Six weeks after Commissioner Barnier's proposals for audit reform were so widely leaked, they were formally unveiled today without the expected dilution that many were expecting after the recent extensive lobbying efforts of the Big 4 Accounting firms, clearly the group with the most to lose.

All the original provisions - mandatory audit rotation; mandatory tendering; the separation of non-audit services; and pan-European authorisation and supervision - are still there.  Mr Barnier told today's 'Times' : "There's not enough competition in the audit market, not enough transparency".

MSI Global Alliance (www.msiglobal.org), which includes amongst its membership mid-tier audit and accountancy firms in most of the EU member states, certainly welcomes the initiative of the European Commission to make proposals to create a more vibrant, open and less concentrated market for the audit of listed companies and to build trust in the independence of the audit profession.

After weeks of speculation and debate based on leaked documents, we really hope that this political debate will now lead to a package of measures that will inspire trust in the audit market through improved competition and greater choice.  That has got to be good for businesses - and it has got to be good for firms that have often felt excluded by the muscle of the Big 4.

The challenge, now, is for all of us to reassure businesses that mid tier firms, particularly those that are part of international groups, do have the breadth of resources to service clients in areas which, in the past, have been the domain of the Big 4.

 

James Mendelssohn (jmendelssohn@msiglobal.org)
CEO, MSI Global Alliance

It has not been a good month for the 'Big 4'.  In the UK, the Office of Fair Trading has referred the audit market to the Competition Commission and in Europe, Internal Markets Commissioner Michel Barnier has floated proposals that would restrict the market share of the Big 4 by introducing a raft of new legislation.

The reaction of the profession - both Big 4 and non-Big 4 alike - has been rapid and fairly predictable.  The Big 4 have mobilised significant resources to combat the proposals.  One of the Big 4, it is reported, now has 60 staff members working full-time to lobby against the proposals.  Others will not be far behind.  And many mid-sized firms outside the Big 4 are working hard to counter this lobbying, arguing that Commissioner Barnier's proposals are exactly what the profession needs.

Many believe that the profession has not covered itself with glory over the last few years. Some of the criticism that the large firms face - and few will forget Commissioner Barnier's description of the Big 4 as "the dogs that did not bark" in the run up to the present financial crisis -  may be fair, but some is misplaced and demonstrates a lack of understanding of the role of the auditor.

Similarly, whilst some mid-sized firms undoubtedly have the resources and competence to take on additional public company work, others may not.  The investment required to broaden the extent of an audit firm's capability is both significant and long term.  And whether it is best achieved by legislation is questionnable.

As with so many arguments that I have put forward about the accounting profession recently, we should be driven by what is in the best interests of the clients.  Of course greater competition means greater choice - and greater choice is almost bound to benefit not only clients, but also the typical high quality firm that makes up the membership of MSI Global Alliance (www.msiglobal.org).

But greater choice is only worthwhile if clients really understand the market and the available options - and if they are not restricted, for example, by banking covenants requiring a Big 4 auditor when, by looking at all other criteria, a smaller firm might be more appropriate.

Clients will only improve their knowledge of the market if the current debate is balanced, fair and open.  Commissioner Barnier's proposals may appear to be anti Big 4 - and there are certainly practical issues in terms of their implementation - but they are not all 'wrong' or 'bad'.  Nor is blatant market intervention to support mid-tier firms necessarily the right way to promote competition.

A balanced debate leading to some form of compromise may well do more to restore stakeholder faith in the auditing profession than one side claiming victory over the other.  'Managed evolution' often leads to better results than a rushed revolution.

 

James Mendelssohn (jmendelssohn@msiglobal.org)
CEO, MSI Global Alliance

 

I had an interesting discussion over the weekend with a recent languages graduate.  She is about to start a Graduate Conversion Course to become a lawyer, and then wants to find a training contract that will allow her to combine her undoubted languages skills (a native English speaker with fluency in French and Russian) with a career in the law.  She assumes that this will be best achieved in a large City firm.

