This article first appeared in Auditores, the magazine of the Instituto de Censores Jurados de Cuentas de España (ICJCE), the professional body in Spain and a member of IFAC.

Why is the IESBA considering a review of the structure of its Code of Ethics for Professional Accountants (the Code)?

Well, we have heard from a number of stakeholders, particularly small- and medium-sized practices (SMPs) and professional accountants working in small- and medium-sized entities (SMEs), about the challenges they face in understanding and applying the requirements in the Code. Let’s be clear—the Code contains robust standards on ethics for the accounting profession. But after years of evolution, the Code has become a complex set of standards, with sections that contain long paragraphs and sentences that many find difficult to understand and translate. At the same time, we have heard from our regulatory stakeholders about the need to increase the visibility of the requirements and prohibitions in the Code, and to clarify who is responsible for meeting them, in order to facilitate enforcement. So we are responding to the concerns by taking a fresh look at the structure of the Code to see if there are ways to enhance its readability, understandability, and accessibility, and assist in its enforcement. So, in essence, it is an effort at modernizing the Code.

However, I must make clear that our initiative to review the structure of the Code is not intended to introduce changes to the basic principles and rules in the Code. While we are considering the feasibility of making the requirements and content of the Code more accessible, by different means, we are NOT planning any changes to the Code itself in the short term. The changes in the structure of the Code will be for the long term, after we have launched a full consultation and achieved buy-in from our stakeholders.

In difficult times such as these, is the auditor providing enough assurance on the veracity of financial information supplied by companies? Is the audit profession helping to restore confidence?

The role of the audit profession has really never changed, in times of economic boom or bust—the profession has always been, and will continue to be, a watchdog protecting the public interest. That is why, in most jurisdictions, auditors are granted a statutory mandate to carry out audits. The essential responsibility of auditors is to express an independent opinion on the truth and fairness of a company’s financial statements. It is the independence with which auditors fulfill their role that gives credibility and adds value to their audit opinions. But in the difficult times we live in, there are continual challenges (or threats, to use our jargon) to auditors’ independence. The Code demands that auditors implement appropriate safeguards to protect their independence against such challenges. So, yes, the audit profession absolutely has a critical role to play in restoring confidence in the financial markets—and the public has a right to expect that it fulfills this role in full compliance with ethical requirements, including independence.

But let’s not forget that the environment in which auditors operate is dynamic, so new threats to their independence can always arise. That is why we must be on our guard and make sure that the Code is capable of evolving to address new challenges.

What are the main conflicts of interest that may be encountered by auditors during the planning stage?

First, let’s be clear that a conflict of interest creates a threat to the auditor’s objectivity and may create threats to other fundamental ethical principles. Conflicts of interest may arise in various circumstances, and I would not say that there are some types of conflicts that are necessarily more common than others. But in an audit context, some of the conflicts one might encounter include, for example, auditing royalties payable by the audit client to a licensor owned by the engagement partner’s immediate family, or using confidential information obtained when planning the audit of the client for purposes of a due diligence service for another client that is considering acquiring the audit client.

One of the main recent changes to the Code was better identification of the circumstances in which a professional accountant may encounter potential conflicts of interest. Are these circumstances newly identified or were they in need of better definition?

I would say it is closer to the latter. The Ethics Board concluded that it would be difficult to develop a definition that would be sufficiently broad to encompass the diverse activities of professional accountants but that would be sufficiently precise to avoid capturing situations that are not conflicts of interest. Accordingly, it determined that it would be more appropriate to provide a more comprehensive description of circumstances that might create a conflict of interest, together with supporting examples to facilitate implementation.

Issues related to auditors’ insider information are detailed in the Code. What are the improvements on this matter?

Quite apart from the strict laws that exist in most jurisdictions regarding insider trading, the Code has always taken a strong position regarding the inappropriate use of insider information. In particular, paragraph 140.1(b) of the Code prohibits auditors from using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties. Equally, paragraph 340.3 of the Code prohibits professional accountants in business from using confidential information for personal gain. So the Code’s position on this matter is unequivocal, and that must be right. Insider trading, however, defined in national laws and regulations, is unethical and harmful to society, and must be rigorously sanctioned when it occurs.

Audit regulation is currently being discussed at different international strata, with particular focus on the question of independence. Don’t you think that compliance with the Code is enough to curtail the potential risks?

Well, the Ethics Board certainly believes the Code provides a robust set of independence rules for global application. We completed two significant projects four to five years ago that led to further strengthening of the independence requirements in the Code. So, many countries around the world, ranging from Australia, Brazil, and China to Japan and South Africa, have benchmarked or aligned their independence requirements with those in the Code. Even with respect to the EU, a February 2013 study from the Fédération des Experts Comptables Européens (FEE) revealed that the independence provisions in the Code are more robust with respect to audits of public interest entities (PIEs) than those in the current EU frameworks on auditor independence. So I believe the Code will stand up to scrutiny.

But of course, we have to respect the sovereignty of nations to review their independence frameworks as they consider necessary, particularly in the aftermath of the global financial crisis, to satisfy themselves that these continue to safeguard auditor independence. So I welcome the debates on independence in the various forums, and that can only be in the public interest. This is not to suggest that the Ethics Board is content with the status quo as far as the Code is concerned. Far from it, we have commenced projects to review the provisions in the Code, addressing long association of senior personnel with an audit client, and the provision of non-assurance services to audit clients. But let me be clear that we are not prejudging from these projects that changes will be needed in these areas. However, we want to make sure that our requirements continue to support auditor independence in a robust and appropriate way.

Do you consider it necessary for IESBA to open a debate on issues related to the independence of the auditor and on the provision of services other than audit, precisely now that these issues are being reviewed by other regulatory entities on an international basis?

It is important to remember that the Ethics Board does not set standards in a vacuum. We recognize that the external environment may evolve very rapidly and we must be prepared to take action as needed. So, we carefully monitor emerging issues or developments internationally that may be of relevance to our work, and discuss the implications of the most significant ones for our strategy and work program. We may decide after careful analysis of environmental developments and discussions with our stakeholders that adjustments to our strategy are necessary, as we did last year when we added four new work streams to our current strategy. But this doesn’t mean we commence a project to respond to every emerging issue or development—our resources are finite after all and must be carefully managed. However, as I noted above, we have already started projects in the areas of long association and non-assurance services to determine whether changes to the Code are needed to further strengthen auditor independence.

