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Grow or Die. It’s probably the most common business axiom, and the least accurate, according to the new book “Smart Growth: Building an Enduring Business by Managing the Risks of Growth” (Columbia Business School Publishing). To better understand the book’s implications for firms, Consulting’s One-on-One sat down with the book’s author, Ed Hess, a former Arthur Andersen strategy consultant and current professor at the University of Virginia's Darden Graduate School of Business.
- »One on One with Summit's David Litherland
When prospective employees interview for a job, they obsess over making a good, lasting impression. Firms should do the same. To learn how firms can avoid typical pitfalls, Consulting’s One on One sat down with David Litherland, managing partner of Summit Search Group, an executive search firm specializing in placing professionals within professional service firms.
- »One on One with PwC's Tom Craren
Senior executives are becoming immune to traditional marketing. Marketing consultants tell us that to pierce through the white noise of corporate communication, firms should consider “content marketing”. Instead of more traditional marketing, providing valuable insight and perspective in a blog or electronic newsletter can serve as a more effective door opener. One of the best examples is PricewaterhouseCoopers’ “10-Minute” series. For almost three years, PwC has boiled down complex thought leadership into small electronic pieces an executive can read in about ten minutes. To learn more about PwC’s marketing efforts, Consulting’s One-on-One sat down with Tom Craren, the firm’s brand strategy and thought leadership leader. His team of 20 writers produces between two to three 10-minute pieces each month, along with more detailed white papers.
- »One on One with Stanford Hospital's Kate Surman
Transitioning healthcare companies from paper to electronic records presents huge consulting opportunities.
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2009
»Financial Aid: IFRS
IFRS is coming and consultancies—particularly the Big 4—are gearing up for what they hope will be a financial windfall
by Joseph Kornik
Dave Kaplan at PricewaterhouseCoopers says the global crisis that we find ourselves in right now demonstrates the interconnectivity of capital markets around the world, and the need for better coordination amongst those capital markets. “Having a common set of accounting standards is an important aspect of ensuring that the information that flows to investors is consistent and useful in terms of making efficient asset capital decisions,” says Kaplan, PwC’s Leader of U.S. International Accounting and SEC Services. “It’s essential for the world’s financial success in the long run.”
In other words, the time has come for the United States to adopt the International Financial Reporting Standards (IFRS). Already in practice in more than 100 countries, including all of Europe, India, China, Hong Kong, Russia and Australia, IFRS will soon be mandated to replace the U.S. Generally Accepted Accounting Principles (U.S. GAAP) for most U.S. companies.
The U.S. Securities and Exchange Commission released a potential roadmap last fall. As of press time, the SEC had not yet made official its original timetable for adoption, but if the SEC sticks to its proposed timetable—early adopting companies in 2014 and all public companies by 2016—there’s still plenty of time for companies, and consultancies, to get ready. “It’s a matter of when, not if the U.S. will convert to IFRS,” says Danita Ostling, Americas IFRS technical leader for Ernst & Young. “The SEC has made it very clear that a single set of high-quality standards would benefit the capital markets, investors, and ultimately would benefit the companies themselves. That’s why we’re very bullish on IFRS.”
Ernst & Young is not alone. While no one is quite sure just how big the potential of IFRS (and estimates vary widely), what is certain is that consulting firms—and specifically the Big 4—are looking at IFRS as a potential gravy train, particularly now that the bottom has dropped out from so many other parts of the business. And even though the 2014 early adopter date seems like a long way out, discussions around IFRS, its implications to financial reporting and its potential to the bottom line have been going on for years.
“It really kicked off for us in about 2000,” says Glenn Koennecke, a partner and national advisory IFRS leader at KPMG. That’s when the European Commission proposed that companies in European Union countries switch to IFRS by 2005. At that point, [KPMG] really started to develop a global team and a global network around IFRS.” As more countries announced they were adopting IFRS, the network grew, he said. “Over the last eight years or so, we’ve continued to build and train a team and use the multi-disciplinary skills required to support clients through the entire IFRS process, including the performance improvement piece. Firm wide, IFRS is one of our top initiatives.”
