Berry Wammes, CEO of the Netherlands Institute of Chartered Accountants, is responsible for regulation, policy and international affairs. Before he joined the Netherlands Institute of Chartered Accountant, he was head of Public Relations at PTT Post and later worked at KPMG. dr. Wammes describes in this article the change in the remuneration policy within the accounting profession. In September the Future Accountancy Profession working group presented its plan for the improvement of audit practices. This plan, entitled ‘In the Public Interest’, consists of a number of measures aimed at the creation of a culture in which quality once more plays a central role. The route of the problem is that in recent decades a culture has arisen, with profit and income maximization as its fundamental principles. That culture has been a significant factor in a series of incidents; breaking through to not let this happen again this will require measures which, amongst other things, address remuneration policy. Remuneration must depend primarily on the quality of the work, not on commercial success. The implementation of high quality audits is nevertheless the accountant’s key task. Therefore this must determine the way the earnings model within accountancy organisations is organized. In turn this will also affect the incomes of accountants. The assumption is that the remuneration system is based on reward as well as punishment. If the emphasis is placed on punishment, there is a risk of creating a culture of fear, and that is not a culture in which professional quality and a high quality audit can thrive. This means that accountancy organisations must develop an internal remuneration system, in which the rewarding of quality is dominant. Furthermore, that remuneration structure must apply to all levels within the organisation. However the remuneration model for accountancy organisations with a so-called PI license (Public Interest Organisations) will not be determined by the partners. This is established by a soon to be introduced Supervisory Board. This Supervisory Board appoints the management and remunerates on the basis of quality performance. Therefore, how the remuneration is composed is relevant. The appreciation and remuneration of an individual accountant must be strongly influenced by the quality of his work and the organisation’s long term objectives. This ensures that the incentive underlying the structure of remuneration is in line with the organisation’s objectives. The assessment of the guidance and coaching of members of the audit team and the results of file reviews will also be important criteria in this respect. Management Managers of accountancy organisations receive remuneration independent of profit and which will be established by the Supervisory Board. This remuneration consists of a fixed amount, plus a variable sum, which can add up to a maximum of 20% of annual salary. This variable element is dependent on the long term objectives set by the Supervisory Board, of which the quality of the audit is a significant element. Partners For partners too, the quality of their work defines their paycheck. Performance in terms of commercial objectives plays no role if a partner is assessed negatively on audit quality. Alongside quality, focus on the long term is a significant criterion in remuneration policy. By not paying out remuneration in full immediately, but linking it to a claw-back scheme, the focus is on the long term and quality is further enhanced. Specifically; a component of a partners’ paycheck is deferred for six years. If during that six year period it becomes evident that the partner concerned has taken his eye off the ball, resulting in social damage, the amount covered by this scheme will not be paid out. These withheld amounts will not be distributed amongst the remaining partners, but will be invested in specific measures aimed at improving quality, in consultation with the Supervisory Board. Career Remuneration extends further than just salaries or profit distribution amongst managers and partners in any particular year. Criteria for promotion and career opportunities are also important elements in the remuneration of people. Fundamental criteria is performance with a focus on quality. Performance which focuses on quality is also central to this. Professional expertise, professional skepticism and quality of work should be the crucial elements within the organisation’s promotion policy. This also applies to the criteria for the appointment of partners. Such professional expertise and experience must be conditions for the appointment of partners. Transparency The remuneration policy and the individual remuneration of the directors of accountancy organisations are published in either the annual report or the transparency report, or they are published on the website of the accountancy organisation. This also applies to criteria regarding profit distribution amongst the audit partners. Obviously, remuneration is also partly dependent on the firm’s profitability and therefore the partners and employees all have an interest in that profitability. This is inherent in the choice to carry out accountancy work within a private commission. However we consider that as a result of the aforementioned measures, implying the remuneration structure will be arranged in such a way that its guiding principle is to provide incentives which are primarily aimed at audit quality. With the firm’s profitability as the starting point, individual remuneration is primarily influenced by the quality delivered. This will have a great effect on conduct. Berry Wammes CEO Nederlandse Beroepsorganisatie van Accountants
