THE GLOBAL financial and economic crisis has brought the auditing profession face to face with some of the biggest challenges it has had to deal with during the relatively short history of Slovakia. The companies active in auditing face more demanding analytical tasks which they must fulfil in more effective and efficient ways because prices for their services have been under pressure from clients suffering during the crisis. On the other hand, the need for thorough and professional auditing of financial statements translates into a continuing strong demand for auditing services.
The Slovak Spectator spoke to Zuzana Letková, a partner of the audit department at Deloitte Slovakia, Alexander Šrank, a partner of the audit department at PricewaterhouseCoopers Slovensko and Ľuboš Vančo, managing partner at KPMG Slovensko, about the impacts of the financial and economic crisis on companies engaged in auditing and whether the crisis has changed the level of interest among those who need accurate information on the financial performance of companies.
The Slovak Spectator (TSS): What challenges has the global economic crisis brought to firms active in auditing? Can firms benefit from the current situation?
Zuzana Letková (ZL): The biggest change in the auditing field is the increased risk linked with the role of the auditor. The auditor must, during this time of great uncertainty linked with the financial and economic crisis, correctly estimate various influences on a firm’s financial statements and take these influences into consideration. In concrete terms this means that the auditor has to correctly assess the liquidity of the audited company and the ability of the company to settle its obligations. During this time when banks have made their loan terms stricter and/or parent companies have insufficient or limited finances, some companies have found themselves in a difficult situation. Valuation of some financial assets in periods of a non-existent active market is complicated and the auditor has to assess parameters in the valuation models. Last, but not least, valuation of assets such as real estate during times when there are no comparable transactions in the market is also complicated. Moreover, the auditor must do all these activities in a very effective way because prices of these services are decreasing during the crisis.
Alexander Šrank (AŠ): The financial and economic crisis has been one of the most significant challenges the auditing profession faced in its history in Slovakia. The crisis impacted the business outlook of all Slovak companies. Even businesses with strong balance sheets and in relatively recession-proof segments of the economy such as utilities had to re-assess their business plans, look at the payback periods and returns on their projects much more rigorously than before. Management also had to spend far more time managing credit risk and cash collection as their customers have been impacted and the rule ‘cash is king’ applies in recession as much as ever. Companies in more impacted sectors – construction, automotive second tier and third tier suppliers, and transportation come to mind as well as some segments of manufacturing – have been in some instances fighting for survival, seeing their order books dropping by 30 to 40 percent, often breaching their loan covenants and having to write off their investments in acquisitions made in good times at high EBITDA multiples or even in fixed assets as the cash flows had been fundamentally re-assessed. We have seen some high profile bankruptcies in the country and faced withdrawal of some investors – the latter even among our client portfolio. All this has been relevant already for the 2008 financial statements and you will recall that there had been a lot of uncertainty in the market in the first quarter of 2009. Completing the 2008 accounts was hence difficult both for company management and then while being audited – companies and their auditors had to deal with going-concern issues, impairment tests, receivables and investment write-offs, and restructuring provisions – just to mention the most significant issues.
In 2009, we are starting to see more clarity in the market and there is emerging focus on preparing for the return of growth – but we do not expect this audit season to be easy, far from it. These challenges required auditing firms to raise their game to meet them and caused a lot of additional senior-level time to be spent on audits so our costs are up. The clients in most cases appreciated that, but we also had to demonstrate that we understood the cost pressures they were under.
Ľuboš Vančo (ĽV): Paradoxically, the crisis has brought huge pressure on reduction of auditing services while the risk of financial collapse of companies has increased significantly.
TSS: How would you assess the current interest of clients in auditing services? Has the crisis affected this level of interest and/or your number of clients?
ZL: The interest of clients in auditing services remains strong. Investors and banks as well as other readers of financial statements – particularly during times of economic crisis – want to be sure that the financial statements were thoroughly examined and the role of the auditor is irreplaceable in this area.
AŠ: The interest in our services has in general increased as the companies, their shareholders and banks require and appreciate an objective view of the company’s affairs and of its financial position – for any significant decision you want to start with a solid set of numbers. The leading auditing firms benefit from their wide experience gained from an audit portfolio across the whole of the Slovak economy and from international cooperation – and at the same time they are willing to be firm and rigorous when necessary.
The number of our clients has increased over the last year, but the growth rate was less than in the recent past when the country enjoyed record levels of growth. At the same time there was a marked slow-down in transactions and many companies postponed their discretionary spending projects and this affected the deals and consulting businesses.
ĽV: The interest either in auditing services or the number of clients is not changing significantly.
TSS: Has your company introduced new auditing services or methods in response to the crisis or has the level of interest in some auditing services decreased?
ZL: In general it can be said that the interest of clients in any consultancy services is lower than before the crisis.
AŠ: In the auditing practice, we are primarily focusing on delivering quality and rigorous audits as it is especially important in difficult times. At the same time, many of our clients weathered the downturn very well, focusing on their cost base and using the period of no growth as an opportunity to look at their structures and processes in order to come out from the recession strong. We were able to assist several of our clients through advice and quality assurance on their process-improvement projects. At the same time we have seen some significant further transfers of the back office functions of large multinationals into Slovakia in the shared service centres and these clients are becoming increasingly important to our business in Slovakia.
One of our own initiatives during this period has been to look at the way we train our staff which is a major cost for us - we currently have in excess of 100 students studying for the international ACCA qualification in the firm. We took the training in-house with help from the Czech PwC firm which started with this very successfully two years ago. This way we were able to maintain our training efforts or even to slightly increase them but at a reduced cost. We are now able to offer the trainings in ACCA as well as the CIMA, CFA IFRS Diploma externally, in high quality and at competitive rates.
ĽV: We have not introduced any new auditing services. The interest in transaction consultancy, that is consultancy during the sale and acquisition of companies, has especially decreased. We have expected an increase in interest in consultancy on the restructuring of companies but this has not been fulfilled completely yet.
1. Mar 2010 at 0:00 | Jana Liptáková