Do you deem it necessary for audit companies to strengthen their Chinese walls (professional confidentiality both for employees as well as a physical separation of the technologies or the working teams) among their different divisions? Please, could you detail any necessary procedures?

The Code’s provisions addressing the fundamental principle of confidentiality are clear. Paragraph 140.4 requires a professional accountant to maintain confidentiality of information within the firm. Paragraph 140.5 requires a professional accountant to take reasonable steps to ensure that staff under the professional accountant’s control and persons from whom advice and assistance is obtained respect the professional accountant’s duty of confidentiality. It is the responsibility of the audit firms to take whatever actions are necessary to comply with these requirements, including segregating teams on different engagements as needed, and protecting the confidentiality of documentation containing client information.

Do you think that setting a cap on the percentage of revenues that may derive from one single client as a general rule, both for public interest entities (PIEs) and small- and medium-sized entities (SMEs), resolves the independence problem? Or would it rather be desirable in the case of SMEs, so as to avoid this problem, to apply the safeguards of the IESBA Code, such as increasing quality controls?

The tool has to fit the purpose. The level of public interest in the audit of a PIE will of course be different from the audit of an SME. So a one-size-fits-all approach may not necessarily be the right answer in every case. That is why I believe the threats and safeguards approach in the Code with respect to evaluating the impact of fees from a given client on independence is the right one. In particular, paragraph 290.220 of the Code states that when the total fees from an audit client represent a large proportion of the total fees of the firm expressing the audit opinion, the dependence on that client and concern about losing the client creates a self-interest or intimidation threat. The Code explains that the significance of the threat will depend on various factors such as the operating structure of the firm and the significance of the client qualitatively and/or quantitatively to the firm. The Code in this case requires the firm to evaluate the significance of the threat and apply appropriate safeguards to eliminate the threat or reduce it to an acceptable level. Among a number of possible safeguards could be to use external quality control reviews.

Of course, for PIEs, the Code already imposes a 15% cap on total fees from an audit client and its related entities relative to the total fees received by the firm as a whole. That is a position that the board believes is appropriate with respect to PIE audits.

How is the audit affected by the new definition of “engagement team” and to what extent has this been agreed with the ISAs?

The amendments to the definition of “engagement team” clarify the relationship between an external auditor’s use of internal auditors to provide direct assistance on the external audit in accordance with the International Auditing and Assurance Standards Board (IAASB)’s International Standard on Auditing (ISA) 610 (Revised 2013), Using the Work of Internal Auditors, and the meaning of an engagement team under the Code. The change to the definition should not affect audits because the sole purpose of the change is to eliminate a perceived inconsistency between the Code and the ISAs. In developing the change to the definition, I was pleased that the Ethics Board and the IAASB worked closely together to ensure that the amended definition would be fully consistent with the ISAs.

But of course, jurisdictions have different views on the appropriateness of using internal auditors to provide direct assistance on the external audit; the Code is not advocating one position or the other.

What sort of procedures will IESBA have to implement and maintain for the ISAs to be in agreement with the Code of Ethics?

Well, we certainly maintain close contact with the IAASB, and that is by necessity given that the Code and the ISAs are so closely linked. We have regular interactions with the IAASB at various levels—at the staff level, at the task force level (as we did on our project on the definition of “engagement team” and the IAASB’s project to revise ISA 610), and at the leadership level through quarterly meetings or teleconferences. We recognize the critical importance of these interactions as we are increasingly finding that issues being addressed on each board’s agenda have implications for the standards of the other board. I would also add that both boards have the benefit of the advice from their consultative advisory groups (CAGs), which have significant overlap in their memberships. As a result, the CAGs are often able to share ethics and audit perspectives on issues of mutual relevance to the two boards. So we do have processes internally to make sure that the Code and the ISAs stay aligned with each other as they evolve.

What are the main objectives for strengthening the Code in respect to the auditor’s actions upon encountering a breach of a requirement of the Code?

The Ethics Board released changes to the Code addressing a breach of a requirement of the Code in March 2013. The main objective of the project was to respond to a concern that the current provisions addressing an inadvertent breach of the Code, including independence requirements, could be misread as implying that all inadvertent breaches can be corrected by applying necessary safeguards. What we have now established in the Code is a robust framework, in particular for auditors to deal with breaches to the independence requirements of the Code. The provisions include strict requirements for communicating all breaches to those charged with governance and documentation.

What is the deadline to complete the revision of the Code of Ethics and to publish the final version?

The 2013 edition of the Handbook of the Code of Ethics for Professional Accountants will be available in May. This edition will contain the revised pronouncements addressing conflicts of interest, a breach of a requirement of the Code, and the definition of “engagement team,” which will take effect next year.

Do you consider that in today’s difficult financial environment, the auditor is satisfactorily fulfilling its public interest role and complying with ethics principles, such as honesty, independence, objectivity, and professional best practice?

Even though I am not an auditor or accountant and have never worked as one, I strongly believe that the vast majority of the audit profession live up to those principles. It helps that most auditors are required, often by law or regulation as a condition of their license, to go through rigorous training and develop core competencies, including a full understanding of the fundamental ethical principles that are the bedrock of the profession and are embodied in the Code. It is a fact of life, however, that in a very small minority of cases, members of any profession succumb to pressure to act unethically. This is when I strongly feel the disciplinary and enforcement regime in the particular jurisdiction should take action to deal with these isolated cases and prevent the profession as a whole from being cast into disrepute.

If you had to choose one single, fundamental ethics principle to rule over the professional activity of all auditors, what would it be?

That would be a fruitless task because no one fundamental principle overrides all the others. The five fundamental principles (integrity, objectivity, professional competence and due care, confidentiality, and professional behavior) that are established in the Code constitute one body of core principles that cannot be taken apart. Auditors must comply with each and all of them in every audit engagement they perform.

© Instituto de Censores Jurados de Cuentas de España (ICJCE). Spain. 2013.

This material belongs to ICJCE, therefore attributed to it all rights and related operating on it in any way, method or medium.