‘Just graduated’ Rik van Maanen
Hi everyone! My name is Rik van Maanen and I am 25 years old. Although it feels like yesterday, I graduated approximately one and a half year ago. By doing that, I finished my Master in Accounting at Tilburg University. Bachelor Before I signed my diploma in the early summer of 2013, I tried to get most out of my time as a student. It all started in 2007 when I moved from the picturesque Renkum to the ‘big’ city of Tilburg. During my first years of the bachelor of Business Economics (Bedrijfseconomie) I really enjoyed the possibility of going out on any day of the week and decide the next morning whether or not you go to class. The absence of (real) obligations made student life really extraordinary for me. During this wonderful period I also became an active member of Asset | Accounting & Finance. One of my housemates convinced me that it was time to gain some extracurricular experience. After that is all went really fast. I started organizing Benefit Event Student Tilburg (B.E.S.T.) where we managed to arrange Hardwell to play for charity. Shortly after that I organized the Studytour to Brazil and became chairman of the association’s board in 2011. Of course, Asset | Accounting & Finance gave me a lot more than some extracurricular experience. It enriched my life with experience that I never could attain during classes. Next to that, it gave me friends for life. Master Unavoidably, life got more serious during my time on campus. After intensely enjoying my year as board member I immediately started a Master in Accounting. As a completion of my Master Accounting I wrote my thesis on the subjects of bargaining power and abnormal audit fees. I expected companies which are perceived to have more bargaining power where able to decrease the amount of audit fee they were paying. However, somewhat disappointing, the evidence did not support my hypothesis. Work life During my active membership of Asset | Accounting & Finance I also met my current employer: PwC. As you might know PwC (former: PricewaterhouseCoopers) is one of world’s largest professional services networks. PwC’s services can be divided in three practices: Assurance, Advisory and Tax. It will be no surprise I started working in the Assurance practice. In September 2013 I started with the Associate Academy program. The Associate Academy fully focuses on development of soft skills and improving technical skills. It supports me as an Associate with multiple development days during the year. In addition, I immediately got a personal coach who gives me guidance and is a sounding board when necessary. Before I started working I did not know what to expect, and asked myself multiple times if I had enough knowledge to function properly in an organization as PwC. However, partly supported by the Associate Academy program as well as my personal coach, integration with my fellow colleagues went smoothly. During my normal work days I spent almost all my time visiting my clients. In multiple different engagement teams I focus on auditing accounts and assessing internal control processes and systems of different customers. My client portfolio is divided between various types of organization (big vs. small, national vs. international, etc.) so I have to possibilities to maximize my learning curve. Last but not least, I really enjoy working at PwC, but you should enjoy student life as long as you can!
The Dutch desk in São Paolo
Eric van Deursen is a senior audit manager at KPMG Amstelveen. He writes about his amazing time as an audit manager at KPMG in São Paulo, Brazil. Van Deursen was the main contact of the Dutch Desk of KMPG in São Paulo. In this article he describes the differences and (unexpected) similarities of accountancy between Brazil and the Netherlands. São Paulo has been a challenge and adventure to him as well as instructive and frustrating. November 2011 to November 2013, KPMG gave me the fantastic opportunity to work in São Paulo, Brazil. Two years long working as audit manager at KPMG in São Paulo is challenging, adventurous, very instructive and sometimes extremely frustrating. It is totally different than in the Netherlands, in every possible way. In this article I will try to outline what the largest differences are in terms of accountancy in