Jörgen, in an IFAC News interview from last August when you became the first independent chair of the International Ethics Standards Board for Accountants [IESBA], you indicated that the board has a clear role to play in responding to the global financial crisis, specifically in terms of helping to restore the reputation of the profession. Since the crisis, regulators and other policy makers have been actively exploring ways to enhance audit quality, including measures to increase the transparency of the audit process and to further safeguard auditor independence. At the same time, we have continued to witness a number of high profile accounting frauds in some jurisdictions. Some have said that the global financial crisis has led to a crisis of confidence in the accountancy profession. How can the IESBA’s Code of Ethics for Professional Accountants [the Code] help to restore the reputation of the profession?

JH: While the profession has not received as much criticism as the rating agencies and banks in relation to the global financial crisis, the profession is certainly not viewed as favorably as it was five years ago and there is still much work to be done. What many people outside of IFAC’s membership may not know is that professional accountants are committed to abiding by strict ethical requirements—the Code presents an internationally robust and comprehensive set of rules and guidelines for professional accountants. However, some accountants may choose not to follow the rules, and therein lies the problem. A relatively small number of accountants commit fraud, but that’s all you hear about in the news, and they end up hurting not only those directly involved, but the reputation of the entire profession.

What can be done about that?

JH: By increasing awareness of the Code and continuing to develop credible, reasonable solutions, we hope that the general public will come to realize that professional accountants are committed to acting ethically and in the public interest, and that fraudulent accountants constitute a small minority.

In some jurisdictions, the ethical requirements in the Code have been written into laws and regulations. However, there are some other incentives to follow the Code, regardless of legal requirements. It is in the best interests of all professional accountants, as members of a highly regarded and trusted profession, to help maintain the reputation of the profession. There are always going to be pressures—from management or potential financial gain, for instance—to stretch or break the rules. The Code includes guidance for professional accountants on how to deal with those situations. We expect that they will choose to do the right thing. Another motivator for firms and individuals to self-enforce the Code is that abiding by the Code can help them improve the consistency of their services and meet the high expectations of clients and employers.

How can the Code help in this way?

JH: As a global set of standards, the Code establishes a recognized benchmark for consistent ethical behavior by professional accountants worldwide. Clients and employers are rightly entitled to expect that professional accountants will act with integrity and objectivity, exhibit appropriate competence, due care, and professional behavior, and abide by the duty of confidentiality in carrying out their roles and responsibilities. Ethics standards can help professional accountants understand and meet their clients’ and employers’ expectations and therefore better serve them.

Do you agree that some of the recent accounting scandals that made headline news such as Olympus in Japan and ERA Mining Machinery Ltd in China were caused by compromised ethics?

JH: First, I should say that I, of course, do not have all of the information surrounding the cases you mention. Much of the information comes from the media. However, even when the news sources are highly respected, they may get the facts wrong or give incomplete coverage of events. While it looks like poor ethics played a role, I think it would be oversimplifying what happened to say that those scandals were caused mainly by a failure of the professional accountants involved to comply with ethics standards. To fully identify the causes would require a deep understanding of the particular facts and circumstances and the complexities of what occurred. At the same time, there is no doubt that those cases have hurt the standing of the profession in many jurisdictions. But it is important to distinguish between legal and ethical issues. Scandals usually become headlines because of suspected illegal activity—but acting illegally is of course very unethical.

Do you believe that ethics is something that cannot be taught, that it is inherent to each individual?

JH: I think most people have a personal code of conduct that they follow and it’s probably determined by how they were brought up, the morals and beliefs that were instilled in them from a young age, etc. I feel that ethical conduct is part of a person’s moral upbringing, so yes, part of it is inherent.

However, codes and rules in general, help the individual to adhere to ethical principles by supporting their intent to act ethically and guiding them in applying general ethical principles with concrete examples. The IESBA Code sets out the fundamental principles, a conceptual framework, and specific prohibitions. All professional accountants must be aware of the parts of the Code or their member body’s Code that are relevant to their work, which will be of help to them when they are facing issues of an ethical nature.

