Kreston BSG to host webinar on U.S. market expansion for Latino entrepreneurs
August 30, 2023
Kreston BSG is hosting a webinar on U.S. Market expansion for Latino entrepreneurs with guest speaker Veronica Quintana, Leader of the Latin-Owned Business Practice at CBIZ MHM. The webinar is on 7 September 2023 at 16:30 (Mexico Central Time) and will be held in Spanish.
Latinos own nearly 5 million businesses in the U.S. and account for over $800 billion in revenue. If you’ve ever thought about taking your business across borders and stepping into the lucrative U.S. market, now is the perfect opportunity. Kreston BSG is thrilled to partner with CBIZ in the United States for a webinar aimed at guiding entrepreneurs through the tax and legal implications of starting or expanding a business in North America.
Event Details:
Date: September 7
Time: 16:30 pm (Mexico Central Time)
Language: Spanish
Audience: Open to the general public, clients, and collaborators of Kreston Global and CBIZ
Leader of the Latino-Owned Business Practice at CBIZ & MHM, Veronica Quintana brings a wealth of knowledge and experience in navigating the U.S. market.
Understanding the U.S Tax system: Navigating the complex U.S tax landscape
Legal requirements: What are the do’s and don’ts when expanding or starting a business in the U.S?
Cultural considerations: Unpack the nuances of doing business in a diverse market.
Why Should You Attend?
Informative: The comprehensive coverage of the tax and legal aspects will equip you with the right tools to set up your business successfully in the U.S.
Networking: Opportunity to interact with experts and like-minded entrepreneurs.
Free of charge: Knowledge, insights, and an array of business benefits, all at zero cost to you.
David heads the Transfer Pricing Practice at CBIZ and offers guidance on transfer pricing and tax valuation, boasting over 17 years in the domain, mainly with prominent international accounting firms. His expertise spans transfer pricing planning, intellectual property valuation, financial modelling, and more, serving industries from oil and gas to software and tax-exempt organisations.
Identifying transfer pricing risks in the digital economy
August 18, 2023
A global economy means hard borders are less visible, creating a sense of ambiguity around regulatory obligations and defining where the value of a digital product begins, subsequently identifying transfer pricing risks in global business operations even more challenging. David Whitmer, National Transfer Pricing Leader at CBIZ and Kreston Global Transfer Pricing Chair explores this emerging challenge in an article on Corporate Compliance Insights.
Understanding existing Transfer Pricing obligations
At its core, transfer pricing sets the rates charged in transactions between related enterprises, like parent companies and their subsidiaries or between different units of a business. The aim? To prevent firms from transferring profits to low-tax jurisdictions, ensuring that taxes align with the actual business activities in a given nation.
The underlying principle is the “arm’s length principle,” which means that transactions between related parties should yield a tax outcome akin to what would have been realised if unrelated parties had conducted a similar transaction.
It’s applicable to tangible transfers like physical goods, intangible transfers like intellectual property, service transactions such as R&D or marketing services, and even financial arrangements.
The impact of the digital economy on Transfer Pricing
Selling goods or offering services used to require a tangible, local presence. However, today’s digital revolution has reshaped the business model. The rise of online storefronts, centralised global warehouses, and ubiquitous smartphone apps exemplifies the shift.
With the advent of technologies like the Internet of Things (IoT), big data analytics, AI, and blockchain, significant profits are now realised from digital avenues. And with remote work and cloud technology, the very definition of service delivery and sales locations is being redefined.
Given these nuances, businesses need to be vigilant and proactive to ensure they remain on the right side of compliance.
The impact of OECD regulations
The loss of tax revenues, estimated between $100 billion and $240 billion annually from profit manipulation, has spurred the Organisation for Economic Co-operation and Development (OECD) into action. They’ve spearheaded the BEPS (base erosion and profit shifting) initiative, with a 15-point action plan and a dual-pillar framework.
Key points include:
Item 1: Targeting proper taxation of digital enterprises, even if they lack a physical presence in the profit-generating jurisdiction. Item 8: Focusing on the challenge of valuing intangible assets to deter their shifting within a corporate group.
Evolution has brought about BEPS 2.0, with Pillar 1 being particularly significant for transfer pricing. It emphasises taxing MNEs (multi-national enterprises) in the markets they operate and generate revenues, even if there’s no direct physical presence.
Though the OECD has set transfer pricing guidelines, countries might have varied interpretations. The sporadic emergence of digital service taxes (DSTs) in various nations adds another layer of complexity, raising concerns like double taxation. Yet, with the onset of Pillar 1, DSTs are predicted to phase out. Presently, over 135 countries have embraced the two-pillar plan.