Brazil and what is (unexpectedly) is the same. Before I dive into the depth, I’ll first provide a brief introduction. My name is Eric van Deursen, senior audit manager at KPMG Amstelveen. Before I went to Brazil, I was part of the Holding & Finance team, a department in which the holdings- and finance international structures are checked. In Brazil, my clients were mostly parts of Dutch (listed) companies and I was the first contact for the Dutch Desk KPMG in São Paulo. Now I’m back for a few months in the Netherlands and again working in the Holding & Finance department. Obviously, since my return, my focus has mainly been on Brazilian companies in the Netherlands. I am also part of our Brazil Desk. Furthermore, I would want to add that the differences and similarities I will depict in this article are mainly differences and similarities I have experienced in my second year in São Paulo. Someone who has worked in Rio or any other city in Brazil will have a totally different experience. The differences between the cities and regions in Brazil are as a matter of fact enormous. Yet many people who were allowed to work in Brazil for a while will undoubtedly recognize themselves in many points. The Language Barrier In the Netherlands, I was used to doing my job in English. We are in the Netherlands quite accustomed that almost everyone speaks English, especially in the business environment. My department in the Netherlands contains about half of expats, who could get along fine by just being able to say ‘good morning’ or ‘enjoy your meal’ in Dutch. In São Paulo, this was another case. Or rather, totally different. Hardly anyone speaks English and without speaking Portuguese you cannot actually do your job. Within my teams no one spoke English and the partners I worked for, this varied. This was also the case for the customer. The senior management speaks mostly English, but certainly not in the workplace. In the beginning, working in Brazil was therefore very difficult, especially with a professional competence as a professional accountant. With a good study discipline and much needed exercise during the hours I could eventually, after three or four months, carry on with my job in Portuguese. How I met my deadlines in the first months still remains a big question. Because every expat KPMG São Paulo had to do his work in Portuguese, this was also the main language at meetings or lunches with only expats. It is remarkable that you are unable to continue speaking English with each other. The Culture Shock On just this subject, I could probably write a whole new article. So let me limit myself to the most remarkable differences. Parties and Churrascos Brazilians invite you very easily for a party or a barbecue (churrasco). A party or barbecue can be thrown for no reason and it’s all initiated a day or few days in advance. Generally speaking, the more people are invited, the more fun it is. This meant that from the first weekend I was there, I was invited by colleagues and it was a great opportunity for me to gain new contacts. Talk about the difference at my return in the Netherlands! See the last section for the reverse culture shock. Kissing and Hugging In the Netherlands, we give our customers a hand while greeting and colleagues greet in the morning with a ‘hi’ or ‘good morning’. You might give a female colleague a kiss when it’s her birthday. The difference in Brazil is quite large. Female colleagues are greeted with a kiss every morning and it is very normal to also greet female clients this way. Men greet each other with a hug (abraço) where you can absolutely touch each other’s shoulder or abdomen. Something I would only do with my best friends in the Netherlands. This ritual also takes place at the end of the day, by the way. When you’re the first to leave the office or the client, you’d better take extra ten minutes. Coffee Break My first day at the office in São Paulo, I thought I would be polite by asking my colleagues if they wanted a cup of coffee or tea. In the Netherlands I was after all quite used to it that everyone gets coffee once a day for all colleagues. When I posed this question to my colleagues in São Paulo, everyone stood up for a twenty-minute coffee break (cafézinho). It is perfectly normal in Brazil just to take two to three times daily coffee break and talk with colleagues about football, weekends and other topics. Hierarchy Although Brazilians seem informal, hierarchy is extremely important. Disagreeing with your boss is not an option. As a critical accountant from the Netherlands this was a very difficult aspect of Brazilian culture for me. In the Netherlands we focus less on hierarchy and it is most important in accountancy that you continue to critically evaluate each other’s work. Where my teams finally managed to appreciate my approach without hierarchy (trainee is just as important as the partner), the senior partners
Future of the Accounting Profession