Can you give us a brief update on what the IESBA has going on right now?

JH: We recently released final revised provisions in the Code that address conflicts of interest, breaches of a requirement of the Code, and the Code’s definition of the term “engagement team.” The changes will be effective in 2014.

These projects were closely followed by a number of stakeholders from the regulatory community, and I was pleased that we were able to effectively engage with them through different forums. I was also pleased that we were able to successfully coordinate with the International Auditing and Assurance Standards Board [IAASB] in finalizing our project on the definition of engagement team, as this project was closely linked to the IAASB’s project to revise its International Standard on Auditing 610, Using the Work of Internal Auditors.

In relation to our current agenda, we had our first deliberation at our last meeting regarding the significant comments to our Exposure Draft on responding to a suspected illegal act, our most important project. Certainly, there are a number of challenging issues that respondents have raised. We will work diligently, systematically, and thoroughly through all the responses as we determine a way forward. We also discussed a number of new projects and initiatives at our March meeting.

See more information on the March 2013 Meeting Page, which includes the meeting highlights and a podcast summary. 

IFAC CEO Fayez Choudhury speaks with Michael Cohn of accountingTODAY.com on:

• His priorities and direction for IFAC 
• IFAC's succession plan
• The role of the profession in the developing world
• IFAC's big tent covering small practices to large firms
• The accountant's role in preventing a future financial crisis

The Confederation of Asian and Pacific Accountants (CAPA) has received a World Bank grant for the Program to Strengthen Accounting Capacity in Mongolia, Philippines and Vietnam: Improving Continuing Professional Development (CPD) Systems of National Professional Accounting Organisations (PAOs).

The General Procurement Notice (GPN), Request for Expression of Interest (REOI), including the Terms of Reference, is available on the UN Development Business website (registration required to view the full documents).

The opportunity to respond is open to any suitable organization or firm. The closing date for submission of the REOI is midnight of May 2, 2013 (Kuala Lumpur time).

The procurement is being conducted in accordance with the Guidelines: Selection and Employment of Consultants [under IBRD Loans and IDA Credits & Grants] by World Bank Borrowers—January 2011 (“Consultant Guidelines”).

Small- and medium-sized entities (SMEs) might think that sustainability is only relevant to large companies. Maybe they think they cannot afford to be sustainable, that measuring and managing environmental performance amounts to a costly and unnecessary burden. Moreover their accountants, both those employed by the business (accountants in business) and those providing services to the business (accountants in practice), will tell you it is a hard sell getting SMEs to embrace sustainability. However, SMEs that integrate sustainability into their core business strategy can benefit from lower costs, reduced risk, and new opportunities. And their accountants, typically operating in small- and medium-sized practices (SMPs), can play a key role in their journey.

SMEs and the Benefits of Sustainability

SMEs are crucially important to the health and stability of the global economy: they account for over 95% of all businesses and for the majority of private sector gross domestic product (GDP), wealth and employment creation, and social and environmental impacts. Meanwhile, there is immense pressure on the natural environment and a recognition that finite resources are fast depleting. Today, SMEs are increasingly being faced with pressure to measure and manage their impact on the environment. They are an integral part of the supply chain where there is a growing demand for sustainability management both from customers and suppliers, especially for those SMEs seeking to secure contracts with governments or larger companies. SMEs also need to ensure they have access to the resources they need to be able to continue offer their products and services in the future.

That said, many SMEs may still feel they can delay addressing sustainability issues. Our global SMP poll indicates there are other more urgent issues preoccupying businesses, including economic concerns and keeping up with new standards, prompting sustainability to slide down their list of priorities. This may explain why few SMPs are presently offering sustainability services. But in the longer term, the sustainability issue is here to stay.