Critical steps for MNEs
As the business terrain morphs, digital-first entities must comprehend their standing, anticipate the determinants of transfer pricing across their expanse, and refine their operations. Miscalculations can lead to unwanted income adjustments, tax increments, interests, and penalties. For rigorous planning, MNEs ought to:
Revisit policies and craft best practices: MNEs must question the relevance and soundness of their current transfer pricing strategies. Does the documentation justify and support the present approach? Do the inter-company deals need recalibration?
Execute a compliance cost analysis: While compliance demands financial resources, the consequences of non-compliance could be pricier. Thus, shaping transfer pricing blueprints should pivot around decisions that skillfully and economically minimize risks.
Pinpoint value creation: Recognising the ramifications of digital transformation on the company’s value chain is paramount. This ensures that profit distribution mirrors the tangible economic results of diverse business activities.
Determine IP jurisdiction: Discerning which entity within the group owns the rights to digital-born intangibles and their geographic locations can significantly influence transfer pricing. Additionally, firms should deliberate if transferring IP ownership internally is strategic.
Strategise organisational structures: Companies should consider structures like on-ground representative offices, which can facilitate local regulation compliance. Alternatively, establishing a resale entity could be beneficial in managing risks associated with permanent establishments and transfer pricing adjustments. Contemplating cost-sharing arrangements, where the expenses tied to intangible assets are divided among associated bodies, is another avenue to explore.
Beyond these considerations, numerous queries arise. How should the value contributions of remote employees, who service multiple territories, be distributed? How are innovative technologies like AI, VR, and automation influencing revenue streams? How is data acquisition shaping value delivery? The considerations are myriad.
In essence, for MNEs that offer services and goods globally, perfecting transfer pricing strategies to ensure continual compliance with both global and local regulations is vital, albeit daunting. To determine the value of intangible assets and establish apt transfer pricing approaches, extensive analysis, modelling, and benchmarking are typically essential.
What’s evident is that methodologies, which were conceptualised over a century ago for conventional businesses, now demand reinvention for the digital age. This era presents a heightened challenge for transfer pricing and companies should remain proactive and adaptable in strategising to retain resilience.
Get in touch with one of Kreston Global’s transfer pricing experts today.
News
Herbert M. Chain
Shareholder, Mayer Hoffman McCann P.C. Deputy Technical Director, Global Audit Group, Kreston Global
Herbert M. Chain is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance.
How audit companies can support staff to better detect financial fraud
Recently, Herbert M Chain, Deputy Technical Director at Kreston Global Audit Group and Shareholder at Mayer Hoffman McCann P.C. spoke to Bloomberg Tax about a holistic approach audit companies must employ to support staff to identify financial fraud effectively. Read the full article or the summary below.
Increasing risk in the audit process
Recent data from the Public Company Accounting Oversight Board in the U.S underscores the correlation between firm culture and audit quality. The study highlights an alarming increase in audit deficiencies, set to climb for a second consecutive year. A significant 40% of these deficiencies in 2022 are linked to cultural aspects such as leadership’s commitment to superior audits, compliance, and staff churn.
At its essence, the culture of a firm serves as an unseen guiding hand, setting the tone for behavioural norms, professional duties, and interpersonal interactions. A perfect alignment of culture, values, processes, and training is imperative to empower auditors to address potential fraud risks.
In the world of auditing, ensuring that professionals are adept at pinpointing and addressing financial fraud is multifaceted. At its core, each auditor works within a framework of professional standards, controls, and strategies tailored to spot and react to fraudulent financial statements. This system—rooted in the culture of the auditing firm—is a cornerstone of the company’s quality control mechanism.
Auditor toolkit to reduce deficiencies
Scepticism as a daily practice
For auditors, embracing professional scepticism is non-negotiable. It emphasises a probing mindset and a scrupulous assessment of audit evidence—key to recognizing and countering potential fraud risks. Auditors, in every step of the process, are expected by regulators, stakeholders, and the public to apply this scepticism.
Auditors with sharp scepticism are not just passive observers. They actively hunt for signs of fraud and methodically inspect every piece of evidence. Their scepticism also helps in assessing managerial responses, ensuring they are not only rational but also evidence-backed. Both intrinsic scepticism and context-driven scepticism shape an auditor’s approach.
Elevating this sense of scepticism through training, awareness programs, and supervision can significantly enhance the trustworthiness of financial audit reports.
Financial Auditing vs. Forensic Auditing
Drawing a line between financial statement auditing and forensic auditing is imperative. While the former is designed to offer an unbiased opinion on the authenticity of financial records, the latter digs deep into suspicions of fraud for legal documentation.
Auditors in financial audits maintain impartiality, while forensic auditors operate under a presumption of potential misconduct. It’s a delicate act for auditors to maintain objectivity, yet remain alert to discrepancies.
