Finding your place in the market - Mazars - Poland

"Trzeba znaleźć swoje miejsce na rynku"
Interview with Michel Kiviatkowski, Managing Partner of Mazars in Poland

29/05/2009

Gazeta Finansowa of 29 May 2009

Translation from Polish

GF: Does it happen frequently that listed companies conceal their bad results?

Michel Kiviatkowski: At present Mazars Group audits 402 listed companies worldwide, of which 281 in Europe and more than half of its turnover which amounted to EUR 750 million in 2008 is generated from the audit of large, international, listed companies.

Of course, in this context, audit opinions might contain some qualifications or explanatory paragraphs relating to abnormal situations. However, these situations are exceptional and they often reflect attitudes or bookkeeping which deviate from transparency principles.

The auditor plays a role in prevention. For example, Mazars has a strict policy of client acceptance aiming at decreasing any abnormal situations or audit conditions. Furthermore, our audit methodology and assignment frequency allow anticipating any difficulties by implementing alert procedures. The goal is to be able to anticipate problems and inform about them. We always follow transparency rules.

What tools do auditors use to reveal all the losses?

The difference between costs and revenues makes the result of the company. Those results differ from cash flows by accruals (profit = cash flow + accruals). Since cash flows are more logically considered as unalterable, the whole difficulty consists in auditing accruals. If there is any “result manipulation” done by the management, it is most often done through accruals.

The auditor verifies the correct proportion of these accruals to the level of activities and adopted accounting policy.

Many firms use window dressing in their reports i.e. they embellish their financial statements. What are the vital aspects that the investor shall pay attention to when looking through the accounts?

Some choices are left to company managers, it is possible to noticeably overestimate the assets or underestimate the liabilities by those choices. The role of an auditor is to comment on and to validate those choices.

I would advise investors, after having analyzed their strategic interests to invest in a given sector, to assess the financial statements of an entity over several years and to get an opinion on transparency of data supporting its variations.

This transparency, as mentioned before, might sometimes result from diverse interests, some managers have a concept of accounting at the service of transparency and others see it as an instrument which might satisfy other interests.

I would encourage investors to make a check on auditing firms. Nowadays, UE directives impose on auditing firms more obligations concerning transparency. These directives will be soon applicable in Poland (Act of 7 May 2009). Investors will be able to get to know better auditing firms. I would like to make investors aware of risks related to the rotation of auditing firms within the same company. Their presence for too long puts a question mark on the auditors’ independence but a too fast rotation is also a question mark over the transparency and the capacity of the company to be audited.

What are the changes relating to auditors in the context of implementation of the new EU directive (Act on Statutory Auditors and Their Self-Government, Entities Entitled to Audit and Public Supervision of 7 May 2009 entering into force on 6 June 2009)?

The first aim is to become aware of the need for improvement of transparency of auditing firms. Nowadays, many independent auditing firms act under international brands which might be misleading for clients. In fact those independent firms without legal links and joint liability, without consolidated accounts and very often without harmonized audit methodology present themselves as part of international network. Ever-changing requirements in the audit of international groups listed on the stock-exchange, where cash flows do not stop on the country borders, make the role of auditor necessary, just as are audit methods, engagement and responsibility not limited to just one country.

Also Big Four is not spared changes regarding transparency of auditing firms. Of course, these organizations due to the volume of their business worldwide are renowned for dealing with international clients but nowadays these firms do not publish their accounts and are not transparent as to their organization and joint liability.

Since 1995 Mazars has been developing as an integrated group. Mazars is the only group which has published its audited consolidated accounts under IFRS along with all the elements related to transparency.

The application of this directive in the international context progressively requires auditors to choose a positioning line. Some auditors will prefer to stay independent and focus on local clients; others will evolve to become integrated groups of auditing firms able to provide full range of services for international listed companies.