The FINANCIAL — Grant Thornton International, one of the world’s leading organizations of independently owned and managed accounting and consulting firms providing assurance, tax and specialist advice, plans to increase total revenues from 3.7 billion USD (2010 year results) to 8 billion USD by the year 2015 according to Gernot Hebestreit, Global Leader of Grant Thornton International Ltd.
The company also intends to increase its global market share from 3% to 5%.
Mr. Gernot Hebestreit has been a member of the Supervisory Board of PVA TePla AG since June 19, 2008. He is Global Leader of Business Development and Client Service at Grant Thornton International.
In his exclusive interview with The FINANCIAL, Mr. Hebestreit spoke about Grant Thornton International’s plans for post-soviet countries, as well as further strategies and operations of the company.
Q. In recent years Grant Thornton has become very active in post-soviet countries as new companies and offices have been established in Central Asia. What are Grant Thornton’s goals in regards to this region?
A. When one tries to measure the market share of large audit organizations which operate globally, obviously there is global data available. If you look at the global market, the “Big Four” have approximately 20% share each; 80% of the market is in the hands of the Big Four. Grant Thornton’s share is 3% and we believe that to go forward we need to increase our market share from 3% to 5%. This means increasing revenues from 3.7 billion USD to approximately 8 billion USD by 2015, which is our growth ambition.
One of the markets where we expect to see significant growth is the post-soviet region. When we started with our business plan for the next five years, we looked at the CIS region where we were operating in three out of 12 countries at the beginning in 2010. Today 18 months later we have representations established in 9 out of 12 countries. There are only 3 countries missing where we will establish presence in a couple of years, these are Turkmenistan, Kirgizstan and Belarus.
In terms of absolute growth, when we look at our revenues, staff and number of clients which we have in the CIS region, we are clearly not where we would like to be. At a regional level we expect to grow by at least 4-5 times over the next five years. We expect growth to be over 100 million USD in the region, we expect to add at least 1,500 employees which will increase the number of clients.
Q. All in all, judging from the responses, what are companies’ expectations from their auditors?
A. I classify our clients into two broad groups: in one group you have clients who are only interested in the audit report, for them audit is like a commodity and they do not see the value of audit. Clearly this is where we need to do some education and raise awareness of what an audit can bring to the table.
The second group of clients are our long standing clients as they understand the value of audit clearly. The clients clearly understand that as auditor we understand their business very well, we can compare their businesses to other businesses, there are lots of insights we can offer in terms of where internal control weaknesses are and where improvements are needed, and we can simply bring value to the table which is beneficial for them.
Secondly if you have an audit report from an audit firm which is perceived to be delivering high audit quality really while being in the process of getting external finance, whether it is equity or bank financing, having an unqualified audit from a respected audit firm clearly makes you either more attractive for foreign investment and allows you to raise capital, equity, loans at lower cost. Thirdly, we believe that an unqualified audit report demonstrates a good reputation in business society.
Q. Among your wide spectrum of services offered, which are the most demanded throughout the world?
A. It depends a little bit on economic development in the region and countries. If we look at global revenues today, we still generate 47% from audit and assurance, 25% from tax and advisory each, and another 3% from outsourcing.
Audit is always very stable even in during financial crisis as financial statements always need to be audited and are a stable contribution to global revenues. Advisory business services are very much affected by global trends, so when I look at today’s economy we expect growth of about at least 10% for 2011 compared to 2010. This growth particularly comes from tax advisory and from specialist advisory, valuation services.
In the future we expect all these three lines to make similar contribution. Our expectation over the next five years is that tax advisory and specialist advisory services as a percentage of our global revenues will increase to above 50%. Audit will be declining slightly but not so much.
The audit, assurance VS advisory is often a reflection of the maturity of the economy. In countries with more mature economies assurance services are about 40-50% of total revenues, while advisory services make up the rest. If you go to emerging markets you see that assurance has a much larger percent share in the revenues, sometimes even 90%, that’s simply a reflection of the marketplace.
I would assume that as the Georgian economy grows and more FDI flows into the country, the business community will see more transactions within Georgia and across borders that will generate demand for increased advisory services.
Q. More than 60% of member firm clients are either family-owned or privately held businesses at Grant Thornton. How easy is it to convince small enterprises that audit and consulting will drive their business operations?
A. We have a business market segment. It is easy to make an argument for the consulting side as every client will eventually ask himself – where do I want to get to? I mean the areas where clients and businesses do not have expertise and look for outside expert advice that covers many areas: from the financial aspect of business to risk management, from governance to tax planning, maybe even strategic advice in terms of identifying targets for further growth. The client may believe that he can do it all by himself. He may be able to do it. But he will probably do it less effectively and less fast than it would be possible with the help of qualified outside expert advice. My advice to this client is to look out for the advice available on the market and he will get significant return on investment.
On the audit side it’s more difficult; it’s difficult to convince somebody of the value of audit.