Nurturing staff expertise
“Due care” is a revered principle in auditing, defining the expertise and diligence auditors should bring to the table. For auditors to be effective, they need expertise, awareness, and adequate oversight—this means entrusting complex evaluations to seasoned professionals rather than novices.
Cultivating a culture that champions learning is vital for auditors to counter financial fraud risks. Academic research supports the idea that well-trained auditors, equipped with fraud detection knowledge, are more sceptical, employ advanced methods, and stand a higher chance of identifying deceit.
When developing training programs, audit firms should:
Promote scepticism and analytical thought: Cultivate a culture that values scepticism and analytical thought. Train auditors to challenge assumptions and view evidence with a discerning eye. Offer guidance on how to scrutinize managerial claims and navigate potential biases.
Raise fraud awareness: Educate auditors about different fraud tactics, warning signals, and potential indicators.
Impart forensic accounting skills: Introduce staff to specialized fraud detection and prevention tools and techniques.
Teach control assessment: Instruct auditors on how to spot control vulnerabilities that may elevate fraud risks.
Enhance interview and enquiry skills: Train staff to extract vital details during fraud discussions and guide them on the intricacies of fraud investigations.
Encourage continued learning: Push for ongoing learning in fraud detection and encourage acquiring certifications, attending seminars, or workshops related to fraud.
Embracing Technological Advances
With technology evolving rapidly, auditors can no longer afford to be on the sidelines. Forensic data tools are increasingly finding their place in the auditor’s arsenal, especially in cases with high fraud concerns. Similarly, AI-powered systems, like expansive language models, are being harnessed to spot and analyze potential fraud.
Turning a blind eye to these developments is perilous. It’s imperative for firms to integrate these tools into their strategy and train their team accordingly.
Mastering data analytics is crucial. By scrutinizing transactional data, algorithms can pinpoint anomalies like unforeseen revenue fluctuations or dubious transactions. Alongside this, auditors need a grasp on data visualization, statistical techniques, and data mining.
The power of AI can’t be ignored. AI can process vast data amounts, spot patterns, and offer invaluable insights. It’s essential for auditors to have a robust understanding of AI technologies. But, it’s also vital to be aware of its limitations, ensuring AI is used judiciously and its outcomes critically examined.
Get in touch
If you would like to talk to an Audit expert about Audit, please get in touch.
Christina is an experienced consultant specialising in ESG, sustainability, and climate change. She has over 13 years of expertise and has worked with various organisations, including local municipalities, national government agencies, the Directorates-General of the European Commission, and the private sector across different industries.
Laurent Le Pajolec
Member of Board EXCO A2A Polska, Kreston Global ESG Committee member
General Manager and shareholder of consulting companies with a Marketing/ business development and a Financial background with direct experience with several sectors (Real estate, Transport, Fintech, Legaltech, M&A, Import- Export, HR, Restructuring). Exco Polska Board Member.
New International Standard on Sustainability Assurance (ISSA) 5000 proposed by IAASB
Introduction of ISSA 5000: The IAASB has proposed ISSA 5000 as an answer to the growing call for transparent and verifiable sustainability reporting. This proposition follows shortly after the release of initial standards on sustainability and climate disclosures by the International Sustainability Standards Board and the expected climate-related disclosure rule by the U.S. Securities and Exchange Commission.
The Essence of ISSA 5000: Tom Seidenstein, the chair of IAASB, highlighted the importance of ISSA 5000 as a mechanism to fortify trust in sustainability reporting. The proposed standard will be compatible with various other reporting frameworks including those issued by the European Union, ISSB, and more. Both professional accountants and non-accountant assurance practitioners can use the standard for sustainability assurance engagements.
Stakeholder engagement: Emphasizing the importance of inclusivity and holistic viewpoints, the IAASB has embarked on an outreach program to gain insights from diverse stakeholders. These insights will be crucial in refining the final standard, according to Josephine Jackson, IAASB vice-chair.
Current landscape & challenges: Christine Tsiarta from Kreston ITH in Cyprus explains that while there is an increasing awareness of climate-related risks, many audit firms lack the knowledge and skills to accurately address these concerns. As regulations intensify, audit firms will need to enhance their capacities to recognize, monitor, and manage such risks. Laurent Le Pajolec from Exco Poland elaborated on the potential hindrances for auditors, including the necessity for independence, proper education, and adequate support from companies.
The Need for a Comprehensive View: Christine and Laurent emphasise the significance of holistic sustainability reporting. It is vital for companies to capture the complete picture, considering all emissions, including Scope 2 and Scope 3, to present an accurate representation of their sustainability efforts.
The Road Ahead: The IAASB has called for comments on the proposed standard through its website, aiming to ensure it addresses all concerns and offers a robust structure for sustainability assurance.
