Networks survey: global risk

Networks survey: global risk

Is it a good time to operate in a network of firms?

Liability is at the forefront of everyone’s minds, especially in these times
of world economic difficulties. In particular, the global organisations are keen
to ensure that difficulties experienced by member firms in one country do not
bring the whole house of cards toppling down, as Andersen demonstrated so
spectacularly at the beginning of the century.

This is why BDO International is defending its position in the Seidman case
over Banco Espirito Santo, and why PricewaterhouseCoopers moved so swiftly to
deal with problems in its Japanese practice two years ago.

Crucially, this is why many of the organisations are bending over backwards
to stress they are not networks, as defined by the EU and other organisations
such as IFAC.

To claim to be one seamless firm without national boundaries might be very
appealing in marketing terms, it is a complete nightmare as far as the lawyers
are concerned. As a consequence, the Accountancy Age table is made up
of networks, alliances and associations.

While the likes of Ernst & Young move to bring their national entities
closer together, others are at pains to demonstrate they are collections of
separate, independent firms.

‘I think about liability every day,’ says RSM International chief executive
Jean Stephens.

‘But we are independent firms. Each firm is responsible for its own quality.’

And this is the crux of the matter. Many of the organisations in this survey
are very clear about their legal definition. They should not be seen as
networks, they are alliances and associations.

Irrespective of the advantages of being a member of such organisations, they
are clear about the downside of being linked through legislation to a firm in
another country that has hit trouble, whether that be an audit failure or other
financial scandal.

A recent study, Trans-national Organisations and Practices within the
Accountancy Profession, by FEE, the European accountancy federation, found three
distinct structural models for trans-national organisations: an international
association of independent firms co-ordinated by a separate legal entity; an
integrated international partnership; and a national practice with subsidiaries
in other jurisdictions. By far the most popular form of organisation was the
association model. And within this model three discernible categories of
associations ­ whose boundaries are not clear-cut ­ can be identified by their
capacity to exercise governance and control and in relation to operational
policies and characteristics.

The three categories fall within the framework of a broad correlation between
relevance, extent of trans-national activity and referrals on the one hand and
size of association budget, shared resources and degree of interaction,
coordination and integration between member firms on the other. The majority of
associations were at the lower end or middle range of the correlation.

Some respondents in the FEE study acknowledged the positive effects of
complying with the EU’s network definition, while others believed the costs of
compliance outweighed benefits. As the report states: ‘In some cases,
associations which hold this view have taken active steps to reduce operational
coordination, for example, in relation to quality control and common branding,
to further ensure that the definition is not applicable’.

There are practical implications of being seen as a network rather than an
association which can have a bearing on how individual firms carry out certain
work. For instance, MGI Midgley Snelling has said that if it could not prove it
was part of an association rather than a network, its audit offering could be
seriously impaired by the EU’s audit directive. The firm would be required to
show that there is no conflict of interest throughout the entire organisation, a
situation it describes as ‘a nightmare’.

What is a network?

The EU’s revised Statutory Audit Directive sets out how it defines a network.
The specific wording of Article 2 (7) of the Directive is: ‘Network means the
larger structure: which is aimed at co-operation and to which a statutory
auditor or an audit firm belongs; and which is clearly aimed at profit ­ or
cost-sharing or shares common ownership, control or management, common
quality-control policies and procedures, a common business strategy, the use of
a common brand-name or a significant part of professional resources.’

This definition has then been augmented by IFAC. The IFAC Code of Ethics s290
(Revised) says the judgement of whether a firm belongs to an international
network should be made ‘in light of whether a reasonable and informed third
party would be likely to conclude that a network exists’. In broad terms, a firm
would be classified as belonging to an international network if it were part of
a structure of co-operation that involves profit or significant cost-sharing, or
there was common ownership, management or control.

But, if in doubt, the reader should consult the websites and printed
literature of the international organisations themselves. And the firms that are
members of the organisations should be very careful about how they describe both
their memberships terms and the organisation itself. As the code itself warns:
‘Even though a firm does not belong to a network and does not use a common brand
name as part of its firm name, it may give the appearance that it belongs to a
network if it makes reference in its stationery or promotional materials to
being a member of an association of firms.’

On the way to the forum…

One of the more interesting developments recently has been the growing
influence of the Forum of Firms. Set up in 2002 by IFAC, the international
accountancy federation, it now lists 18 member organisations with a further four
provisional members
), many of which feature in Accountancy Age’s survey. Its
members must ‘promote the consistent application of high-quality audit practices
worldwide, including international standards on auditing, and support
convergence of national audit standards with ISAs’. Members are required to have
policies that conform to the IFAC ethics code.

In order to achieve such ideals there has to be an element of strong
influence over the member firms of the organisations.

Most recently, the forum convened a symposium on the audit of financial
institutions in light of the current crisis. Such moves serve to underline the
importance of the international networks and associations in helping to provide
globally consistent auditing and accounting standards.

Related Articles

Top 50+50: Ranking reshuffle as firms break £15bn barrier

Accounting Firms Top 50+50: Ranking reshuffle as firms break £15bn barrier

1m Emma Smith, Managing Editor
Top 50+50: Eight highlights from the 2018 ranking

Accounting Firms Top 50+50: Eight highlights from the 2018 ranking

1m Emma Smith, Managing Editor
Compulsory retirement: avoiding the partner pitfalls

Accounting Firms Compulsory retirement: avoiding the partner pitfalls

2m Lewis Silkin
Mitchell Charlesworth hires two tax managers

Accounting Firms Mitchell Charlesworth hires two tax managers

2m Emma Smith, Managing Editor
Founder of Escalate on how the service is transforming the accountancy industry

Accounting Firms Founder of Escalate on how the service is transforming the accountancy industry

3m Emma Smith, Managing Editor
Top 50+50 UK Accountancy Firms 2018 – deadline extended!

Accounting Firms Top 50+50 UK Accountancy Firms 2018 – deadline extended!

3m Emma Smith, Managing Editor
CogitalGroup announces acquisition of Wilkins Kennedy

Accounting Firms CogitalGroup announces acquisition of Wilkins Kennedy

3m Emma Smith, Managing Editor
Blick Rothenberg acquires Westleton Drake

Accounting Firms Blick Rothenberg acquires Westleton Drake

4m Emma Smith, Managing Editor