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A single set of accounting standards is inevitable: Samuel A. Dipiazza
R. Sridharan and Shalini S. Dagar

Business Today – 23/3/2008
As the CEO of PricewaterhouseCoopers, Samuel A. DiPiazza Jr. runs the world’s biggest audit and advisory firm, with revenues of $25.2 billion and a headcount of 146,767 (June 2007). It’s a job DiPiazza has held for six years now with two more to go. When the accounting scandal at Enron blew up in late 2001, DiPiazza, who joined the firm in 1973, lost no time in telling the world how to prevent such scandals in future. His book Building Public Trust: The Future of Corporate Reporting, co-authored with PwC colleague and former Harvard Business School professor Robert G. Eccles, was published in 2002 and made a case for greater transparency and accountability in financial reporting. DiPiazza currently serves as a Trustee of the International Accounting Standards Committee Foundation and is Chairman of the World Business Council on Sustainable Development. Recently in India, DiPiazza, 57, spoke to BT’s R. Sridharan and Shalini S.

Dagar on how much things have improved since and how much more they can improve. Excerpts:

Q. It’s been a little over five years since you co-authored your book Building Public Trust in the wake of the Enron and other accounting scandals. Has the accounting environment changed for the better since?

A. In the 1990s, the focus of business was really on revenue growth. Valuations were driven on growth numbers, not necessarily income. There was an attitude in business, almost an obsession, of creating wealth and I think we were out of balance, particularly in the US. As I look back now, and see the changes, they’ve been dramatic. Supervisory boards understand their obligation to provide oversight, to have a firm hand over the control structures, and the accountability of companies. The management understands the risk of pushing the envelope and their obligation to being transparent and, frankly, the price they pay when their organisation is not transparent. The (audit) profession has responded very well to this over the last four-five years. Are we perfect? No. We will make mistakes, we’re big. At times you will have someone who makes a mistake by accident. If it’s an accident we treat them, we help them learn. We don’t tolerate multiple mistakes, but we try to coach them through that. If it’s on purpose, we fire them.

Q. Is the cost of compliance a big issue for corporations around the world?

A. We do a survey every year of about 1,000 CEOs around the world and it’s interesting to see how their attitudes change over the time. We are just completing our survey that was done in December. Regulation has always been the biggest issue on the mind of the CEOs. But last year we began to see that regulation wasn’t the first, it second. The first issue was people. So, the access to the talent was getting the focus of CEOs as the primary issue that they faced every year. Now, this year, regulation was reported as third. Second, will be people. And first, will be global economic growth, and CEOs are very focussed on what’s happening across the world in the economic environment. And they worry about it as it affects their own business.

Q. Is the accounting industry still too controlled by the big (four) audit firms. Why isn’t there more competition?

A. First, you have to understand why the industry went from eight to four. When there were eight firms, it was often the case that a firm would be very strong in one geography and very weak in another. Because of that, we were not as capable of serving companies that were moving across the world. And so those early mergers happened. Our own merger 10 years ago happened (Price Waterhouse merged with Coopers & Lybrand) to fill the gaps. It was all about filling competencies and gaps. So, it went from eight to five, really as a pressure around audit quality. It went from five to four because of the (Arthur) Andersen collapse, which none of us was happy to see and frankly I’d prefer five firms… Now, what do you do with four? It is clear, and I think that there’ve been plenty of studies to suggest, that this is not a competitive issue. The CEOs that try to live in denial, that want to live inside their own border… eventually they find themselves out of business The environment is still very competitive, pricing is very competitive, and the firms aggressively are competing against each other. If any one was to ask the question it would be more about choice. Four firms, is it enough (choice)? We’ve seen very little issue with people finding auditors unless those firms have higher risk. We are now in a position with just four firms, where no client influences our behaviour. We’re big enough that if our largest client decides that they want to disengage us because we’re too tough, that’s fine, because we have so much coverage around the world. I think the real question is, how do you make sure that you keep four firms and not lose one. It’s about the risk of going from four to three, or from four to two, and what would happen to the industry if something like that was to happen. That becomes the real public policy question.

Q. Is there still too much that firms like PwC do in terms of services to one client you’re doing auditing, you’re doing tax advisory and you’re also doing consulting for them. Wouldn’t there be some sort of conflict that gets built into this kind of a model?

A. I simply don’t accept that. There’ve been considerable number of academic studies that have shown that where we have engaged with a client in a broader set of activities, the likelihood of audit failure is much lower because we have a deeper understanding of the company. Another piece of that is when we audit, we don’t just use accounts. Our auditing requires tax people, it requires actuaries, it requires technology people all different types of skills. If you were to take one of these audit firms and say ‘you only do audits’, we would have a very difficult time attracting those kinds of talents and the quality of audits would go down.