However, the road to comprehensive sustainability reporting isn’t without challenges. Christine Tsiarta, head of advisory services for sustainability at Kreston ITH in Cyprus, shed light on the current state of affairs, remarking, “So far, there hasn’t been lots of regulation requiring audit firms to report or help clients manage climate-related risks. Now we’re slowly seeing that changing and evolving. But as a result, even auditors themselves don’t have sufficient knowledge, skills and understanding.” She further highlighted the imminent evolution in the landscape as auditors increasingly acknowledge these risks’ relevance.
Laurent Le Pajolec elaborated on the obstacles auditors face. He mentioned the “lack of independence” and added, “It is difficult to be an engineer to identify, for example, what are the sources of emissions of CO2 for a company.” Le Pajolec and Tsiarta both underscored the significance of holistic sustainability reporting. Tsiarta states, “If you’re ignoring part of the picture, then you’re essentially giving a false image of what your impacts are.”
As the world inches closer to a sustainability-centric approach, standards like the proposed ISSA 5000 are indispensable. However, for it to be effective, the collaborative efforts of stakeholders, equipped with the right knowledge and approach, are paramount.
To learn more about the impact of the proposed International Standard on Sustainability Assurance (ISSA) 5000 on your business, please get in touch.
Surandar Jesrani is the CEO of MMJS Consulting in Dubai, steering businesses toward successful VAT implementation in the UAE and GCC since 2017. Before MMJS, he managed finance and taxation at a top Private Equity Group and sharpened his international taxation skills at Infosys and General Motors. An alumnus of The Institute of Chartered Accountants of India, Surandar specialises in Accounting, Finance, and International Taxation.
UAE’s corporate tax update
Surandar Jesrani of MMJS consulting in Dubai shares his thoughts on the implication of UAE’s corporate tax update with eprivateclient magazine. Read the full article here or the summary below.
The United Arab Emirates (UAE) has long demonstrated its commitment to international tax transparency standards, notably as a member of the Organization of Economic Co-operation and Development (OECD). Here’s a glimpse into the recent evolution in the UAE’s tax scenario.
The path to global tax transparency
OECD’s 2015 Base Erosion and Profit Sharing (BEPS) Action Plans aimed at preventing Multi-National Enterprises (MNEs) from employing strategies to lower their tax liabilities across jurisdictions. Nonetheless, as the initial BEPS strategies weren’t wholly suited to the challenges of a digital economy, the OECD introduced an Inclusive Framework (IF) in 2021. This two-pillar model proposed that MNEs should pay a minimum corporate tax of 15% in every jurisdiction.
The UAE, endorsing this global tax framework initiative, joined a consensus with 139 other countries. In alignment with its OECD obligations and its vision of positioning itself as a leading global business hub, the UAE announced a federal corporate tax on business profits in 2022.
Key principles of the UAE corporate tax update
UAE’s corporate tax regime adheres to universally acknowledged principles ensuring:
Flexibility with modern business practices.
Simplicity and certainty.
Equitable taxation.
Transparent procedures.
Effective from 1 June 2023, the UAE corporate tax law encompasses 20 chapters and 70 articles detailing the scope, application, and compliance rules. All business and commercial activities, undertaken by individuals or entities, fall under this tax regime, divided into resident and non-resident classifications.
An overview of taxable entities
Resident Persons: Legal entities in the UAE are taxed on global income.
Non-resident Persons: Foreign businesses are taxed on income sourced in the UAE.
Moreover, all business-active individuals and legal entities will need to register under the UAE corporate tax law.
Certain entities can avail tax exemptions, like the UAE government entities, qualifying public benefit entities, qualifying investment funds, and some specific entities as designated by the Minister.
Tax rates and categories
Depending on the size and type of business, the UAE corporate tax rates vary:
Taxable Persons: 0% on income up to AED 375,000, and 9% on income above this threshold.
Qualifying Free Zone Persons (QFZP): 0% on qualifying income and 9% on other incomes.
Small businesses: 0% if the gross revenue of the previous year is under AED 3 million; otherwise, they’re taxed similarly to general taxable persons.
MNCs, until the full adoption of Pillar Two rules by the UAE, will be taxed under these regular corporate tax rates.
Compliances
Entities are required to file tax returns within nine months post the close of a tax year. While there are provisions for withholding taxes on specific domestic and foreign payments, currently, it stands at zero per cent.
Conclusion
UAE’s introduction of corporate tax is a strategic move in its journey as an OECD IF member, especially concerning the global minimum tax proposed by BEPS Pillar Two. With a 9% tax rate, the UAE remains an attractive proposition when compared to other tax jurisdictions. Furthermore, the UAE tax law’s foundation on internationally practised principles ensures a streamlined transition for businesses accustomed to similar laws elsewhere. As a result, many enterprises may re-evaluate their corporate structures to maximize genuine tax benefits under this new regime.