Today over 175 delegates from 33 professional accountancy organizations in 30 countries convened in Kampala, Uganda, for the seventh annual IFAC Small and Medium Practices (SMP) Forum. Co-hosted with the Institute of Certified Public Accountants of Uganda (ICPAU) and the Pan African Federation of Accountants (PAFA), this year’s event featured a keynote address by Right Honorable Rebecca Kadaga, Speaker of the Parliament of Uganda.

The SMP Forum brings together representatives from the regulatory community, regional and national professional accountancy bodies, standard setters, and thought leaders and experts in their fields to collaborate on solutions to the challenges and pressures facing SMPs, both regionally and globally. This year’s event focused on trends that may impact the growth of small business and the way SMPs deliver their services. In addition to the co-hosts, the event was made possible by the generous support of our gold sponsor, the Association of Chartered Certified Accountants; and silver sponsors, Corpul Expertilor Contabili si Contabililor Autorizati din Romania (CECCAR), Hong Kong Institute of Certified Public Accountants (Hong Kong Institute of CPAs), and Institute of Chartered Accountants in England and Wales (ICAEW).

IFAC CEO Fayez Choudhury noted, “The IFAC SMP Forum is an important event that allows us to learn how we can best support professional accountancy organizations in the development of their SMP members globally. The focus on innovative solutions to the unique challenges SMPs face is essential for helping SMPs to continue to adapt and create value. With this event, we aim to facilitate capacity development, which has long been a focus for IFAC, through the sharing of ideas and best practices on a global platform.”

Naru Thakkar, president of ICPAU, and Dr. Mussa J. Assad, president of PAFA, said, “We are proud to host this year’s SMP Forum with IFAC, as supporting the development of SMPs is at the core of our mission and values. Africa has sustained continued growth over the last fifteen years despite economic volatility and crisis elsewhere in the world. While parts of Africa have seen explosive growth and other areas are still developing, the accountancy profession is crucial to providing a sound financial infrastructure to support both.”

IFAC SMP Committee Chair Giancarlo Attolini added, “The world is changing and standard setters, practitioners, and regulators are responding. There are vast opportunities for SMPs, including internationalization and expanded business lines. Now is the time to position SMPs for growth so that by the time the economic recovery gains more momentum globally, SMPs and the small businesses they serve can lead the way.”

For more information on the IFAC SMP Forum, including the agenda and speakers, see www.ifac.org/2013SMPForum. Presentations will be made available in the week following the event. A Trainers’ Seminar was also held in conjunction with the Forum for a smaller group of attendees.

About PAFA
The Pan African Federation of Accountants (PAFA) was established to accelerate the development of the accountancy profession in Africa and strengthen the voice of the profession within Africa and worldwide. PAFA believes that good governance, accountability, good financial management, and transparency are principal pillars in the acceleration of economic development and reduction of poverty.

About ICPAU
The Institute of Certified Public Accountants of Uganda (ICPAU) is the national body for professional accountants in Uganda. It currently offers two qualifications: the professional qualification  (CPA Uganda) and the accounting technician certificate (ATC). These qualifications are based on IAESB standards thus providing graduates with an excellent foundation of core accountancy skills that meet international benchmarks. ICPAU’s focus is to produce individuals who exhibit professional excellence and integrity, who are committed to service and good governance, and who are socially responsive to the environment in which they operate. 

About IFAC
IFAC is the global organization for the accountancy profession, dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of 172 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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Welcome to IFAC's Small and Medium Practices (SMP) Committee eNews.

In This Issue:

SUSTAINABILITY 

1. Sustainability: Challenges and Opportunities for SMPs and SMEs
2. Updated Good Practice Checklist Features Environmental Management

STANDARDS AND REGULATION

3. Closing Soon: IAASB Consults on Audit Quality Framework
4. SMP Committee Contributes to Standard Setters’ Key Projects and Strategic Planning
5. IFRS for SMEs Update

RESOURCES AND EVENTS

6. Registration Closing Soon: 2013 IFAC SMP Forum
7. World Congress of Accountants 2014 to be Held in Rome; Sponsorship Opportunities Available

SUSTAINABILITY

1. Sustainability: Challenges and Opportunities for SMPs and SMEs

Small- and medium-sized entities (SMEs) might think that sustainability is only relevant to large companies. Maybe they think they cannot afford to be sustainable, that measuring and managing environmental performance amounts to a costly and unnecessary burden. Moreover their accountants, both those employed by the business (accountants in business) and those providing services to the business (accountants in practice), will tell you it is a hard sell getting SMEs to embrace sustainability. However, SMEs that integrate sustainability into their core business strategy can benefit from lower costs, reduced risk, and new opportunities. And their accountants, typically operating in SMPs, can play a key role in their journey.

SMEs and the Benefits of Sustainability

SMEs are crucially important to the health and stability of the global economy: they account for over 95% of all businesses and for the majority of private sector gross domestic product (GDP), wealth and employment creation, and social and environmental impacts. Meanwhile, there is immense pressure on the natural environment and a recognition that finite resources are fast depleting. Today, SMEs are increasingly being faced with pressure to measure and manage their impact on the environment. They are an integral part of the supply chain where there is a growing demand for sustainability management both from customers and suppliers, especially for those SMEs seeking to secure contracts with governments or larger companies. SMEs also need to ensure they have access to the resources they need to be able to continue offer their products and services in the future.

That said, many SMEs may still feel they can delay addressing sustainability issues. Our global SMP poll indicates there are other more urgent issues preoccupying businesses, including economic concerns and keeping up with new standards, prompting sustainability to slide down their list of priorities. This may explain why few SMPs are presently offering sustainability services. But in the longer term, the sustainability issue is here to stay.

The good news is that there is growing evidence that sustainability initiatives, such as those to reduce an SME’s carbon footprint, can also help improve their bottom line.

2. Updated Good Practice Checklist Features Environmental Management

The second edition of the Good Practice Checklist for Small Business is now available. This multi-part checklist features a new standalone section on environmental management. Other sections cover financial and strategic management tasks and regulatory requirements, among others. The checklist is meant primarily for SMPs as a marketing or diagnostic tool to help them determine the advice a small business client may need, and also to help them in managing their own businesses. Six translations of the checklist have either been completed or are in progress.