Q. Earlier you’d mentioned that businesses would continue to make mistakes. No one has issues with mistakes that happen due to bad strategy. But what happened in Japan with one of your clients in 2006 was cheating and that affected PwC very badly. So, have companies actually learnt and are they keen on being clean?

A. I think the vast, vast majority of companies have always had a commitment to being clean, to do the right thing, before Enron, and after Enron. But I also believe that you operate in a world where if people want to break the rules, if they feel personal pressure or greed, they’ll try to break the rules. And you need processes and activities to keep that from happening. And whenever we feel that one of our people has done something wrong not just made a mistake, but something morally illegal we take very harsh action, and our situation in Japan shows that. We, effectively, shut that firm down. It cost us hundreds of millions of dollars of business, but we didn’t blink.

Q. But do you think it’s possible for auditors to prevent fraud?

A. Actually, I think auditors prevent fraud every day because we are the eyes and ears of industry. We come to the table with an independent point of view. We test, question, and we challenge. CEOs encourage us to do this. So, there’s no question in my mind that the entire audit profession has, over the years, prevented fraud. We find often, during the course of a year, people pushing that envelope. And most of the time it’s not visible, it’s not public because it’s fixed before it ever becomes a factor. People are fired, and it’s very quiet and that’s the job we have.

Q. In some sense, you’re not just the eyes and ears of the industry, but also the conscience of the client.

A. Yes, and boards… you asked about change. Today, CEOs and supervisory boards are deeply into what we do. So, it’s not we and they , we’re in this with the boards and with the management. Reputational damage done through financial mis-statement is huge and no one wants their name connected to that. No board member, no supervisory board member and no CEO. Sometimes, the pressures they put create that incentive in their company and they have to understand that they can only push so far before people might go too far.

Q. Is globalisation making the job harder for firms like yours?

A. I think globalisation has made the entire world more complex, not just for a firm like PWC. Competitors are coming from different places, supply chains are connected in different ways, risks are (in) places you don’t expect in every piece of your business. The opportunity is also at a much higher level because globalisation opens markets. The CEOs that try to live in denial, that want to live inside their own border… eventually they’ll find themselves out of business. Q. In your 2007 review, you talked about how the M&A environment has been very robust and that’s helped the extraordinary number that PwC announced. What’s the M&A outlook for 2008 and 2009?A. There’s no question that many of the major economies have started to slow a bit, especially in the US. There’s also concern about the weakening dollar, the effect it has on the rupee, the effect it has on many places around the world. The credit crisis in 2007 continues to be difficult. But in light of all that, you see 2007 as being one of the strongest M&A years in history and, frankly, we see 2008 being very strong as well. It’ll be different because what you saw happening in 2006 and part of 2007 was transactions… acquisitions being driven by private equity. We are the eyes and ears of the industry… There’s no question in my mind that the entire audit profession has, over the years, prevented fraud Today, you’re seeing transactions moving towards strategic corporates because the leverage of private equity has changed. You also see lots of sovereign wealth funds in play and now you see companies in markets like Brazil, India and Russia being major buyers. So, the capital shift is beginning to show itself in the acquisition game (and) that’s actually going to take the acquisition game into an even higher level.

Q. PwC has been growing in India at between 35 and 40 per cent. What are the challenges for the firm in ensuring that it keeps growing on an increasing base?

A. Well, it is difficult to grow any business at 35-40 per cent year after year without experiencing some problems. Problems in attracting people, problems in making sure your processes are stable. When you go from 3,000 people to 5,000 people like we’ve done in the past few years and now heading to 10,000 people, you need to put in place very different processes around recruiting and retaining people. I think our team has done a great job in building that foundation. In our significant emerging markets Eastern Europe, South America, China, India, and Turkey we have strong infrastructure in place. So, I feel we’re in good shape to take this from 5,000 to 10,000, in a very short period of time.

Q. How far are we from a common set of global accounting standards, realistically speaking?

A. When I wrote Building Public Trust in 2002, I led that book by saying that the issue with many of these corporate failures was transparency. Accounting standards were too complex and frankly, transparency didn’t exist. And I said, one of the key issues was moving towards a single global standard. And if you look around the world, over a 100 countries are using IFRS (International Financial Reporting Standards) today. India will be there within three years. Before this is over, and I feel we have the chance, between now and the middle of the next decade, to have one standard around the world and that standard will be IFRS. It’s not about converging India with IFRS, or US GAAP (Generally Accepted Accounting Principles) with IFRS. This is about moving towards a single global standard. I think this is a path that, at this point, could happen very, very quickly.

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