If you would like to speak to one of our UAE taxation experts, please get in touch.
News
A guide to setting up a business in Italy
August 3, 2023
Kreston TDL Italy, a member of Kreston Global’s international network, has created a detailed 128-page guide to setting up a business in Italy. This guide is for anyone investing in Italy, to help you navigate the Italian business landscape.
The guide offers an in-depth analysis of various aspects integral to operating a business in Italy. It begins with an introduction to the country’s corporate and legal structures, including an exploration of different business entity forms. Subsequent sections delve into setup and liquidation procedures, the intricacies of mergers and acquisitions, and the responsibilities arising from corporate criminal liability.
Understanding taxes in Italy
Kreston TDL’s guide shines a light on Italy’s complex taxation system. Covering corporate taxes, business income, VAT, and individual income taxation, the guide provides an exhaustive exploration of main incentives, anti-avoidance measures, and withholding taxes. It also presents in-depth knowledge on VAT registration, returns, deductibility, and the mechanisms behind international supplies of goods and services.
Business laws in Italy
The guide further examines various legal aspects like customs, excise, import VAT, accounting procedures, filing requirements, and audit systems. In addition, it offers comprehensive advice on potentially challenging areas like transfer pricing, bankruptcy, reorganisation, debt restructuring procedures, and employment laws.
Local experts
The guide offers you invaluable technical insights from Kreston TDL’s team of experts, to help you make informed decisions and save time and money setting up a business in Italy correctly.
Established in 1985, Studio TDL is an independent Italian firm that specialises in tax, corporate and labour consultancy, and administrative outsourcing services. With a team of Certified Accountants, Statutory Auditors, and Labour Consultants, the firm caters to multinational companies and groups, capitalising on its long-standing relationships with major international professional firms.
The quality of Studio TDL’s services is driven by the team’s high level of expertise. They offer a wide range of services in tax, corporate, accounting, and labour matters, serving both local and international clients. This is supported by the latest methodologies and a vast network of international relations.
Studio TDL’s professionals are active contributors at conferences and trade magazines and are members of study commissions set up by relevant professional institutes in Milan. This engagement, alongside their in-house Study Centre, allows them to maintain current knowledge and develop best practices. As such, they can provide reliable support for even the most complex operations. Their in-depth understanding of the Italian business environment makes Studio TDL a go-to source for business setup and operations in Italy.
Recently, International Accounting Bulletin invited Kreston Global members to comment on global M&A trends in accounting. Mergers and acquisitions (M&A) have become a critical competitive strategy for companies worldwide. However, the landscape varies significantly across developed and developing markets. Kreston Global members Alexandre Kouame partner at Exco ECA in the Ivory Coast, George Itotia from Kreston KM in Kenya, and Chairman of the Board, Rich Howard from CBIZ MHM, share valuable insights to the discussion. Read the full article here or the summary below.
M&A in US and Canada
In developed markets like the US and Canada, M&A activity in 2022 was largely driven by a skills shortage. Companies have had to adapt, embracing remote working environments and supplementing resources through outsourcing and offshoring. Here, M&A provides a platform for immediate resource and capability amalgamation. Another surprising driver for M&A in these markets is succession. As Rich Howard points out, many partners in accounting firms approaching retirement age are seeking mechanisms to monetise their contributions, and M&A provides a sustainable solution.
Technology in M&A
Technology has played a significant role in M&A activity. To stay competitive, firms are investing heavily in technological development and implementation. Private equity investment, while creating some buzz, is not the dominant investment form in the US, according to Howard. Regulatory scrutiny may accompany the introduction of third-party capital, ensuring that relationships between firms and private equity groups adhere to the rules and regulations of the accounting sector.
M&A trends in Africa
Despite the M&A trends in developed markets, businesses in Africa face serious challenges. The lack of liquidity is a crippling factor, and raising funds or attracting investment for crucial M&A operations is difficult. Alexandre Kouame, accountant and statutory auditor at Exco ECA (a Kreston Global member firm), believes the issue lies with the financial sector, particularly European banks operating in African markets. These banks often support European companies established in Africa rather than local businesses.
George Itotia, a partner at Kreston KM, highlights that M&A in Africa isn’t merely about promoting growth, but survival. High taxes and low lending contribute to liquidity problems, resulting in many companies folding. He notes a shift by local lenders to invest in long-term government securities rather than in the private sector, deemed too risky. Thus, foreign direct investment is essential for local M&A to thrive.
However, M&A’s financial, tax, and legal challenges in Africa make partnerships a more viable alternative. Strategic partnering helps local companies collaborate on technology and enhance local personnel’s skills. Although private equity is gaining traction in Africa, Kouame asserts that the margins attracting PE companies are shrinking due to increased competition and tax pressure.