For young and aspiring accountants who want to have an attractive, respected and exciting profession, these are interesting times. One of these weeks, at the urgent request of the government, ‘the profession’ presents a package of policy measures to ensure the quality and independence of the audit. If the government finds the new measures inadequate, it will proclaim measures itself. A well-known empirical rule suggests that politicians do not usually operate with scalpels and precision equipment, but with larger tools. Confidence in the audit currently reached a low point. This is caused by several factors: the accumulation of critical AFM reports, ‘absence’ in the run-up to the credit crisis, inadequate inspections and incorrect statements by companies and housing associations, headline news about help with bribery, estate trades and the alleged tax antics concerning the Amstelveen headquarters. Though this may be unreasonable for the vast majority of accountants who do their job with enthusiasm, commitment, knowledge and integrity, when a popular television program such as ‘De Wereld Draait Door’ devotes ten minutes to you and Youp van ’t Hek does not only write an entire column in the NRC about your profession, but keeps mocking about accountants for weeks afterwards. Then as a sector you have got a serious problem. Serious, convincing measures are needed to avoid politicians to intervene. Contrary to what is often thought and said – unfortunately memories are short – the problems are far from new. Since the early nineties of the last century (international) regulators criticized the excessive commercialization of the accounting profession and the following lack of criticism in the audit. Since then, many measures have been incurred, including external supervision by the AFM in the Netherlands, serious efforts by the professional association NBA and in 2013 the statutory restraining of advice to audit clients and the mandatory rotation of audit firms in ’Public Interest Companies’ (PIC’s). But it does not seem to be enough. In either case, that is what politicians think. Eventually, it will be all right, but time is running out. Some even claim that it is ‘five past twelve’. It is going to be interesting. Especially for the younger auditors, whose future is at stake. Unfortunately, experience shows that young (beginning) auditors are not intensively engaged in public discussions about their profession. Understandably, because as far as I can remember I did not do that as a student either – a long time ago, in another discipline. Still, it would be good to follow the discussions and developments, focusing for example on Accountant.nl. and even better, to get actively involved. Roughly speaking, the choice is between two directions. The first direction is a structural intervention in the organization and business model of the accounting firms. According to proponents of this direction, the purely commercial setting creates wrong (financial) incentives. The direct financial relationship between auditor and audited – who does not only pay the auditor but also chooses him – could lead to the temptation to maintain the client by being not ‘too hard’. In addition, the urge to maximize the income of the partners may prompt to save too much on the (control) costs and hence on the quality of the control. The remedy for these so-called ‘perverse’ incentives would be to get rid of or strictly regulate the direct link between the auditor and audited. Another option is to maximize the currently, in principle, unlimited maximization of the partner’s income and to introduce an obligation to put the ‘excess profits’ in quality measures. The second approach is to neutralize the misdirected incentives in the existing business and commercial model by even stronger adverse incentives: administrative measures (e.g. external persons in the board, a leading role of directors in the audit) and / or solid sanction systems to prevent wrong behaviour. That road has been followed so far, and it is also the way most people prefer. Of course, a combination of the two main directions is possible too. Plenty of choice. In recent years, dozens of measures and solutions are proposed on Accountant.nl. As always the case is with long-running debates, this debate has also a tendency to run in circles. Arguments in favour and against are exchanged and by the time the stock of arguments is consumed, everyone has already forgotten the first argument and the whole party starts again. Go ahead and try. The interests are considerable, both the commercial interests and the broader interests of the profession. The working group of mostly young accountants that started in May and is busy formulating plans – has a heavy responsibility. It is time to decide. But the rest of the young accountants, including those who still study, must not stand idly by. Keep an eye open, take a clear position and make your voice be heard. And do not be afraid. ‘Stupid’ questions are often the best. There is much at stake.