STANDARDS AND REGULATION

3. Closing Soon: IAASB Audit Quality Framework Consultation

The comment period for the International Auditing and Assurance Standards Board (IAASB)’s Consultation Paper, A Framework for Audit Quality, will close on May 15, 2013. Through the proposed framework, the IAASB aims to raise awareness of the key elements of audit quality, encourage stakeholders to explore ways to improve audit quality, and facilitate greater dialogue on the topic. The SMP Committee plans to submit a comment letter and encourages individual SMPs to comment as well. 

4. SMP Committee Contributes to Standard Setters’ Key Projects and Strategic Planning

IAASB

The SMP Committee provided comments to the International Auditing and Assurance Standards Board (IAASB) on its auditor reporting project prior to their February meeting. See the IAASB February Meeting Page for the agenda papers, highlights, and podcast. In advance of the IAASB April Meeting, the committee will provide further comments on this project as well as the IAASB’s work addressing disclosures, International Standard on Auditing (ISA) implementation monitoring, and International Standard on Assurance Engagements (ISAE) 3000.

The IAASB is seeking comments, insights, and views from all stakeholders to help shape its future direction for 2015 and beyond via the Strategic Review Survey. Responses to the survey will inform the development of a formal Consultation Paper to be issued in late 3013. The SMP Committee plans to submit a response and encourages individual SMPs to comment as well.

IESBA

In early March, the committee responded to the International Ethics Standards Board for Accountants (IESBA)’s online survey, which was conducted as part of the IESBA’s strategic review to develop its strategy and work plan for the period 2014-2016. The survey has now closed and the IESBA will consider the survey responses in upcoming meetings.

5. IFRS for SMEs Update

In 2012, the International Accounting Standards Board (IASB) issued a Request for Information (RFI) to begin its comprehensive review of the International Financial Reporting Standard for Small- and Medium-Sized Entities (IFRS for SMEs). The objective of the RFI was to publicly consult on whether amendments are required to the standard. Last month, the IASB began to discuss issues relating to the scope of the standard, including whether or not the standard should be used by publicly accountable entities. See the IASB’s March Meeting Page to access the agenda papers and audio recording. See a summary of decisions in the March IASB Update.

EVENTS

6. Registration Closing Soon: 2013 IFAC SMP Forum

The 2013 IFAC SMP Forum will be held in Kampala, Uganda, on June 5, 2013, and jointly hosted with the Institute of Certified Public Accountants of Uganda (ICPAU) and the Pan African Federation of Accountants (PAFA). Each IFAC member organization may send up to ten delegates, who should be those responsible for SMP/small- and medium-sized entity (SME) affairs at their organization. Registration forms have been sent to IFAC member organizations. If you are an individual member of an IFAC member organization and wish to attend, please register your interest with your organization as soon as possible, as the deadline for registration is April 30, 2013. More information will be posted as it becomes available.

7. World Congress of Accountants 2014 to be Held in Rome; Sponsorship Opportunities Available

The next World Congress of Accountants (WCOA) will be hosted by the Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili (CNDCEC) in Rome, Italy, in 2014. Themed 2020 Vision: Learning from the Past, Building the Future, the 2014 WCOA will be held November 10-13 at the Auditorium Parco della Musica. More than 4,000 professionals from all over the world will convene at this can’t-miss IFAC event, held every four years. WCOA 2014 will look back to explore the evolution of the accountancy profession and forward to showcase the innovations that will set the tone for the future.

The WCOA also affords an unparalleled opportunity for organizations and firms to share their projects and visions with the world by taking advantage of one of our carefully crafted sponsorship packages. There are numerous options so you’ll be able to select the one that best suits your organization’s unique strategy and goals.

Small- and medium-sized entities (SMEs) might think that sustainability is only relevant to large companies. Maybe they think they cannot afford to be sustainable, that measuring and managing environmental performance amounts to a costly and unnecessary burden. Moreover their accountants, both those employed by the business (accountants in business) and those providing services to the business (accountants in practice), will tell you it is a hard sell getting SMEs to embrace sustainability. However, SMEs that integrate sustainability into their core business strategy can benefit from lower costs, reduced risk, and new opportunities. And their accountants, typically operating in small- and medium-sized practices (SMPs), can play a key role in their journey.

SMEs and the Benefits of Sustainability

SMEs are crucially important to the health and stability of the global economy: they account for over 95% of all businesses and for the majority of private sector gross domestic product (GDP), wealth and employment creation, and social and environmental impacts. Meanwhile, there is immense pressure on the natural environment and a recognition that finite resources are fast depleting. Today, SMEs are increasingly being faced with pressure to measure and manage their impact on the environment. They are an integral part of the supply chain where there is a growing demand for sustainability management both from customers and suppliers, especially for those SMEs seeking to secure contracts with governments or larger companies. SMEs also need to ensure they have access to the resources they need to be able to continue offer their products and services in the future.

That said, many SMEs may still feel they can delay addressing sustainability issues. Our global SMP poll indicates there are other more urgent issues preoccupying businesses, including economic concerns and keeping up with new standards, prompting sustainability to slide down their list of priorities. This may explain why few SMPs are presently offering sustainability services. But in the longer term, the sustainability issue is here to stay.

The good news is that there is growing evidence that sustainability initiatives, such as those to reduce an SME’s carbon footprint, can also help improve their bottom line. SMEs of all shapes and sizes—for profits and not-for-profits, public or private, across all industrial sectors—stand to yield significant benefits from adopting sustainable business practices. The initial cost of integrating sustainability into the core business strategy, and reporting on it, can be more than offset by cost savings, reduced risk, positive brand association, and the ability to meet consumer, investor, and supplier demand for environmentally conscientious products and services. In this way, the initial cost is more an investment.

Opportunities for SMPs

Accountants working in SMEs can help their employers at each step of the way, from advising on the costs/benefits of behavioral changes aimed at reducing waste, to investment in new equipment and alternate sources of energy, to developing a comprehensive environmental management system (EMS). However, many SMEs lack the capability to this without outside help. They will likely seek the help of someone they trust, their accounting firm, a demand that can generate new revenue opportunities for SMPs. But first SMEs need to know that they can expect assistance of this nature from their accountants.

