Mysterious letter rattles E&Y’s Iraq ambitions

by Mario Christodoulou

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20 May 2010

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Rumours, speculation and finger pointing still surround a letter that purports to “forbid” Big Four firm Ernst & Young from practicing in Iraq.

The letter, sent as authorities said the firm was on the verge of obtaining an accounting license, raised eyebrows throughout the regional accounting establishment, but the dispute at its heart remains a mystery.

E&Y entered Iraq not long after the toppling of Saddam Hussein’s regime in 2004. Along with crumbling buildings and routine insurgency attacks, the firm faced an out of date accounting regime which had standards dating back to the 1930s. The nation still required hand-written ledgers.

The firm has since established a presence in the country conducting business services but, according to authorities, it is not yet able to audit local accounts.

So it came as a shock when the firm learned of a letter sent to the Iraqi Supreme Court, the Central Bank of Iraq, the Commission of Integrity, the Companys’ registrar and the Iraqi Banks Union, among other senior institutions, from the Iraq Union of Accountants and Auditors, which claimed the firm had been banned.

“It has been decided to forbid the accreditation of any financial statements audited by Ernst & Young (E&Y) company and forbid its operations in accountancy and auditing for governmental and private sectors in Iraq,” the letter stated.

The letter, in Arabic and signed by the Union Secretary Dr Rafed Obaid Al Nawwas, said the union reserved the right to go to “legal authorities to stop non-Iraqis from conducting audit and accountancy in Iraq”.

E&Y was not sent the letter, but news travels fast in Iraq, and the firm responded within days. “The Iraqi Union of Accountants and Auditors is an association of Iraqi accountants and has no regulatory authority,” the firm said.

E&Y went on to contact Iraq’s chief accounting regulator, which also said it was not aware of the letter.
The union has not replied to numerous attempts to clarify the letter.

E&Y is one of a number of firms trying to gain a foothold in the country. Iraq is a frontier land for accountants, promising potential and widely perceived as a gateway to the wider Middle East, including nearby Syria and Iran.

Senior accountants say success in Baghdad would pave the way for success in the wider region. PwC is also making headway in the region, hoping to benefit from an estimated $2 trillion (£1.4 trillion) infrastructure spend during the next five years across the Middle East.

Iraq authorities need the Big Four and the comfort their audit reports bring to foreign investors. Accountants in Iraq use the antiquated Unified Accounting System, which includes standards that haven’t been updated since the mid-nineties and others which are about 70 years old.

It may be seven years since the US-led invasion but, despite millions of pounds of investment, no accounting firm has yet managed to crack the Iraqi accounting market. Local laws require foreign accountants to partner with Iraqi firms or a consortium of individuals to practice in the region, according to local accountants.

The Big Four have struggled to find firms and individuals of a high enough caliber to make partnerships. The firms are mindful a poorly managed partner may pose a significant liability risk. The collapse of a local firm may bring down its Big Four partner.

Sources said E&Y has spent the past year and a half searching for partners, and, under Iraqi rules, this means the firm is not yet able to sign off on local audits.

When asked about the issue, E&Y said it has been operating through a Iraqi joint partnership comprised of individuals and there were no plans to pursue a partnership with a local accounting firm.

Confusingly, authorities said the firm was on the brink of gaining a license to audit Iraqi companies.
Partnerships must be registered with the Company Registrar and the Audit Advisory Board, headed by Dr Abdul Basit, considered Iraq’s most senior accounting official.

He told Accountancy Age E&Y has not “submitted any financial statements for approval” but are “just about to obtain their license”. He also launched an investigation into the union’s letter, which he believes will not affect E& Y’s attempts to obtain a license.

“We have requested, officially from the union, to present an explanation for its letter, to be discussed at the board’s next meeting,” he said.

He said he did not agree with “moral attacks” on auditors unless they commit a “deliberate violation which affects the honour or the activity of the profession in Iraq”.

E&Y said its operations have been unaffected by the letter. The firm contacted the president of the union, but said he was unaware of its origins.

E&Y has defended its relationship with the union which it claims is unchanged.

“Ernst & Young has a good relationship with the Iraqi Union of Accountants and Auditors Association, and a number of our Iraqi employees are members of the union,” a spokeswoman said. “We expect those good relationships to continue.”

Iraq-whos-who

Accounting for iraq: who’s who

Board of Supreme Audit Legislative body that is responsible for the issuance of accounting standards and policies in Iraq.

Audit Advisory Board Organises auditing and accountancy profession within the private sector.

Registrar of Companies Authority responsible for registering Iraqi companies

Iraq Union of Accountants and Auditors IFAC-affiliated body which represents accountants in Iraq.

Unified Accounting System Local accounting system used for statutory reporting. Includes requirements for the maintenance of Arabic ledgers. Central Bank of Iraq plans to convert Banks financial statements to International standards.

Dr Abdul Basit Head of both the BSA and AAB. Considered Iraq’s most senior accounting figure.

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