Big data analytics in audit
The application of big data in auditing is a hot topic (see, for example, Accountant 2013, “Large audit firms are investing heavily in big data”). In this article, I want to give a vision on what big data means in this context and how to position it in auditing. The definition of big data is pretty hard to give. Earlier this year, one of my master students, Bas Jansen, made an inventory of over 20 publicly available definitions of big data. Some highlights were: “If your personal laptop can handle the data on an Excel spreadsheet, it is not big.” (Siraj Dato, 2014), “If you know what questions to ask of your transactional cash register data, which fits nicely into a relational database, you probably don’t have a big data problem. If you’re storing this same data and also an array of weather, social and other data to try to find trends that might impact sales, you probably do.” (Matt Asay, 2013), “Big data refers to things you do on a large scale that are not possible on a small scale. (…) Big data is about correlation, not causation. It’s the what, not the how.” (Mayer-Schönberger & Cukier, 2013). IBM uses four Vs to characterize big data: Volume, Velocity, Variety and Veracity, where the latter refers to the uncertainty of data. My own preferred, very short definition that I used in an article in the Accountant, reads: “Explorative analysis of literally large data sets from heterogeneous sources”. Positioning big data analytics in auditing is even harder, because the variety of powerful applications of big data analytics in auditing is huge and unstructured. The International Standards on Auditing (ISAs) are not of much help here, since the ISAs are strolling behind big data developments at a considerable distance. ISA 520 on Analytical Procedures even states that an auditor should limit himself to confirmative analysis. The variety in big data definitions may be large, but the explorative nature is an element that most definitions have in common. The final attainment levels for the auditing curriculum as set by the Commissie Eindtermen Accountantsopleidingen (CEA) do not give much guidance in this context either. The CEA has positioned data analysis under Mathematics & Statistics as one of the auxiliary specialties in Section 3.4.6.4. The Chi-squared test is the most technical term in this section. The good news for auditors who are afraid of statistics is that this test should only be understood at Level 1, the most superficial of the three levels. My colleagues Barbara Majoor and Jan Wille and myself have recently introduced the Push-left principle to structure the use of big data analytics in auditing (MAB, 2013). In short, we state that the biggest challenge that auditors face is that they should replace some existing Evidence Gathering Activities (EGAs) by data analytical techniques instead of adding these techniques as nice-to-haves. Adding means that no budgets are reserved for data analytics, that the auditor is not forced to derive audit comfort from data analytics, and, consequently, that auditing will not exploit the big data opportunity. However, given the current state of ISAs we understand that auditors are afraid to skip EGAs that make their audits ISA compliant in favor of EGAs that are – to put it mildly – not encouraged by ISA. To face this challenge, we state that an auditor should strive for three objectives when applying big data. First, big data analytics should control audit risk in a quantitative manner. In May 2013, four weeks before Hans Blokdijk died, the Limperg Institute organized a symposium to honor him as “(pro)motor of statistical auditing”. In his final speech he claimed: “It is inevitable that auditors will be forced to quantify their audit risk by means of statistics.” If data to be audited can be reconciled against a reference data source that is electronically available, all misstatements can be reported. This means that – potentially after corrections – audit risk, which is the risk that the auditor misses material misstatements, is zero. In case that such electronic reference sources are not available, statistical models may be used to quantify audit risk in a statistically sound manner. Secondly, big data analytics should help to improve the audit process. More and more in- and external data can be made available in electronic form. Not considering the option to utilize this data in audits cannot guarantee the efficiency of audits to be optimal. Necessary condition for this claim to hold is that whenever data analytics are utilized, these should replace a control activity that would have been applied without data analytics. This also holds for the situation that the auditee already uses data analytics as part of his internal control framework. Within an ISA based audit approach, it should be first investigated whether comfort can be gained from reviewing these data analytics. Finally, big data analytics should create insights to improve the auditee’s business. Next to the primary goal of any audit approach – giving assurance on financial statements, using data analytics to create insights for the auditee to improve his own business is the secondary goal. In practice it often happens that auditor’s data analytics are transferred to the auditee to become part of the auditee’s internal framework. If auditors would force themselves to use big data analytics that meet all these three objectives in every audit, I am sure that the audit profession will give itself a boost in relevance for society and “emerge as a new kind of professional, the data scientist, who combines the skills of software programmer, statistician and storyteller/artist to extract the nuggets of gold hidden under mountains of data.” (The Economist, 2011).