With more than 1,400 conversions globally under its belt, KPMG believes it is uniquely positioned to advise clients through the entire IFRS process. “We’re global, and we have strong IFRS technical skills—and those qualities are limited to just a few firms,” Koennecke says. Three of those firms are Ernst & Young, Deloitte and PwC. Since at least 2001, all three firms say they have been busy bulking up their U.S. practice with overseas talent and ramping up training. “The emphasis has picked up recently,” says Ostling, “spurred mainly by the SEC’s initial proposed roadmap announcement.”
The SEC’s initial road-map really helped people sit up and take notice, says Sam Silvers, principal and national service line leader for the Financial Management practice at Deloitte Consulting. “That got a lot of people’s attention, and now everyone is in the game,” he says. “If the CFO isn’t getting asked by the audit committee chair right now, ‘What are we doing about IFRS?’ he will be at the next audit committee meeting. If the answer is, ‘Nothing’… well, that’s a bad answer. Six months ago that answer might have worked, but it won’t anymore.”
That’s one of the reasons Deloitte is busy scaling up services to meet potential demand. “The kinds of services we’re scaling up are the things we do right now. The exception is that we’re linking the technical accounting change, and that capability sits within a different part of the Deloitte firm, so we’re making sure that connection is a little more hard-wired than it was a few years ago,” Silvers says. “So, while IFRS represents a significant opportunity from a consulting perspective, it does not represent a significant change order in what we’re all about.”
And that’s the main reason there’s so much buzz around IFRS among the Big 4. For the most part, those firms are already well positioned to meet the needs of the clients. “There’s no question that we see lots of opportunity ahead,” says Glen Feinberg, principal and leader of Deloitte’s IFRS practice. “We’re planning around it, and we know our competitors are as well. You can certainly expect to see significant investment in [IFRS] from Deloitte in the years ahead.”
Still Kicking the Tires
With IFRS just beginning to hit client radar screens, most firms say any advisory work they’ve seen thus far has been limited to the initial diagnostic and assessment phase. In the last few months, KPMG says it has had more than 400 conversations with clients who are mostly interested in learning and understanding just what’s involved with an IFRS conversion, although many aren’t prepared to move on it just yet because of the current economic situation.
That seems to be a common theme, and with so much uncertainty in the economy, who can blame clients with bigger fish to fry? “This change is still a number of years away, and many companies really need to be focused on their core business today,” PwC’s Kaplan says. “Are there opportunities out there around IFRS?
We believe there are, but we also believe that companies need to take a very measured and thoughtful approach to it. We’re telling clients to be strategic and identify those areas of IFRS where they think they may need to start, but we’re also telling them it’s OK to delay it. IFRS may not be their top priority right now; that’s a business decision, and it’s probably the correct one.”
Budget-conscious clients are also on showing up on EY’s book of business. “I think I’d be disingenuous if I said that the economy was not having an impact,” Ostling says. The economy is impacting the way companies are spending money across the board, but EY is still encouraging its clients to go ahead with the diagnostic so they’ll be prepared to make better, and informed, decisions when the time comes.
That’s what Chris Wright, the firm-wide managing director of the Financial Reporting Risk Services group at Protiviti, has been preaching about IFRS all along. Protiviti, and specifically Wright, has been out ahead of the IFRS curve talking up the message that the best way to serve the client is to properly size the effort so they understand what it will take to get from where they are now to IFRS compliant by the appropriate year. “There is no one-size-fits-all approach,” Wright says. “For some companies this will be a very large undertaking; it’ll be expensive, time-consuming and it will require a lot of external resources. For others, it will be a matter of tweaking a few things to become compliant. Serve the client by sizing the effort. That way they can have a plan to execute themselves or engage others to execute for them.”
He also argues that his firm enjoys a unique advantage over the Big 4. “To the extent that a company believes this is an accounting exercise, they can choose to engage their auditor [for an IFRS conversion],” Wright says. “But we believe it’s much more than an accounting exercise. Once a firm gets beyond the finite project of rewriting accounting policies and procedures, a client will have to stop using its own auditor. There’s no point at which we would need to cease serving them because of a conflict with the other work we do.”