And therein lies the problem.  The combination of the size, culture, and type of clients - and many other factors too - means that for many new graduates starting out on a career in the law, large City firms are not the right solution.

The frustration of many MSI Global Alliance (www.msiglobal.org) member firms - and firms in similar groups that put together strong mid-sized firms with like-minded firms overseas - is that they can offer the graduate that I was talking to exactly what she wants in terms of exposure to international clients, but within a mid-sized firm environment. 

A current challenge is to educate and inform potential clients of the value of using high quality, mid-tier firms with an international link.  It now seems that we should be extending that challenge to embrace students, who need to understand the full range of options before going down one particular career route.

James Mendelssohn (jmendelssohn@msiglobal.org)
CEO, MSI Global Alliance

Many - if not all - professional services firms have made some tough management decisions over the last couple of years.  Staff cut backs, a tighter management approach, pay freezes, and so on.  And, much to the consternation of perhaps superficial observers, partner profitability has, in some cases at least, actually increased despite the downturn.

Firms have, in reality, been doing during a recession exactly what they should have been doing during the boom times as well.  It is all too easy during periods of growth to overlook the failings of 'only average' performers.  The philosophy that such people are 'better than nothing' is woefully inadequate.

Similarly, when the profits are there, management tend to overlook those things that can be a real drain on firms - unfocused marketing; turning a blind eye to failing partner performance; excessive entertaining of the 'wrong' people.  In a recession, such practices get managed more closely.

But this 'recession management culture' comes at a price.  Some would prefer to be a little less profitable and enjoy a more 'comfortable' working environment without the constant pressure to focus on the bottom line.

Amongst MSI Global Alliance (www.msiglobal.org) member firms, I have heard both views expressed.  Some partners would prefer to work hard with minimal 'frills' in the office, maximise their earnings, and then decide at a personal level how they are going to spend their money when they get home.  Others feel that, spending as much time as they do working, they want that time to be at least reasonably comfortable.  And if that means a good level of support within the office, sensible working hours, some entertaining and other 'fun' activities - but with reduced income, that is a price they are prepared to pay.

I am not saying that either approach is right or wrong.  Indeed, there are many scenarios between the two extremes.  My point is a very simple one.  Within most firms, there are partners with different ideas and different expectations.  The challenge for firms moving forward is to have the debate about the route they want to take, to manage themselves effectively to achieve that route, and to bring all the partners with them on the journey.

 

James Mendelssohn (jmendelssohn@msiglobal.org)
CEO, MSI Global Alliance

Who knows what 2011 holds for professional firms around the world?  There is a little more optimism around the place - but not everywhere.

It will be interesting, though, to see how those who do enjoy something of an upturn react to more positive times.  WIll they slip back to the bad old ways of tolerating underperforming partners and staff, and not managing their costs appropriately, or will they maintain the more parsimonious culture that has been forced on many firms during the recent downturn?

Different firms will take different approaches - and that has got to be right.   Some, for example, will want to improve the perceived quality of life within their firms, even if that has a negative impact on profitability.  Others will want to remain lean and mean to maintain their profitability, irrespective of the impact on office life.

The important thing is for firms to take a conscious decision as to how they manage themselves moving forward.  Drift must be avoided at all costs.

 

James Mendelssohn (jmendelssohn@msiglobal.org)
CEO, MSI Global Alliance

The recent Green Paper from the European Commission makes interesting reading.  A large number of good areas for discussion in commendably few pages.  It can be found at : http://ec.europa.eu/internal_market/auditing/otherdocs/index_en.htm

The impact of some of the proposals could be far-reaching and could certainly be significant for the large number of stakeholders that are involved with any sizeable audit.  And yet the discussion period for such an important document is only 8 weeks.

Admittedly, many of the proposals have been aired in the past by different groups and therefore many interested parties already have a view on many of the issues.  But for such an important topic to be rushed through seems a great shame.  Let's hope that the quality of the feedback is good, despite the time constraints.