The Accounting Profession on a Journey
Over the past decade the accounting profession has attracted widespread attention more than ever before. If it is not because of accounting scandals and the financial crisis, then it is because of reports from the AFM concerning the poor quality of financial audit by accounting firms, the involvement of accountants in corruption (such as Ballast Nedam) or changing regulations for auditors. The question that presents itself is whether these developments are understandable and whether the new regulations will ultimately lead to a better functioning accounting profession and thus to a restored confidence in the audit and the financial markets. For this reflection, I will first briefly discuss the explanation for the existence of the accounting profession to subsequently give an indication of its history with emphasis on the latest developments. Finally, I will provide you with my comments on the most recent developments, policies and regulations relating to the accounting profession, for which I want to emphasize that it is my personal opinion. Auditing Theory For explaining the existence of the accounting profession, there are several theories available. The most common of these is the information theory, where the existence of the audit profession is explained by the reduction of the information risk as a result of the work of the auditor. The reasoning followed is that by counting the reduced information risk of for example, the financial statements, as evidenced by the attached audit report, investors and financers make calculation with a lower risk premium in the desired return on the presumed reliability of information provided. Confidence that investors and financiers in the auditor’s report of the auditor, is thus crucial. If the perceived information security is not provided by the auditor, it may ultimately harm the existing basis of the accounting profession. Brief Historical Overview The emergence of the accounting profession in the Netherlands is situated at the end of the 19th century, when the fraud of Pincoffs at the African Trading Association is discovered. Pincoffs draws false balance sheets and a large number of private investors are at the receiving end. Until then Pincoffs had a high reputation in the Rotterdam community and possessed all investor’s trust. After Pincoffs’ fraud scandal, a way has been made for the appointment of a controller of the books, made by the supervisors. The profession is evolving and gradually, large accounting firms are being formed through partnerships. The 80s and 90s can be characterized as a further commercialization of the audit market, where the individual practitioner is subordinate to the commoditisation of accounting firms, which are becoming more and more international operating and centrally controlled. During this period we also see that the advisory departments of accounting firms experience tremendous growth. The audit shall be subordinate to the advisory function. Typical is the practice of ‘lowballing’ where accounting firms are buying from a client through an incredibly low budget control to offset sizeable consulting with that same client. This way heavy pressure is put on the independence of the auditor, one of the pillars for the accounting profession. The settlement follows the beginning of the 21st century. Immediately after entering a new century, there is a large number of apearances of several accounting scandals. Enron, Worldcom, Parmalat and Ahold are just a few examples of fraudulent financial reporting that form a plague to financial markets. Accountants have failed to detect or signal these frauds. Recent Developments The accounting profession has yet tried to change its course, through self-regulation, but for that, the trust of the financial markets was put to the test too much and the profession was too derailed. All over the world, supervision in the accounting profession was strengthened or introduced. In the United States, the PCAOB (Public Company Accounting Oversight Board) is formed and in the Netherlands the WTA (Wet Toezicht Accountantsorganisaties) is introduced, in which supervision is entrusted to the AFM. Also typical is the Sarbanes Oxley legislation in the United States in which listed companies are held accountable through an Internal Control Statement on ensuring reliable financial reporting for which the auditor must provide assurance. Also the independence rules are tightened worldwide, listed companies are at the forefront and in particular the combination of audit and advisory is increasingly questioned. In fact, the introduction of the WTA in the Netherlands, is a logical development. Up to that point there was in fact just mention of laws and regulations that primarily focused on the individual professional, while as outlined above, within the accounting firms, the individual professional increasingly came under pressure and in fact performed mainly centrally formulated polices of the firm. Due to the introduction of the WTA, regulations came into balance with the way in which the profession was practiced, which made it possible they could be maintained at the level of the audit firms. The initiatives at European level are more of a recent date. Commissioner Barnier has made suggestions in his green paper on the reform of the accounting profession. Most eye-catching were his proposals for the rotation of audit firms and the execution of so-called joint audits. The rotation of individual auditors in audit firms had previously been controlled by the introduction of the WTA. Barnier now wanted to take the next step by also requiring that at least public interest entities (PIEs called) should change their accounting office periodically. He linked this to a proposal to not entrust auditing to one accounting firm, but to provide two audit firms who will perform the audit of the financial statements jointly, and will collectively make an assessment, as is now usual in France. There is a lot of lobbying by accounting firms against Barnier’s proposals and ultimately in European context, not much is left of his proposals in the draft guidelines that are now circulating. That is unfortunate, because in principle, Brnier’s proposals do point in the right direction. Rotation of audit firms and joint audits reinforce the independence of auditors and hence the objectivity in their judgment. At leasy byy rotation