The good news is that there is growing evidence that sustainability initiatives, such as those to reduce an SME’s carbon footprint, can also help improve their bottom line. SMEs of all shapes and sizes—for profits and not-for-profits, public or private, across all industrial sectors—stand to yield significant benefits from adopting sustainable business practices. The initial cost of integrating sustainability into the core business strategy, and reporting on it, can be more than offset by cost savings, reduced risk, positive brand association, and the ability to meet consumer, investor, and supplier demand for environmentally conscientious products and services. In this way, the initial cost is more an investment.

Opportunities for SMPs

Accountants working in SMEs can help their employers at each step of the way, from advising on the costs/benefits of behavioral changes aimed at reducing waste, to investment in new equipment and alternate sources of energy, to developing a comprehensive environmental management system (EMS). However, many SMEs lack the capability to this without outside help. They will likely seek the help of someone they trust, their accounting firm, a demand that can generate new revenue opportunities for SMPs. But first SMEs need to know that they can expect assistance of this nature from their accountants.

Given that SMEs are keen to realize the financial benefits of adopting more sustainable practices, a starting point for SMPs might be to offer to help their clients implement the plan-do-check-act method for the control and continuous improvement of processes and products. This advisory service could include improving business opportunities and creating efficiencies, identifying the risks to cash flow that social, economic, and environmental change will present, and ensuring that clients or employers take advantage of the cost reductions, minimize any cost increases, and maximize the potential revenue by adopting business strategies that identify and address those sustainability issues that are most relevant to their particular business circumstances. In addition, SMPs might wish to encourage their SME clients or employers to have an EnviroReady Report, an engagement based on ISRS 4400 that confirms that the business has an environmental management system (EMS) in place that meets the requirements in ISO 14001:2004.

Some accountants might also help SMEs do some form of sustainability reporting, such as the Global Reporting Initiative’s Level C. They could employ a step-by-step approach of making a public commitment to take action, assessing the business’s impact, setting targets for reducing impact, acting to reduce impact, and publishing the business’s policies and actions. Some SMPs are already helping their clients to develop metrics and the systems needed to capture and report on the metrics. If reporting is deemed valuable, SMPs could progressively do more, culminating in getting some form of assurance on what the client/employer reports, perhaps using the IAASB’s ISAE 3000 series of engagement standards, such as ISAE 3410 for greenhouse gas emissions.

Initial Steps in Offering a Sustainability Service

An ACCA report suggests that SMPs take the following steps to ensure they have the prerequisite expertise to offer a sustainability service:

1. Build partnerships—SMPs should establish collaboration with local environmental sustainability experts in order to gain local access to credible knowledge.

2. Gain experience—This begins in the SMP’s own business. Practitioners should review the environmental sustainability of their own business and then use that valuable experience to have rounded, relevant conversations, based on genuine experience, with their clients.

3. Seek information—Practitioners should familiarize themselves with information sources that they could recommend to others or use to broaden their own knowledge.

4. Formalize commitment—Where appropriate, practitioners should formalize their commitment to offering environmental sustainability advice through marketing and awareness raising in newsletters, their documentation, and website.

Ultimately, offering a sustainability service can help SMPs both add value to the services they offer and help their clients/employers improve the way they run their businesses. Applying the same principles to the practice itself can help accountants improve the way they run their own businesses as well. Does your practice offer a sustainability service? If so, we’d love to hear about it. Please describe your experience and any advice you would give.

Public Finance International (PFI) has published an in-depth interview with IFAC’s new CEO, Fayezul Choudhury, which discusses some of his goals as he takes the reins at IFAC and the landscape for public sector accounting.

