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TAX CORNER

Big Four muscle versus other expertise

SOME people think that market rules do not apply to the provision of audit and tax consulting services in Slovakia, as the most expensive providers often get the most business.
Slovak tax advisors and auditors have pointed out that Slovak companies with foreign shareholders often feel compelled to use the services of the Big Four companies - PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche, and KPMG - despite the huge difference in prices charged by these companies and other auditors and tax advisors.
So why do foreign investors choose to pay more? Is their behaviour really irrational?

SOME people think that market rules do not apply to the provision of audit and tax consulting services in Slovakia, as the most expensive providers often get the most business.

Slovak tax advisors and auditors have pointed out that Slovak companies with foreign shareholders often feel compelled to use the services of the Big Four companies - PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche, and KPMG - despite the huge difference in prices charged by these companies and other auditors and tax advisors.

So why do foreign investors choose to pay more? Is their behaviour really irrational?

Firstly, the Big Four companies are known throughout the world, and many foreign investors have already worked with at least one of them before starting their activities in Slovakia. They know how these companies work; their culture, the quality of their services, and they also know what prices to expect. It is natural that they choose one of these audit/consulting companies when they enter a new market, despite the fact that these companies are very expensive.

In addition, the Big Four companies are known as due-diligence specialists. This is one of the reasons why even the Slovak government has used their services, when it sold state shareholdings in Slovak companies. Because most foreign investors begin by doing due diligence, the first tax advisor or auditor they meet in Slovakia is usually a Big Four employee.

Another reason why foreign companies use the services of the Big Four is to ease the process of auditing a cross-border holding company. The fact that the Big Four companies have a global presence gives them a great advantage. In addition, as many Slovak auditors do not speak foreign languages and are not able to audit financial statements prepared under IAS or US GAAP standards, they cannot satisfy the needs of foreign investors.

These are the main reasons why foreign companies often choose the Big Four when entering the Slovak market. Once they are able to orientate themselves in the Slovak market, they sometimes switch to using other auditors and tax advisors with good reputation to achieve a better ratio between the quality of services received and the price paid.

However, it is not easy to find a good local auditor or tax advisor in Slovakia. Unfortunately, the fact that somebody is a licensed tax advisor or auditor does not mean that he or she is a good professional.

The majority of tax advisors and auditors were granted their licenses from 1991 to 1995, including the Big Four companies. Since the law is changing very fast, there is no guarantee that these auditors and tax advisors keep track of the changes.

In addition, one of conditions to obtaining a license is passing an exam that is organized by the Slovak Chamber of Auditors and Tax Advisors. It is natural that tax advisors and auditors are interested in reducing the competition as much as possible, so it is therefore very questionable whether the "right" people are granted the licenses.

It is difficult for companies to find out whether or not they will receive high-quality services, but it is clearly something they care about. Therefore, a good reputation is vital for auditors and tax advisors. One way to find a good tax advisor is to ask a lawyer for a recommendation. As the tax law is interconnected with the commercial law, lawyers are able to find out how experienced and knowledgeable a tax advisor is. Likewise, as the accounting law is interconnected with the tax law, a good tax advisor can be very helpful in recommending a good auditor.

Ultimately, observers often blame the state for hindering market forces with respect to audit services as it forces companies to have statutory audits and pay auditors irrespective of whether they want them. In addition, since the tax law is very complicated, companies are indirectly forced by the state to use the services of tax advisors.

However, things may be looking up. Improving the quality of audit services is partially supported by a new law, which became effective at the beginning of this year. Among other changes, the new law more strictly determines the obligations of auditors, and clearly defines the responsibilities of the Slovak Chamber of the Auditors and Tax Advisors in controlling the quality of the work performed by its members.

The market for audit and tax services in Slovakia is developing, and it can be assumed that it will be similar to the market in western Europe in the future: The Big Four companies will serve clients in the fields in which they are better than others, while other auditors and tax advisors will have competitive advantages in other fields of audit and tax advisory services.

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