Given that SMEs are keen to realize the financial benefits of adopting more sustainable practices, a starting point for SMPs might be to offer to help their clients implement the plan-do-check-act method for the control and continuous improvement of processes and products. This advisory service could include improving business opportunities and creating efficiencies, identifying the risks to cash flow that social, economic, and environmental change will present, and ensuring that clients or employers take advantage of the cost reductions, minimize any cost increases, and maximize the potential revenue by adopting business strategies that identify and address those sustainability issues that are most relevant to their particular business circumstances. In addition, SMPs might wish to encourage their SME clients or employers to have an EnviroReady Report, an engagement based on ISRS 4400 that confirms that the business has an environmental management system (EMS) in place that meets the requirements in ISO 14001:2004.

Some accountants might also help SMEs do some form of sustainability reporting, such as the Global Reporting Initiative’s Level C. They could employ a step-by-step approach of making a public commitment to take action, assessing the business’s impact, setting targets for reducing impact, acting to reduce impact, and publishing the business’s policies and actions. Some SMPs are already helping their clients to develop metrics and the systems needed to capture and report on the metrics. If reporting is deemed valuable, SMPs could progressively do more, culminating in getting some form of assurance on what the client/employer reports, perhaps using the IAASB’s ISAE 3000 series of engagement standards, such as ISAE 3410 for greenhouse gas emissions.

Initial Steps in Offering a Sustainability Service

An ACCA report suggests that SMPs take the following steps to ensure they have the prerequisite expertise to offer a sustainability service:

1. Build partnerships—SMPs should establish collaboration with local environmental sustainability experts in order to gain local access to credible knowledge.

2. Gain experience—This begins in the SMP’s own business. Practitioners should review the environmental sustainability of their own business and then use that valuable experience to have rounded, relevant conversations, based on genuine experience, with their clients.

3. Seek information—Practitioners should familiarize themselves with information sources that they could recommend to others or use to broaden their own knowledge.

4. Formalize commitment—Where appropriate, practitioners should formalize their commitment to offering environmental sustainability advice through marketing and awareness raising in newsletters, their documentation, and website.

Ultimately, offering a sustainability service can help SMPs both add value to the services they offer and help their clients/employers improve the way they run their businesses. Applying the same principles to the practice itself can help accountants improve the way they run their own businesses as well. Does your practice offer a sustainability service? If so, we’d love to hear about it. Please describe your experience and any advice you would give.

Translation of IFAC Interview with Ronald J. Baker

Interview von WP StB Andreas Noodt mit Ronald J. Baker[1]

Andreas Noodt

Partner der FIDES Treuhand GmbH & Co. KG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Bremen

Mitglied des Hauptfachausschusses (HFA) des IDW, Düsseldorf

Mitglied des Small and Medium Practices Committee der International Federation of Accountants (IFAC), New York

Ronald J. Baker

Gründer des VeraSage Institute (www.verasage.com), Petaluma, Kalifornien (USA)

Die Auswertung einer Umfrage der IFAC Ende 2012 ergab, dass die Berufsangehörigen in dem bestehenden Honorardruck eine der größten Herausforderungen für kleine und mittelgroße Prüfungspraxen sehen. Für einige Dienstleistungsangebote wie Unternehmensberatung kann das traditionelle Abrechnungsmodell nach Stundensätzen für die Praxis von Nachteil sein. Die wertbasierte Preisbildung, die den Preis hauptsächlich – jedoch nicht ausschließlich – abhängig von der Wertschöpfung für den Mandanten festlegt, anstatt sich ausschließlich nach den Kosten der Dienstleistung oder nach der historischen Preisentwicklung zu richten, könnte dazu beitragen, den Honorardruck zu verringern.

Der US-Amerikaner Ron Baker ist bekannt für sein Bemühen, „die abrechenbare Stunde zu begraben und die Stundenaufschreibung abzuschaffen“. Neben dem Verfassen von sechs Bestsellern hat er das VeraSage Institut gegründet, das sich damit beschäftigt, sog. „professional firms“, zu denen auch Wirtschaftsprüferpraxen zählen, „unabhängig von der Tyrannei der Zeit zu machen“.

WP StB Andreas Noodt, Mitglied des IFAC Small and Medium Practices Committee und als Wirtschaftsprüfer tätig bei FIDES, einer deutschen Mitgliedsgesellschaft der Praxity Allianz, traf Ron Baker kürzlich zu einem Interview. Dieser Beitrag führt in das Konzept der wertbasierten Preisbildung ein, künftige Beiträge werden sich mit deren Umsetzung beschäftigen.

Andreas Noodt: Ron, seit mehr als 17 Jahren bemühen Sie sich weltweit um eine Abkehr von dem Konzept der Stundenabrechnung und der Stundenaufschreibung als Basis für die Preisbildung. Welche Veränderungen haben Sie in dieser Zeit beobachtet?

Ron Baker: Grundsätzlich ist der bisher erreichte Fortschritt durchaus ermutigend. Wir versuchen, eine neue Theorie im Berufsstand zu verbreiten, hier ist in Dekaden zu denken – manchmal auch in Jahrhunderten, wie bei der Keimtheorie in der Medizin –; deshalb bin ich zuversichtlich, auch wenn noch ein langer Weg vor uns liegt. Zumindest befinden sich Stundenabrechnung und Stundenzettel in der Defensive.

Andreas Noodt: In Ihrem neuesten Buch „Implementing Value Pricing: A Radical Business Model for Professional Firms“ schlagen Sie ein neues Geschäftsmodell vor. Lassen Sie uns zunächst über Ihre Definition eines Geschäftsmodells und Ihre Kritik an dem traditionellen Geschäftsmodell der Praxen sprechen.

Ron Baker: Ein Geschäftsmodell beschreibt die Art und Weise, wie Ihre Praxis Mehrwert für die Kunden schafft und wie sie einen Anteil an dieser Wertschöpfung für sich gewinnt; somit ist das Geschäftsmodell untrennbar mit Ihrer Preisstrategie verbunden. In meiner ganzen Berufskarriere wurde das folgende Geschäftsmodell gelehrt, das für mich „der Prüfungspraxis der Vergangenheit“ dient:

Umsatz (Revenue) = Arbeitskraft (People Power) x Wirtschaftlichkeit (Efficiency) x Stundensatz

Diese Theorie hat einige Schwachstellen. Zum einen vermittelt sie den Praxen den falschen Eindruck, dass jeglicher Umsatz gut ist, sobald die Gewinnschwelle erreicht ist. Dementsprechend akzeptiert die Praxis auch weniger rentable Mandanten, die kostbare Kapazitäten der Praxis beanspruchen und damit verhindern, Kapazitäten für die wertvolleren Mandanten zu reservieren.