Translation of IFAC Interview with Ronald J. Baker

Interview von WP StB Andreas Noodt mit Ronald J. Baker[1]

Andreas Noodt

Partner der FIDES Treuhand GmbH & Co. KG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Bremen

Mitglied des Hauptfachausschusses (HFA) des IDW, Düsseldorf

Mitglied des Small and Medium Practices Committee der International Federation of Accountants (IFAC), New York

Ronald J. Baker

Gründer des VeraSage Institute (www.verasage.com), Petaluma, Kalifornien (USA)

Die Auswertung einer Umfrage der IFAC Ende 2012 ergab, dass die Berufsangehörigen in dem bestehenden Honorardruck eine der größten Herausforderungen für kleine und mittelgroße Prüfungspraxen sehen. Für einige Dienstleistungsangebote wie Unternehmensberatung kann das traditionelle Abrechnungsmodell nach Stundensätzen für die Praxis von Nachteil sein. Die wertbasierte Preisbildung, die den Preis hauptsächlich – jedoch nicht ausschließlich – abhängig von der Wertschöpfung für den Mandanten festlegt, anstatt sich ausschließlich nach den Kosten der Dienstleistung oder nach der historischen Preisentwicklung zu richten, könnte dazu beitragen, den Honorardruck zu verringern.

Der US-Amerikaner Ron Baker ist bekannt für sein Bemühen, „die abrechenbare Stunde zu begraben und die Stundenaufschreibung abzuschaffen“. Neben dem Verfassen von sechs Bestsellern hat er das VeraSage Institut gegründet, das sich damit beschäftigt, sog. „professional firms“, zu denen auch Wirtschaftsprüferpraxen zählen, „unabhängig von der Tyrannei der Zeit zu machen“.

WP StB Andreas Noodt, Mitglied des IFAC Small and Medium Practices Committee und als Wirtschaftsprüfer tätig bei FIDES, einer deutschen Mitgliedsgesellschaft der Praxity Allianz, traf Ron Baker kürzlich zu einem Interview. Dieser Beitrag führt in das Konzept der wertbasierten Preisbildung ein, künftige Beiträge werden sich mit deren Umsetzung beschäftigen.

Andreas Noodt: Ron, seit mehr als 17 Jahren bemühen Sie sich weltweit um eine Abkehr von dem Konzept der Stundenabrechnung und der Stundenaufschreibung als Basis für die Preisbildung. Welche Veränderungen haben Sie in dieser Zeit beobachtet?

Ron Baker: Grundsätzlich ist der bisher erreichte Fortschritt durchaus ermutigend. Wir versuchen, eine neue Theorie im Berufsstand zu verbreiten, hier ist in Dekaden zu denken – manchmal auch in Jahrhunderten, wie bei der Keimtheorie in der Medizin –; deshalb bin ich zuversichtlich, auch wenn noch ein langer Weg vor uns liegt. Zumindest befinden sich Stundenabrechnung und Stundenzettel in der Defensive.

Andreas Noodt: In Ihrem neuesten Buch „Implementing Value Pricing: A Radical Business Model for Professional Firms“ schlagen Sie ein neues Geschäftsmodell vor. Lassen Sie uns zunächst über Ihre Definition eines Geschäftsmodells und Ihre Kritik an dem traditionellen Geschäftsmodell der Praxen sprechen.

Ron Baker: Ein Geschäftsmodell beschreibt die Art und Weise, wie Ihre Praxis Mehrwert für die Kunden schafft und wie sie einen Anteil an dieser Wertschöpfung für sich gewinnt; somit ist das Geschäftsmodell untrennbar mit Ihrer Preisstrategie verbunden. In meiner ganzen Berufskarriere wurde das folgende Geschäftsmodell gelehrt, das für mich „der Prüfungspraxis der Vergangenheit“ dient:

Umsatz (Revenue) = Arbeitskraft (People Power) x Wirtschaftlichkeit (Efficiency) x Stundensatz

Diese Theorie hat einige Schwachstellen. Zum einen vermittelt sie den Praxen den falschen Eindruck, dass jeglicher Umsatz gut ist, sobald die Gewinnschwelle erreicht ist. Dementsprechend akzeptiert die Praxis auch weniger rentable Mandanten, die kostbare Kapazitäten der Praxis beanspruchen und damit verhindern, Kapazitäten für die wertvolleren Mandanten zu reservieren.