In South America and the Middle East, inflation and other economic challenges have created an uncertain environment for M&A. However, M&A continues to be discussed as a possible path forward.
M&A as a competitive advantage
In conclusion, while M&A offers a significant competitive advantage in developed markets, several obstacles hinder its effectiveness in developing regions. Experts from Kreston Global, including Rich Howard, Alexandre Kouame, and George Itotia, contribute to a more nuanced understanding of this global trend and its various implications. Kreston Global Chief Executive, Liza Robbins, recently wrote a blog on private equity investments in accounting firms. Read her full blog here.
Get in touch
If you would like to talk about M&A in your country, please get in touch.
Carmen Cojocaru is a highly qualified professional with extensive experience in the fields of accounting, audit, tax, and business process outsourcing. Additionally, Carmen’s involvement with the ESG committee and Kreston Global highlights her commitment to promoting ethical business practices and fostering sustainable growth within the industry.
EFRAG approves European Commission’s adoption of European Sustainability Reporting Standards
August 2, 2023
EFRAG has approved the European Commission’s adoption of European Sustainability Reporting Standards (ESRS). The European Commission adopted the first ESRS, set on July 31, 2023. This is mandated by the Corporate Sustainability Reporting Directive (CSRD) and covers environmental, social, and governance matters. The adoption represents a significant step towards relevant and comparable sustainability reporting and identifying sustainability-related financial risks and opportunities for companies.
The European Commission adopted the ESRS after a comprehensive process that began in September 2020. EFRAG played a significant role in this procedure, including submitting a preparatory work report to the European Commission in February 2021, launching a public consultation on Exposure Drafts of ESRS in April 2022, and providing Technical Advice to the European Commission on the final draft standards delivered in November 2022.
EFRAG is putting significant efforts into developing standards for small and medium-sized enterprises (SMEs). Additionally, they are actively preparing guidance to encourage the implementation and interoperability of ESRS with overlapping ISSB standards, contributing to the joint work with the ISSB and ensuring the interoperability of ESRS with other relevant international standards.
On August 23, the EFRAG SRB will have a public session to receive an update on the first draft of the EFRAG Implementation Guidance and FAQ regarding materiality assessment (MAIG) and value chain (VCIG). Papers related to this will be posted on or before August 16, 2023. The EFRAG SRB and EFRAG SR TEG will also review the responses to the European Commission’s consultation for feedback on the Have Your Say portal on the draft ESRS to identify priority areas for further guidance. Furthermore, EFRAG will soon establish a single access point on its website for stakeholders to ask questions about the ESRS application.
Since its inception, EFRAG has aimed to contribute to the progress of sustainability reporting worldwide while preventing EU preparers and users from having to report multiple times. During its public session on August 23, 2023, the EFRAG SRB will receive an update on interoperability with other major standard-setting initiatives. The SRB acknowledges the excellent progress made in interoperability between the ESRS adopted by the European Commission and the ISSB standards published in June (IFRS S 1 and S 2). Additionally, the SRB will receive an update on joint efforts to promote straightforward interoperability of ESRS and ISSB climate-related standards. EFRAG and the GRI have approved a joint statement acknowledging a high level of commonality and the possibility for ESRS reporting entities to report regarding GRI, which will also be submitted to the EFRAG SRB.
According to the SRB, there has been significant advancement in the development of SME standards(both for listed SMEs (LSME) and for voluntary use (VSME)). The progress on sector standards is ongoing, but the European Commission will provide updated information on the timeline in the fall.
To learn more about your ESG reporting obligations, visit our Sustainability pages.
News
Herb Chain
Shareholder, Mayer Hoffman McCann P.C. Deputy Technical Director, Global Audit Group, Kreston Global
Herb is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance.
Auditor role in financial statement fraud prevention
August 1, 2023
Auditors have a significant role in financial statement fraud prevention. Herbert M Chain, Deputy Technical Director at Kreston Global Audit Group and Shareholder at Mayer Hoffman McCann P.C. in the US, believes auditors serve as the sentinels, ensuring the accuracy and fairness of financial statements for regulators, stakeholders, and the public. He recently shared his thoughts with Bloomberg Tax. Read the full article here, or the summary below.
What is the financial impact of fraudulent activities?
Financial fraud remains a pervasive menace to the global economy, causing substantial damage to businesses and the economy. As noted by the Association of Certified Fraud Examiners, financial statement fraud, while being the least frequent (at 9%), was the most expensive source of financial damage in 2022, with a median loss of $593,000.
Financial statement fraud isn’t just about misrepresenting earnings or misappropriating assets. It can also be driven by attempts to manage tax liability, with parties distorting their income through manipulation, misrepresentation, or evasion to shrink their tax responsibilities. This correlation between tax reporting and financial statement fraud emphasises the necessity for robust internal controls, thorough auditing practices, and vigorous regulatory oversight.