Zum anderen wurden in den vergangenen Jahrzehnten die meisten Prüfungspraxen aufgebaut, indem die eingesetzten Arbeitsstunden optimal ausgeschöpft wurden – es ergab sich die Pyramidenstruktur. Mit fortschreitender Technologie, vor allem als der Personal Computer Einzug in die Büros fand, wurde die Pyramide zwar flacher. Die meisten Praxen setzen jedoch immer noch Umsatz vor Kapazität und hinken der Arbeitslast und den Kundenbedürfnissen hinterher. Das hemmt Innovation, Kundenservice, Investitionen in Weiterbildung usw.

Zum Dritten konzentrieren sich die meisten Prüfungspraxen auf Effizienz, gemessen an Auslastungsgrad und abrechenbaren Stunden. Schaut man sich jedoch die Statistiken der letzten 70 Jahre an, stellt man fest, dass sich der Auslastungsgrad der Praxen und die Rate der abrechenbaren Stunden in einer relativ engen Bandbreite bewegt haben. Das zeigt, dass – egal ob eine Praxis mit dem Füllfederhalter arbeitet oder Notebooks einsetzt –: sie kann jährlich nur eine begrenzte Zahl an Stunden berechnen. Die Theorie nötigt die Praxisleitung auch zu dem Glauben, Effizienz sei der Schlüssel zum Erfolg für eine profitable Prüfungspraxis. Dies ist nachweislich falsch. Ich bin mir sicher, dass Hersteller von Pferdekutschen ein Vorbild an Effizienz waren, bevor sie durch das Automobil ersetzt wurden. Und was passiert, wenn man effizient die falschen Dinge tut?

Abschließend kommen wir zum Stundensatz. Dem Berufsstand wurde über ungefähr drei Generationen lang beigebracht, dass er nichts als seine Zeit verkauft. Das ist Unsinn, aus einem ganz einfachen Grund – kein Mandant kauft Zeit. Wie können Sie etwas verkaufen, was der Mandant nicht kauft?

Andreas Noodt: In welcher Weise unterscheidet sich Ihr neues Geschäftsmodell? Warum ist es besser?

Ron Baker: Das alte Modell erklärt nicht hinreichend, warum Prüfungspraxen erfolgreich sind. Es zeigt auch keine umsetzbaren Alternativen auf, um die kritischen Erfolgsfaktoren in einer Wissensgesellschaft bzw. in einer Wirtschaft des geistigen Kapitals zu beeinflussen – es ist deshalb suboptimal. Das neue Geschäftsmodell für „die Wirtschaftsprüferpraxis der Zukunft“ ist vorteilhafter:

Rentabilität = Geistiges Kapital (Wissen) x Wirksamkeit x wertbasierter Preis

Gegenüber der alten Theorie hat Letztere viele Vorteile:

• Anstatt sich auf den Umsatz zu konzentrieren, ist die Praxis zunächst gezwungen, sich über die Rentabilität eines jeden Mandanten Gedanken zu machen. Nicht alle Mandanten sind gleichwertig. Viele Praxen könnten beispielsweise 40% bis 60% ihrer Mandanten verlieren und würden trotzdem profitabler arbeiten.
• Zweitens verkaufen Berufspraxen, die wissensintensive Dienstleistungen anbieten, sog. „Professional Knowledge Firms“, keine Stunden. Sie entwickeln und verkaufen – und ihre Mandanten kaufen – geistiges Kapital. Diese Sichtweise ist umfassender, als über das optimale Ausschöpfen von Menschen und Stunden nachzudenken. Apple und Microsoft entwickelten ihren Unternehmenswert nicht dadurch, Stundensätze festzulegen, und ich möchte bezweifeln, dass Steve Jobs und Bill Gates Stundenzettel führten.
• Drittens: „Die Wirtschaftsprüferpraxis der Zukunft“ wird sich auf Effektivität konzentrieren, nicht auf Effizienz. Eine durchschnittliche Praxis hat nicht so viele Möglichkeiten, die Effizienz ihres Humankapitals um weitere 15% bis 20% zu steigern, es handelt sich schließlich um fehlbare Menschen und nicht um Maschinen.

Schaut man sich Studien an, anhand welcher Kriterien Mandanten ihre Wirtschaftsprüfer auswählen – oder feuern –, sind Effizienz und Preis kein Thema. Es liegt fast immer an der herausragenden Leistung – oder dem Mangel daran. Wenn Sie sich auf nichts anderes als die fakturierbaren Stundensätze und aufwendige Wirtschaftlichkeitsberechnungen konzentrieren, können Sie keine herausragende Leistung erbringen.

Letztlich müssen Professional Knowledge Firms erkennen, dass sie Unternehmen sind, die Preise haben und keine Stundensätze. Persönlich würden Sie doch niemals mit einer Fluggesellschaft fliegen, die Ihnen 4 € pro Minute berechnen will – und Ihnen die Rechnung für die Flugzeit nach dem Flug zusendet. Professional Knowledge Firms müssen vorab für alles, was sie tun, Preise festlegen – Punktum. Dafür gibt es keine Ausrede. In Tausenden von Professional Knowledge Firms weltweit – in allen Sektoren: ob Werbung, Rechtsberatung, Wirtschaftsprüfung oder IT – bewegt sich erfreulicherweise langsam, aber sicher etwas.

Andreas Noodt: Könnten Sie Ihr Konzept des geistigen Kapitals noch etwas näher im Zusammenhang mit Wirtschaftsprüferpraxen erläutern?

Ron Baker: Das intellektuelle Kapital eines Unternehmens besteht aus drei Komponenten:

1. Humankapital – die Mitarbeiter, die laut Weltbank 80% des Reichtums eines wirtschaftlich entwickelten Landes ausmachen;
2. Strukturkapital – die Systeme, eigene Software, Checklisten, Ressourcen usw.;
3. Sozialkapital – Kunden, Verkäufer, Lieferanten, Bezugsquellen, Alumni-Gruppen, Allianzen usw.