Q. As we know, in autumn 2010 the European Commission launched large-scale discussions on the policy changes related to the audit industry – the so-called Green Paper. These discussions were aimed at focusing on the lessons learnt from the losses incurred due to the global financial crisis. At what stage are these discussions today and what is Grant Thornton’s standpoint on the Green Paper?
A. The European Commission has done all the consultation with all the stakeholders and they had preliminary round table talks a couple of weeks ago. However they have not taken an official position yet. We will be expecting an official position from the commission by November this year. There are some thoughts which are evolving but status quo is not an option so we will see changes. Changes will be seen in terms of auditor appointment processes, mandatory tendering, and restrictive governance.
Grant Thornton International welcomes the Green Paper. I think it’s good to look at not just the auditing profession on the audit market but all the stakeholders which are involved in financial reporting, in capital markets, in regulation. So we welcome the debate, we take a fresh look in terms of the positions which are in the Green Paper, we would welcome stronger dialogue and communication between the auditor and all other stakeholders. Particularly between the auditor and shareholder for example so that the auditor can answer questions of the shareholders and improve communication between auditors and the audit committee of the audited entity, and certainly improve communication between auditors and regulators.
Another area that needs to be changed is restrictive governance where we have certain loan arrangements which require one of the Big Four accounting firms to be the auditors of the entities which have received the loan. Either direct reference to the Big Four or the language that’s currently used interpreting as “the Big Four only” clauses is something we are entirely opposed to, as it is essentially anti-competitive. The Commission agrees. We welcome competition and it should be in an open and fair transfer position.
Thirdly, we believe that there is concern by a number of stakeholders that concentration is too strong in some markets. We certainly look at segments of the markets where we believe there is deep concern that the market is closed for anybody else but the Big Four and even in some markets it’s only one or two of the Big Four companies which provide 80-90% of services in certain market segments. We believe some of the more radical solutions which the Green Paper discusses are not appropriate. For example, we oppose the mandatory audit rotation principle and we also do not believe in third party audit appointments. We would prefer mandatory tendering which is open to all audit firms which are able to provide the very high quality needed by the market.
Q. Grant Thornton is active in making publications about the countries it operates in. Grant Thornton has its publication of the first Doing Business in Georgia. What importance does this provide for Grant Thornton as well as investors?
A. The major aim is to inform investors about opportunities in Georgia and in many other countries. More than 75% of our member firms have published doing business guides for respective countries. We would like to help investors who are considering moving into new territory, providing comprehensive guides which answer the very first questions and from the information included you can make a pre-selection of which countries could suit your business strategy best. There are a couple of parameters which investors have already predefined and use to make assessment opportunities. Our guide supports the expansion of their business plans.
Q. In your opinion what procedures should guide businesses in today’s conditions in order for them to operate properly? What should businesses consider while making financial documentation?
A. There are two lessons learned from the financial crisis. The information being made available by reporting entities is not necessarily meeting investor expectations, investors are seeking more transparency among the business model observing the risks and opportunities as well. The big question is to what extent the auditor can provide the same level of assurance for the kind of information we can give in financial statements. So it’s about financial reporting which investors are looking at. Financial statements are mostly looking backwards and capturing the conditions as they are as of the balance sheet date but the decision making is based on future expectations – where the business is going in the future.
The second thing is: measurements. We have a lot of volatility when it comes to pure fair value measurements applied in financial statements.
Q. Irish businesses are European leaders in promoting women to senior financial management positions, according to a new global survey. The 2011 figures, compiled by accountancy firm Grant Thornton to mark International Women’s Day (8th March) show that 27% of Chief Financial Officers (CFOs) and Financial Directors (FDs) in Irish privately held businesses are women. At a European level, just 16% of women across the EU are in senior financial positions. Across the globe 22% of CFOs or Financial Directors are women. How does Grant Thornton promote women’s engagement in the company?
A. The issue of gender diversity is an emerging issue across the world. Grant Thornton is fully committed to increasing the percentage of women in our organization and I am pleased to say that quite a number of our firms are headed by women, but still we have a long way to go. This is clearly part of our priorities and we held a global conference in the US, we have dedicated a panel to gender diversity where we invited male and female partners for engagement in the topic.
Grant Thornton International, through its International Business Report (IBR), has been surveying the views of PHBs (Private Held Businesses) for 19 years. Its latest study, conducted in December 2010, reveals that 34% of the 6,000 respondents across 39 economies are planning acquisitions, an increase of 8% points on last year.
An altruistic desire to preserve the natural environment remains low on the agenda of businesses according to the 2011 Grant Thornton IBR. Just 36% of businesses globally are motivated to move to more ethical practices by a desire to ‘save the planet’, down from 40% in 2008. However businesses remain focused on the merits of corporate social responsibility (CSR) in terms of building brand, securing key staff and winning future contracts. Globally, 56% of businesses cite public attitudes/brand building and recruitment/retention of staff as the key drivers (alongside cost management) this year, highlighting the importance of public opinion in shaping businesses’ CSR priorities.