments and opportunities to our Irish clients. Through KPMG International we bring our Irish clients to global markets. We understand Irish business. As professionals we are committed to working with our clients to grow their business and making deals happen in an increasingly complex and regulated business environment.

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