What are the professional responsibilities of external auditors?
External auditors carry the weighty responsibility of identifying and responding to the risk of significant misstatement in financial statements due to fraud. Professional standards such as the American Institute of Certified Public Accountants AU-C Section 240 and the International Standard on Auditing 240 guide the responsibilities of auditors.
Though regional and terminology differences may exist, these standards largely define financial statement fraud as intentional acts that lead to significant misstatements in financial statements or misappropriation of assets. They underline the need for auditors to maintain professional scepticism, exercise sound judgment, and obtain sufficient evidence to ensure that financial statements are free from material misstatements caused by fraud or error.
The auditor’s toolkit: Mitigating fraud risk
To effectively counter fraud at the audit engagement level, auditors must familiarise themselves with tools like the fraud triangle, which helps assess fraud risks. This conceptual framework, developed by criminologist Donald R. Cressey, considers three key elements that could increase fraud risk: incentive/pressure, opportunity, and rationalisation/attitude.
However, strong internal controls can be bypassed or overridden by management, leading to material misstatements in financial statements. To address this risk, auditors must understand the control environment, assess the design and implementation of internal controls, analyse journal entries, accounting policies, and adjustments, and incorporate unpredictability into the audit procedures.
Encouraging team engagement to detect fraud
One of the key tactics to identify and respond to fraud risks is to encourage brainstorming sessions within the engagement team. These discussions facilitate the sharing of knowledge, experiences, and insights, and allow for the development of staff members.
The engagement team must prepare before the sessions, encourage open discussions, emphasise the need for professional scepticism, focus on unusual transactions, and document and follow up on all identified fraud risks and related audit procedures.
In this ever-evolving financial landscape, it is our duty as auditors to uphold the integrity of financial reporting, thus contributing to a stable economy and instilling trust in external stakeholders.
Speak to us about fraud prevention
If you would like to know more about how audit can help your company prevent fraud, please get in touch.
Herb is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance.
Ricardo is a fraud, audit and risk expert with over two decades at Ernst & Young (EY), where he served as an Audit and Forensics Partner across Canada, Chile, and Argentina. He led major clients in utilities, retail, manufacturing, and mining sectors, including Coca-Cola, McDonald’s, Siemens, Fluor Daniels, and others. Ricardo is a Certified Public Accountant (CPA) in the United States, Chile, and Argentina, a Certified Fraud Examiner (CFE), and holds an MBA designation. He’s also a university professor at Universidad de los Andes and a published author on occupational fraud.
Why mid-tier networks are a compelling alternative to the Big Four for audit
More companies are considering mid-tier networks for audit, shifting away from the long-established dominance of the Big Four audit firms. Herbert M. Chain, Deputy Technical Director, Global Audit Group and Ricardo Gameroff, Kreston Global Audit Business Director, shed light on this development in the latest edition of International Accounting Bulletin. Read the full article here or the summary below.
Why are companies switching from Big Four to mid-tier audit firms?
There’s a renewed interest in the mid-tier networks to carry out audits, due to regulatory pressures and concerns over conflicts of interest within the Big Four. The shift is also fuelled by the desire for greater competition, personalised service, and an alternative approach to audit delivery. These factors create substantial opportunities for smaller networks to serve companies previously in the portfolio of the Big Four.
What advantages do mid-tier networks offer when competing against the Big Four to audit companies?
The shift to mid-tier firms like Kreston Global is due to several key advantages they offer over their larger counterparts:
Client-centric service: Mid-tier firms devote more time and effort to understand their clients’ businesses, providing personalised advice tailored to their specific needs.
Cost-effectiveness: These firms offer more cost-friendly solutions, a compelling factor for clients looking to lower their audit fees.
Regulatory factors: Policies proposed by the EU and UK favour mid-tier audit firms, encouraging them to collaborate with the Big Four and giving them increased access to larger clients.
Quality of service: Mid-tier firms can offer more bespoke and specialized services, which can lead to a deeper understanding of the clients’ operations, resulting in a more comprehensive audit approach.
What challenges do mid-tier networks face when competing with the Big Four?
Despite these advantages, mid-tier firms face significant challenges when competing with the Big Four:
Brand recognition: The Big Four have a formidable reputation that is challenging to match.
Resources: The Big Four’s extensive resources in workforce, technology, research, and training are hard to rival.
Global presence: Mid-tier firms find it challenging to match the Big Four’s extensive global reach.
Service consistency: The Big Four’s consistent high-quality service across jurisdictions can be hard for mid-tier firms to replicate.
Regulatory compliance: The Big Four’s robust compliance programs and resources can give clients more confidence and security.
Talent acquisition: The Big Four’s reputation as top-tier employers can make it more challenging for mid-tier firms to attract and retain top talent.