 

James Mendelssohn (jmendelssohn@msiglobal.org)
CEO, Chief Executive, MSI Global Alliance

Today marks a landmark in British journalism.  Whilst I might be referring to the news that today sees 'The Times' (www.thetimes.co.uk) publishing its 70,000th edition, I am in fact referring to the fact that Edward Fennell, the long-standing contributor to its law section, describes himself as "breaking new ground" by referring to iPhone apps for lawyers!

They're beginning to emerge everywhere - and with the launch next week of the MSI Global Alliance (www.msiglobal.org) iPhone app for lawyers and accountants, we hope to take the lead among the international networks and associations as being the first such grouping to have its directory available as an app.  All exciting stuff, but not the purpose of this blog.

More interesting in today's 'Times' was the comment that many law firms are being criticised for reducing staff and partner numbers drastically whilst, at the same time, allowing partner incomes to rise significantly.

But without wishing to be unduly cynical, why is this such a surprise?  Many law firms were thought to be using the downturn to cull underperforming partners and staff - and indeed to go further by cutting complete departments.  The criticism of firms should not be that they did this - but that they had tolerated such underperformance for so long during the good times.

And the next challenge will be to keep firms lean and mean - and profitable - as and when things begin to pick up.

James Mendelssohn (jmendelssohn@msiglobal.org)
Chief Executive, MSI Global Alliance

News over the weekend of the impending demise of Halliwells, one of the UK's largest regional law firms, was bound to generate a few column inches this week.  When you add to that the beginning of the reporting season for some of the largest firms, it is perhaps not surprising that in today's edition of 'The Times', two of the three leader stories in the business section deal with the legal profession.

David Wighton makes a number of good points.  With the resurgence of the 'Magic Circle' firms, (profits up 10% - 15% after a difficult previous year), some of the second-tier firms have decided that if they can't compete with the 'Magic Circle' firms to win the highly profitable, multinational work, then they need to bulk up, through mergers, to increase their chances of winning other international - if not multinational - work.

But mergers are not always easy things to manage - and that assumes that the firms get to the altar in the first place.  Only this week, the proposed link-up between Simmons & Simmons in the UK and Mayer Brown in the US came to nothing with, I would guess, a frightening amount of potentially charegeable time having been written off.

But there are other options.  Within MSI Global Alliance (www.msiglobal.org), the vast majority of firms approaching us, both law firms and accounting firms, do so because they are looking for broader geographic and technical reach without the loss of independence that is inevitably associated with a merger.

The law and accounting firm network or association route is not right for all firms, but it is certainly an option that should be on the agenda for those mid-tier firms looking to progress to the next level.

James Mendelssohn (jmendelssohn@msiglobal.org)
Chief Executive

Before anyone accuses me of writing melodramatic headlines, let me point out that the headline for this blog has been copied directly from the business section of yesterday's edition of The Times.  In fact, it was the lead story in the business section.

The story is about a leading law firm that expanded rapidly in the North of England through a series of mergers, signed a deal to become an anchor tenant at a prestigious new office complex in Manchester at the height of the market ... and from there it all went terribly wrong.  The administrators were called in on Friday.

No doubt much will be written about this particular firm over the days ahead, but the point that I would emphasise is a very simple one.  The majority of the high quality, mid-sized law firms that join MSI Global Alliance (www.msiglobal.org) come to us when they are looking for geographical or technical reach - and want to achieve this without giving up their independence or putting themselves through the emotional and organisational turmoil of a merger.  Too often, they end in tears.

By the way, I was flattered - but perhaps I should not have been surprised - by the reaction to my previous blog about iPhone apps for lawyers and accountants.  There are clearly many professional services firms beginning to realise that they need to face the brave new world of social networking.  But iPhone apps foe lawyers and accountants?  Surely a step too far - or at least too soon.

I don't think so.  MSI Global Alliance is nearly there.  Watch this space.  We will let you know what reaction we get to our foray into the iPhone app world.

James Mendelssohn (jmendelssohn@msiglobal.org)
Chief Executive, MSI Global Alliance