In an interview, Lukas Marty talks about the latest trends in auditing and explains how auditors can advise companies to help them cope with mounting uncertainties regarding market policy.
Confidence that the growth of recent years can be maintained has declined noticeably in many industries and companies. Over the past few months, several different clients have felt the ramifications of trade policy tensions between the US and China, especially. There’s a palpable sense of nervousness in companies’ business dealings with China, plus questions surrounding Brexit terms are adding even greater uncertainty into the system. So far, this hasn’t had much of an impact outside the Swiss financial industry. That could change abruptly at the end of March, though, if the United Kingdom leaves the EU without a deal.
Staying on top of all the regulations in the export industry and anticipating changes in time is getting tougher for smaller companies, in particular. New trade obstacles such as duties and technical trade barriers, distortions of competition caused by protectionist measures in areas including public-sector procurement, sanctions against various countries and differences in data protection legislation are all hurdles that have to be overcome.
In our role as auditors, we can make our clients aware of new challenges. As part of a global network, we have proven specialists at our disposal from many different disciplines. We pay special attention to new risks and how they could potentially impact business models or the recoverability of investments.
Several clients have already revised their business plans. In the case of activities acquired in the past few years, this means that risks have risen in some areas, that targeted synergies could not be achieved as planned and that growth and profitability expectations are now out of step with the original plans upon which the acquisitions were based. If balance sheets still contain any large amounts of goodwill stemming from the acquisitions, the recoverable value needs to be reviewed critically and, where appropriate, written down based on the currently more subdued expectations. Persistently low interest rates might still be helping to prevent more major value adjustments, yet future interest rate hikes wouldn’t just trigger large write-downs on capitalized intangible assets, they could also swiftly reduce the willingness to invest and, in doing so, jeopardize targeted increases in productivity. We help companies by taking a critical look at their management’s assessments and sharing our experience and observations from work with other companies.
2018 was indeed another year of major shifts in the tax landscape. For many companies, changes in tax laws, with the US tax reform leading the way, as well as growing pressure from tax authorities in many countries to tap new sources of revenue presented difficult challenges. Transfer pricing between subsidiaries and group-internal value streams are assessed differently in each and every country. That left its mark in the annual financial statements of 2018. Some of the effects are long-term in nature whereas others are non-recurring and arise at the time changes are made to tax laws or corporate structures.
At the same time, uncertainties regarding taxes have increased. If the Corporate Tax Reform is rejected, numerous corporations in Switzerland would review the situation and that would probably result in more major shifts in business activities. This makes it all the more important that we assess both the impact of changes in tax laws and the practical application of those laws. For that, we call on our tax specialists from KPMG’s global network. We take a critical look at management’s assessments of provisions for tax uncertainty.
Digitalization and swift technological transformation are causing a fundamental shift in how business models, which until just recently were considered forward-looking, are viewed today. This calls for changes and new ideas. Myriad new opportunities can be generated by separating and re-integrating activities, often in association with a change in ownership.
Many companies have made use of the opportunities offered by digitalization, particularly when designing their internal processes. Administrative tasks are often pooled by region, which also means across national borders. Today, however, the focus has moved away from shifting administrative processes to low-wage countries and toward automation. When processes within the company change, the controls also have to be reviewed and adjusted. New, integrated ERP systems offer more opportunities to automate many of these controls as well.
Audit firms have an important role to play in reorganizations of relevant processes and systems. We examine the integrity and correctness of data and processes plus the financial information they generate. We check the adequacy and functionality of new control systems on behalf of our clients.
Low interest rates are still fueling the M&A environment. Many companies are taking this opportunity to review and optimize their portfolio of activities. Companies’ financial organizations are now faced with the challenge of structuring themselves in such a way that they can, on short notice, prepare relevant financial information relating to parts of a business that were not monitored separately in the past and remove this information from the balance sheets. Financial organizations will have to become increasingly agile in order to successfully cope with constant reorganization. Forward-looking, robust financial information is vital to senior management, as it serves both as an early indicator and a reliable management tool.
Our job is to review the reliability of relevant financial information for decision making and give management and the board of directors the assurance they need.
The new regulations governing revenue recognition, accounting for financial instruments and leasing agreements will affect the annual financial statements of companies in different industries to different degrees. The impact on the annual financial statements of many industrials was ultimately minor, however the introduction of these new financial reporting standards was quite time-consuming and costly. Major changes were needed in various IT systems.
We have closely guided our clients through the introduction of the new financial reporting standards, meaning that we assessed the impact of the new standards and checked the accuracy of both the system adjustments and their presentation in the annual financial statements.