Diese Komponenten sind die wahren Einflussfaktoren auf die Profitabilität einer Professional Knowledge Firm und nicht die Stunden. Außerdem ist nur das Strukturkapital im Besitz des Unternehmens – Professional Knowledge Firms sind die ultimativen Unternehmen ohne nennenswertes Betriebsvermögen.

Wirtschaftsexperten bezeichnen geistiges Kapital als „non-rival asset“ – dies bedeutet, es ist möglich, Wissen weiterzugeben, ohne dass es sich verringert (beide Parteien besitzen danach das Wissen). Tatsächlich nimmt der Nutzen zu, je mehr Personen das Wissen besitzen und es vermehren. Ein „rival asset“ dagegen kann jeweils nur für einen einzelnen Zweck eingesetzt werden – gebe ich Dir meine Krawatte, hast Du sie und ich nicht mehr. Eine fakturierbare Arbeitsstunde ist ein „rival asset“ – wir können nur eine Sache nach der anderen tun. Als Grundlage für ein Geschäftsmodell ist ihr Nutzenpotential sehr begrenzt.

Andreas Noodt: Was würden Sie denen entgegnen, die behaupten, dass das, was Sie beschreiben, weltweit nur begrenzt angewendet werden kann, dass es eher für Nordamerika, Großbritannien und Australien zutrifft?

Ron Baker: Auch wenn ich zustimme, dass der Wirtschaftsprüfermarkt und die vorherrschenden kulturellen, rechtlichen und geschäftlichen Normen von Land zu Land unterschiedlich sind, bin ich mir sicher, dass Berufsangehörige überall etwas mit dem Konzept des geistigen Kapitals anfangen können und die wachsende Globalisierung des Marktes für Prüfungs- und Beratungsleistungen wahrnehmen. Was die Einzelheiten der Umsetzung eines neuen Modells betrifft, vor allem der wertbasierten Preisbildung, wird man sicher einige Unterschiede feststellen können.

Wir von VeraSage glauben, dass dieses Modell dem alten Modell überlegen ist und es letztendlich ablösen wird. Die Abschaffung der abrechenbaren Stunde und des Stundenzettels ist vielleicht nicht in Reichweite, aber sicherlich in Sichtweite.[2]

Referenzen:

Baker, Ronald J., Implementing Value Pricing: A Radical Business Model for Professional Firms. Hoboken, New Jersey: John Wiley & Sons, Inc., 2011 (www.verasage.com).

IFAC, IFAC SMP Quick Poll: 2012 Round-up. New York: IFAC, 2013 (www.ifac.org/news-events/2013-01/ifac-smp-poll-highlights-pervading-economic-uncertainty-cautious-optimism-and-ke).

The World Bank, The Changing Wealth of Nations. Washington D.C.: The World Bank, 2010 (http://data.worldbank.org/data-catalog/wealth-of-nations).

Zusätzliche kostenfreie Informationen für kleine und mittelgroße Prüfungspraxen, einschließlich weiterer Beiträge sowie die gesamte Ausgabe des Guide to Practice Management for SMPs, finden Sie unter der Rubrik: Resources and Tools im Bereich „SMP Committee” auf der IFAC Webseite (www.ifac.org/SMP).

In a late-2012 poll conducted by IFAC, pressure to lower fees was identified by practitioners as one of the biggest challenges facing their small- and medium-sized accounting practices (SMPs). For some service offerings, like business advisory, the traditional hourly billing model may place a strain on the practice. Value pricing—which sets prices primarily, but not exclusively, on the value to the customer rather than on the cost of the service or historical prices—may be part of the solution to alleviating this pressure.

Ron Baker is known for his quest to “bury the billable hour and trash the timesheet.” Along with six best-selling books, he founded VeraSage Institute, dedicated to helping professional firms become “free and independent from the tyranny of time.” Andreas Noodt, member of the IFAC SMP Committee and practitioner at FIDES, a German Praxity member firm, recently caught up with Ron for an interview. This article introduces the concept of value pricing; future articles will look at the “how to” of value pricing.[1]

Andreas Noodt: Ron, you’ve been pursuing your worldwide quest to bury the billable hour and timesheets for the purpose of pricing for over 17 years now. What changes have you seen in that time?

Ron Baker: Overall, I’m encouraged by the progress we’ve been able to make. We are trying to diffuse a new theory into the accounting profession, which is measured in decades—sometimes centuries, as with germ theory in the medical profession— so I’m encouraged, while admitting we have a long way to go. At least the billable hour and timesheet are now on the defensive.

Andreas Noodt: In your latest book, Implementing Value Pricing: A Radical Business Model for Professional Firms, you propose a new business model. But first let us understand your definition of a business model, and your criticism of the traditional firm business model.

Ron Baker: A business model is how your firm creates value for clients and how you capture a portion of that value, so it’s inextricably linked to your pricing strategies. Throughout my accounting career, I was taught the following business model, which I think of as serving “The Firm of the Past”:

                        Revenue = People Power x Efficiency x Hourly Rate

There are several problems with this theory. First, once firms pass breakeven, it gives them a false sense that any revenue is good. Consequently, they accept low-value clients, taking up a firm’s precious capacity, and preventing it from reserving capacity for its most valuable clients.

Second, the way most firms were built in the last century was by leveraging people hours—the pyramid structure. As technology arrived––especially when the computer hit the desktop––the pyramids began to flatten. Most firms, however, still put revenue before capacity, always playing catch-up to the workflow and client demand. This inhibits innovation, client service, investments in CPE [continuing professional development] etc.

Third, most firms focus on efficiency by measuring utilization rates and billable hours. Yet, if you study statistics going back seventy years, you’d find utilization rates and billable hours are within a very tight range. So, whether firms are using a quill pen or a laptop computer, they can charge only so many hours in a year. The theory also compels leaders to believe efficiency is the talisman of running a profitable firm. This is demonstrably false. I’m sure the buggy-whip manufacturers were a model of efficiency before they were replaced by the automobile. What if you are efficient at doing the wrong things?

Last, the hourly rate. The profession has taught approximately three generations of accountants the only thing they sell is their time. This is nonsense, for a very fundamental reason––no client buys time. How can you sell something the client doesn’t buy?