What strategies are mid-tier networks using to compete with the Big Four?
Mid-tier firms are developing effective strategies to compete with the Big Four:
Client-focused service: Mid-tier firms focus on delivering bespoke client service, building stronger relationships with clients.
Specialisation: By focusing on specific industries or niches, mid-tier firms are differentiating themselves from their competitors.
Flexibility: Mid-tier firms can quickly adapt to new audit methodologies, showing greater flexibility in their service delivery.
Innovation: Mid-tier firms are investing in cutting-edge technology to improve the efficiency and efficacy of their audits.
Global reach: Through international alliances, mid-tier firms can match the Big Four’s global coverage.
What is the future outlook for the global audit market?
Mid-tier networks’ future will be shaped by their ability to adapt to market dynamics, leverage technology, and deliver high-quality, specialised services that meet clients’ evolving needs. With the global accounting firms’ market expected to grow at a CAGR of 12.60% from 2022-2030, these firms are uniquely poised to seize this opportunity.
Find a firm
Are you interested in discovering the advantages of a mid-tier network carrying out an audit for your company? Contact your nearest firm to find out more.
Liza joined Kreston in 2018, after almost a decade with Morison Global. Liza manages all network operational activities, including Board and Global Expert Group liaison. She is focused on the development of the Network as a commercially-viable entity for its members and their clients.
Prior to Morison KSi, Liza held roles at Cision, Thomson Reuters, Conde Nast and Dennis, as well as holding a number of Non-executive roles.
Navigating the trend of private equity investment in accountancy
In a significant development highlighting the growing trend of private equity in accountancy, Moore Kingston Smith – a top-10 accountancy firm in the UK – was recently bought by a Dutch private equity group. For the first time in the UK, it will retain its partnership structure. According to press reports, this may lead to an influx of private equity investment locally, in our industry and in other professional services.
I wasn’t surprised to read this news. In recent years, there has been an influx of private equity money into our industry. In 2022, three top-100 US CPA firms were bought by private equity, and there are reports that “six of the largest accounting firms” in the US are currently in talks.
The appeal of accountancy firms for private equity
The trend is by no means restricted to large firms or to the US. So what are the lessons to be learned?
From the point of view of private equity firms, accountancy firms are an attractive proposition.
Our profession offers high client stickiness, with an expanding client base as we venture into advisory services, cybersecurity, internal audit and other related areas. As businesses become more complex, the demand for our services continues to grow. The accountancy sector also offers numerous opportunities for mergers and acquisitions, enabling private equity firms to establish substantial platforms quickly.
Many accountancy firms find the prospect equally appealing.
The traditional ownership model, where new partners buy out equity, is facing challenges. Younger accountants are often reluctant to take on significant debt, particularly when they are uncertain about committing to a single firm for the next three decades. At the same time, senior partners are seeking retirement options.
These circumstances open the door to alternative funding avenues, such as private equity investment.
It can be an excellent choice. There is currently a huge demand for investment in firms – whether that’s in talent acquisition, technology, the development of new services or the implementation of robust ESG policies. Private equity entities have the financial resources to make all this possible.
And their involvement can have a positive ripple effect on our entire industry, potentially raising standards, expediting innovation and driving substantial investment.
But there are also significant challenges when you take this path.
Challenges of private equity investment
Culturally, it can be very difficult to give up control of a firm which you used to regard as yours, sometimes leading to clashes between old and new management. (This can be true for any acquisition.)
There are also the exit strategies of private equity firms to consider.
More broadly, this trend can create pressure on smaller firms that don’t have the same access to funds, either to sell out themselves – or face falling behind their competitors.
The potential consequences of widespread consolidation within the industry remain uncertain, and there are implications for networks like ours, as well. Specific equity funds may prefer the firms they buy to belong to one preferred network, which may result in a lot of movement.
Is private equity right for your firm?
Whether or not the private equity route is right for your firm is a very personal decision – there is no objective right or wrong. By staying abreast with the big players and deals, you will be well-informed about developments. It is also important to consider your own exit plan.
Think, as well, about the future you wish for your team, because this concerns them too. Selling to private equity can provide many opportunities for them, including a more corporate structure, the chance to belong to a larger group, the opportunity to work for a well-funded firm and more. But be aware that others won’t like the cultural change that accompanies this transition.
Ultimately, if you do go down this route, do your due diligence on potential buyers – and look beyond the financial aspects. Do their values align with your firm’s? Will they respect your knowledge and expertise? Is there cultural alignment?
The success of any purchase will ultimately depend on the answers to these questions.
Join the network
Kreston Global is a network of over 25, 000 people across 160 accountancy firms, in 115 countries. If you are thinking of joining an international accounting network, please get in touch.
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