VideoShortly after Daniel Bednar clinched a new job as deputy CFO at Bureau Veritas, CFO François Tardan assigned him to a project that would have left other, less hearty finance executives heading for the door. It was 2004 and companies across Europe were facing a veritable mountain of auditing work thanks to the knock-on effects of the Sarbanes-Oxley Act, not to mention the looming EU deadline to adopt IFRS. Under these conditions, the relationship between companies and their external auditors was reaching a breaking point.
Bureau Veritas, a Paris-based professional services firm specialising in industrial testing and certification, was no exception. Bednar, having recently arrived from an auditing firm, sensed the tension at his new company and how "[Tardan], who does not come from an audit background, was very frustrated with what he considered back then to be pure bureaucracy, requiring things that weren't helping the business."
Bednar's new project didn't just involve repairing the company's relationship with its auditors. He also needed to improve the quality of the audit, as Bureau Veritas' private equity owners were preparing it for an IPO. And he was expected to do all this without letting fees spiral out of control, as they were at numerous other companies.
To shake things up, he first asked PricewaterhouseCoopers — one of the firm's two lead auditors — to re-tender for its business, and then he went looking for a new co-lead auditor (as required by French law), choosing Bellot Mullenbach & Associés, a small, local firm. Bednar also began a multi-year review of the company's financial systems and controls to help streamline the auditing process. This would eventually involve, among other things, rolling out a new ERP system across its offices in 170 countries.
Today, Bednar gives his auditors the thumbs up. "They have really contributed to helping us raise the bar," he says. This was a timely improvement given Bureau Veritas' IPO in October — the first in Europe following the summer's subprime turmoil.
That's not the only reason both Bednar and Tardan are pleased. "Our group audit fees have remained stable," boasts Bednar. "We have been spending a little over €1m every year even though our turnover has grown from €1.3 billion when I joined to more than €2 billion now. That's a 30% reduction despite all the increased regulations. I'm very happy with that."
Not many CFOs can say the same, according to new research from CFO Europe. In a poll of nearly 200 finance executives of medium-sized and large firms from across Europe, nearly 75% said their fees have risen over recent years. And while 49% report that they have been spending an increasing amount of time with their lead auditors — which can be good or bad, depending on the circumstances — 36% said they feel they aren't getting value for money and another 22% are undecided.
Yet while CFO-auditor relationships aren't as good as they could be, they have been worse. When CFO Europe ran a similar survey in late 2004, 28% of respondents said that their relationship with external auditors had changed for the worse over the previous year; in our new survey, only 17% said the same.
However, it was shortly after the first survey was conducted that CFO-auditor relationships were at their frostiest. "2005 in particular was quite difficult," recalls Ken Lever, chair of the financial reporting committee at The Hundred Group, the influential club of FTSE 100 CFOs. Lever, who until last November was CFO of £3 billion (€4 billion) UK engineering group Tomkins, uses the term "standoffish" to describe many auditors as they tried to shift from being their clients' close business partners to a role that included being chief interpreter of all the new governance codes.
What's more, uncertainly over the first-time application of IFRS led to further tensions. As Lever recounts, audit partners felt they needed to rely heavily on their technical departments before answering client queries, often slowing down discussions. "People were learning as they went along," he says. "Your partner became an intermediary [between the CFO and the technical department], which caused all sorts of stresses and strains."
The Rapprochement
But then the new regime turned a corner. "In 2006 we started to mend fences," says Lever. "If anything, relationships had started to improve." Part of the reason, he reckons, was that auditors acknowledged the deterioration of their relationships, having swung dramatically from being "business partners" to "policemen," and began working harder to re-connect with clients. Encouragingly, CFO Europe's research confirms a change for the better — for example, in the 2004 survey, nearly 80% of finance executives felt that the advice provided by their auditors was becoming more cautious; in the latest survey, that was 60%.
Even so, "the relationship will never go back to where it was," says Lever. "The auditors must regret the passing of time when a business relationship was where you sought their advice."
Some CFOs must also look back nostalgically, say auditors. For one thing, "the more complex accounting standards are not as intuitive and remove certain judgements," which require more consultation, says Richard Bennison, head of UK audit at KPMG. It is "inevitable that our clients feel this."
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