Andreas Noodt: In what ways is your new business model different? Why is it better?

Ron Baker: The old model doesn’t explain why firms are successful, nor does it offer viable alternatives to leveraging the critical success factors in an intellectual capital economy––it is suboptimal. The new business model for “The Firm of the Future” is more optimal:

                        Profitability = Intellectual Capital x Effectiveness x Value Price

This theory has many advantages over the old one. First, rather than focusing on revenue, the firm is forced to think about the profitability of each client. Not all clients are created equal. Many firms could stand to lose up to 40-60% of their clients and they’d be more profitable.

Second, “Professional Knowledge Firms” (PKFs) don’t sell hours. They create and sell—and their clients buy—intellectual capital (IC). This is a far broader view than thinking about leveraging people and hours. Apple and Microsoft didn’t create the wealth they have by pricing by the hour, and I doubt Steve Jobs and Bill Gates kept a timesheet. Third, “The Firm of the Future” will focus on effectiveness, not efficiency. There’s not much the average firm can do to squeeze another 15-20% efficiency from its human capital, which is based on fallible human beings after all, not machines.

If you study surveys of how clients select—or fire—their accountants, efficiency and price is never mentioned. It is almost always because of outstanding service, or lack of service. You can’t provide outstanding service if you are focused on nothing but billable hour quotas and tedious efficiency metrics.

Last, PKFs need to recognize they are businesses, which have prices, not hourly rates. You’d never fly an airline that tried to charge you $4 per minute—and sent you the bill based on the flight time after the flight. PKFs need to start pricing upfront for everything they do, period. No more excuses. Fortunately, in thousands of PKFs around the world—in all sectors, from advertising agencies to law, accounting, and IT firms—this is beginning to happen.

Andreas Noodt: Would you elaborate on the concept of intellectual capital and discuss it in the context of accounting practices?

Ron Baker: A firm’s IC consists of three components: 1) human capital—its people, comprising 80% of developed countries wealth, according to the World Bank; 2) structural capital—its systems, proprietary software, checklists, resources, etc.; and 3) social capital—clients, vendors, suppliers, referral sources, alumni, alliances, etc. These components are the real levers of profitability in any PKF, not hours. Moreover, only the structural capital is owned by the firm—PKFs are the ultimate asset-less organizations.

IC is what economists call a non-rival asset—meaning you can transfer knowledge and it doesn’t diminish (you both now have it). In fact, it grows in usefulness as more people possess it and add to it. In contrast, a rival asset can only be used for one function at a time—if I give you the tie off my shirt, now you have it and I don’t. A billable hour is a rival asset—we can only do one thing at a time. This is a very limiting source of leverage around which to build a business model.

Andreas Noodt: How would you respond to those that claim that what you describe has limited global applicability, it being suited more to the likes of North America, the UK, and Australia?

Ron Baker: While I accept that the accountancy market and prevailing cultural, legal, and business norms vary from country to country, I am sure practitioners everywhere can relate to IC and recognize the increasing globalization of the market for accountancy services. When it comes to the finer points of implementing the new model, in particular value pricing, then we may find some differences.

At VeraSage, we believe this model is superior to, and will eventually supplant, the old model. Eliminating the billable hour and timesheets may not be within reach, but it is definitely within sight.

The latest IFAC SMP Quick Poll, conducted in late 2012, showed that the smallest accounting practices and their clients are not immune to macroeconomic instability. With the continuing sovereign debt crisis, a double-dip recession in the Eurozone, and rising inflation in some regions, economic uncertainty pervaded many of the responses to the poll of small- and medium-sized accounting practitioners (SMPs). Despite these concerns, SMPs remain cautiously optimistic, showing their resilience and perseverance during challenging times.

After keeping up with new regulations and standards, three issues related to the health of the economy—attracting and retaining clients, pressure to lower fees, and rising costs—topped the list of challenges faced by SMPs. Similarly, respondents indicated that their clients, small- and medium-sized entities (SMEs), are most challenged by regulations followed by economic uncertainty. Respondents generally expect little change in business performance in the coming year; however, slightly more SMPs (5 points more) indicated they expect business to improve in the coming year compared to those who said the same at the end of 2011. They expect this growth primarily to be driven by revenue from new clients.

While respondents identified the reputation and credibility of the profession as a top issue facing the profession in 2013, they generally ranked public perception of the profession in their country/jurisdiction as average to above average and expect this perception to improve by 2025.

“As drivers of growth and development, small businesses are extremely important to the health of local and global economies. We must not underestimate the value of this sector and the role that accountants play in supporting SMEs as trusted business advisors. Therefore, regulators and standard setters need to be mindful of the impact their requirements have on SMPs and SMEs; as the poll results show, this is an area that continues to challenge both small businesses and their accountants,” said SMP Committee Chair Giancarlo Attolini.

The poll report includes notable variations by region and size of practice in addition to trend data based on previous polls where available. 

The year-end 2012 poll received 3,767 responses and was conducted in 17 languages from November 21 to December 31. The poll, conducted twice in 2012, is intended to take a snapshot of key challenges and trends influencing SMPs globally; since the responses were not geographically balanced, the results are not necessarily representative of SMPs on a global or regional basis. IFAC wishes to thank the many member and regional organizations that helped with translation and distribution of the poll. 

About the SMP Committee
The SMP Committee of the International Federation of Accountants (IFAC) represents the interests of professional accountants operating in small- and medium-sized practices (SMPs). The committee develops guidance and tools and works to ensure the needs of the SMPs are considered by standard setters, regulators, and policy makers. The committee also speaks out on behalf of SMPs to raise awareness of their role and value, especially in supporting SMEs, and the importance of the small business sector overall.

About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 173 members and associates in 129 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

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This report provides a summary and, where appropriate, analysis and commentary including possible limitations of the data from the poll conducted November 21-December 31, 2012. This edition of the poll received 3,767 responses and was conducted in 17 languages.

The SMP Committee submitted this comment letter to the International Ethics Standards Board for Accountants (IESBA)'s proposed changes to the Code of Ethics for Professional Accountants addressing Responding to a Suspected Illegal Act.

The business advisory video series features interviews with SMP Committee Members Florin Toma, CPA, Romania, and Stuart Black, FCA, Australia. View all on the IFAC YouTube Channel.