A ‘Once-in-a-Lifetime Opportunity’
Still, there should be plenty of work out there to go around, and the first job, consultants say, is convincing clients that IFRS is not simply an accounting exercise, but rather, a “once-in-a-lifetime opportunity to look at everything they’re doing and evaluate it completely,” says EY’s Ostling. “I do think companies realize that this is more than just an accounting exercise,” she says.
On one hand, it’s completely accounting, but at the same time there will be new systems and process issues to consider. For instance, a company’s reported results will be different under IFRS than they were under U.S. GAAP. Whether the results are higher or lower doesn’t really matter. What matters most, she says, is how these new figures impact other aspects of the business, such as debt covenants and employee bonus structures. “This process is going to involve people from investor relations, IT, general counsel, human resources… it’s massive,” Ostling says. “It may be accounting and finance that’s driving it, but all of these other components have to be involved.”
Ostling says EY’s clients tend to break up into two camps. “One is the ‘minimize the differences’ approach,” she says. “Some companies are clearly just looking to get through this with as little change as possible, and that’s OK.” The other approach, she says, is the “clean sheet of paper” approach, where a company takes a giant step back, starts with a clean slate and reconsiders all of its processes and policies related to financial reporting and the related business processes. Ostling says she suspects most companies are looking at IFRS as an opportunity to gain efficiencies or reconsider processes. “But the clients using ‘minimize the difference’ approach could be missing a big opportunity.”
So, of course, would all those consultancies. While firms are fully aware of the potential of the market, turning that potential into real dollars—particularly when some companies see IFRS as a regulatory requirement only—is another story.
“There is an element about IFRS that is about being compliant, but we’re talking with clients about this being an opportunity to do some other things within their finance function—to improve their processes and efficiencies,” KPMG’s Koennecke says. “As long as a company is taking a look at its financial reporting process to make this compliance change, clients might as well move toward those additional process improvements at the same time.”
That compliance conundrum can be all too real for firms still fighting the ghost of Sarbanes-Oxley. For many Deloitte clients, for instance, SOX is the first thing that comes to mind. “There’s no doubt that some clients have a slight sense of skepticism about IFRS,” Feinberg says. “We’re very sensitive about making sure we don’t come into clients with this doomsday mentality around compliancy issues. Some clients—usually the ones that had a bad experience with Sarbanes-Oxley—are going to go kicking and screaming through this and will probably take a minimalist view of things.”
Sizing Up the Market
But Feinberg suspects those clients will be in the minority. To assess the overall market potential for IFRS, Deloitte recently conducted a survey of 2,700 company leaders across various industries. The firm found that 20 percent of the market sees IFRS as technical accounting only, and will probably not require much more than a tweak to their current system.
The majority—about 60 percent—understand that to adopt and sustain IFRS, a company should probably push this into its back-office systems and make some internal changes. Another 20 percent believe they can achieve the biggest benefits by undergoing a complete overhaul. “To us, the latter 80 percent represents the real IFRS consulting opportunity,” Feinberg says. “Over the next several years, pretty much every major company in the U.S. is going to go through this process. Now matter how you look at it, that’s a pretty good market.”
For Protiviti’s part, “the larger and more complex the organization, the bigger the consulting opportunity will be,” Wright says. “For those companies that operate on a global footprint and perhaps use multiple ERP systems and consolidate using a tool that will require an update, there will be more opportunities. High tech companies, those with software—or software embedded in the hardware—will require a lot of assistance in fleshing out how they plan on applying IFRS to a given set of circumstances for revenue recognition.”
In addition, industries where there’s been more merger and acquisition activity, such as financial services, could be fertile ground for consultancies because there will be more assets and liabilities which will require fair value determinations, Wright says. But larger organizations that are relatively mature—and may already use IFRS overseas—are less likely to need any consulting help at all.
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