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BUSINESSES FORCED TO ROTATE ACCOUNTING FIRMS EVERY THREE YEARS

Law change hurts audit firms and their clients

A new twist to an audit law that compels businesses to switch audit companies every three years will cause audit firms to lose clients and force companies to expend time and money to work with new accounting firms, auditing executives and representatives from the Slovak Chamber of Auditors said.
"We don't agree with it on our side," said Mark Dobson, senior manager for international audits for Ernst & Young's (E&Y) office in Bratislava, "and [our] clients are against it because they are used to working with someone. It's like chopping and changing, so to speak."
Added to a 1992 audit law, the amendment mandates that businesses operating in Slovakia - foreign and Slovak - must change their accounting partner every three years. The provision's proponents say it is necessary to prevent corruption in performing audits, citing the potential for too cozy auditor-client relationships.


"We clearly were very agitated about it [the new law]. We lost the most from it."

Gavin Flook, Senior audit manager at D & T


A new twist to an audit law that compels businesses to switch audit companies every three years will cause audit firms to lose clients and force companies to expend time and money to work with new accounting firms, auditing executives and representatives from the Slovak Chamber of Auditors said.

"We don't agree with it on our side," said Mark Dobson, senior manager for international audits for Ernst & Young's (E&Y) office in Bratislava, "and [our] clients are against it because they are used to working with someone. It's like chopping and changing, so to speak."

Added to a 1992 audit law, the amendment mandates that businesses operating in Slovakia - foreign and Slovak - must change their accounting partner every three years. The provision's proponents say it is necessary to prevent corruption in performing audits, citing the potential for too cozy auditor-client relationships.

It is still unclear whether the measure, drafted by officials at the Ministry of Finance and passed by parliamentary deputies last November, will be retroactive or will come into force in October 1999, though representatives at the Slovak Chamber of Auditors, who oppose the measure, interpret the latter as being true.

But chamber representatives also said the concept of rotating auditors virtually has no precedent. "This example just dosn't exist in Europe, except for in Italy where it's nine years," said Richard Farkáš, the chamber's liaison with the Ministry of Finance and a partner with the international accounting and consulting firm KPMG Slovensko.

Slovak audit firms, also opposed to the amendment, are especially afraid that three years will not be enough time to recoup lost business. "It will be quite difficult," said Hana Lečková, the director of the audit firm Ace Centrum in Považská Bystrica. "I have 70 clients now, and new clients don't come quite so often. I cannot change clients that quickly."

Lost employees and money

One reason why audit firms dislike the new law is that it could cause their employees to leave and sign on with a new company that takes over the paperwork. This already happened at the international accounting and management consulting company Deloitte & Touche (D&T), which was forced to yield many of its biggest clients in industries that were already internally regulated, such as in the commercial banking, investment funds and insurance sectors.

The firm was hit hard when the law passed, because one-third of its audit workforce specialized in those industries. People "followed where the work went," said Gavin Flook, a senior audit manager at the firm. "A number of people took that route."

At that time, 20 percent of D&T's total audit work focused on the financial sector, Flook recalled, estimating that the firm lost $250,000-500,000 "when we could have been serving other clients."

D&T lost such valuable customers as Slovenská Sporiteľňa (picked up by E&Y), Slovenská Poisťovňa, and investment funds VÚB Invest and VÚB Kupón. "We clearly were very agitated about it [the new law]," Flook said. "We lost the most from it."

Businesses to lose

Businesses will also lose out economically, although the bulk of the costs are intangible. For example, as Flook pointed out, companies' finance and accounting managers will need to spend a lot of time cultivating new relationships with the new auditors and explaining the company's bookkeeping to them. "It's economic in as much as time has a value," Flook said.

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