Zum anderen wurden in den vergangenen Jahrzehnten die meisten Prüfungspraxen aufgebaut, indem die eingesetzten Arbeitsstunden optimal ausgeschöpft wurden – es ergab sich die Pyramidenstruktur. Mit fortschreitender Technologie, vor allem als der Personal Computer Einzug in die Büros fand, wurde die Pyramide zwar flacher. Die meisten Praxen setzen jedoch immer noch Umsatz vor Kapazität und hinken der Arbeitslast und den Kundenbedürfnissen hinterher. Das hemmt Innovation, Kundenservice, Investitionen in Weiterbildung usw.

Zum Dritten konzentrieren sich die meisten Prüfungspraxen auf Effizienz, gemessen an Auslastungsgrad und abrechenbaren Stunden. Schaut man sich jedoch die Statistiken der letzten 70 Jahre an, stellt man fest, dass sich der Auslastungsgrad der Praxen und die Rate der abrechenbaren Stunden in einer relativ engen Bandbreite bewegt haben. Das zeigt, dass – egal ob eine Praxis mit dem Füllfederhalter arbeitet oder Notebooks einsetzt –: sie kann jährlich nur eine begrenzte Zahl an Stunden berechnen. Die Theorie nötigt die Praxisleitung auch zu dem Glauben, Effizienz sei der Schlüssel zum Erfolg für eine profitable Prüfungspraxis. Dies ist nachweislich falsch. Ich bin mir sicher, dass Hersteller von Pferdekutschen ein Vorbild an Effizienz waren, bevor sie durch das Automobil ersetzt wurden. Und was passiert, wenn man effizient die falschen Dinge tut?

Abschließend kommen wir zum Stundensatz. Dem Berufsstand wurde über ungefähr drei Generationen lang beigebracht, dass er nichts als seine Zeit verkauft. Das ist Unsinn, aus einem ganz einfachen Grund – kein Mandant kauft Zeit. Wie können Sie etwas verkaufen, was der Mandant nicht kauft?

Andreas Noodt: In welcher Weise unterscheidet sich Ihr neues Geschäftsmodell? Warum ist es besser?

Ron Baker: Das alte Modell erklärt nicht hinreichend, warum Prüfungspraxen erfolgreich sind. Es zeigt auch keine umsetzbaren Alternativen auf, um die kritischen Erfolgsfaktoren in einer Wissensgesellschaft bzw. in einer Wirtschaft des geistigen Kapitals zu beeinflussen – es ist deshalb suboptimal. Das neue Geschäftsmodell für „die Wirtschaftsprüferpraxis der Zukunft“ ist vorteilhafter:

Rentabilität = Geistiges Kapital (Wissen) x Wirksamkeit x wertbasierter Preis

Gegenüber der alten Theorie hat Letztere viele Vorteile:

• Anstatt sich auf den Umsatz zu konzentrieren, ist die Praxis zunächst gezwungen, sich über die Rentabilität eines jeden Mandanten Gedanken zu machen. Nicht alle Mandanten sind gleichwertig. Viele Praxen könnten beispielsweise 40% bis 60% ihrer Mandanten verlieren und würden trotzdem profitabler arbeiten.
• Zweitens verkaufen Berufspraxen, die wissensintensive Dienstleistungen anbieten, sog. „Professional Knowledge Firms“, keine Stunden. Sie entwickeln und verkaufen – und ihre Mandanten kaufen – geistiges Kapital. Diese Sichtweise ist umfassender, als über das optimale Ausschöpfen von Menschen und Stunden nachzudenken. Apple und Microsoft entwickelten ihren Unternehmenswert nicht dadurch, Stundensätze festzulegen, und ich möchte bezweifeln, dass Steve Jobs und Bill Gates Stundenzettel führten.
• Drittens: „Die Wirtschaftsprüferpraxis der Zukunft“ wird sich auf Effektivität konzentrieren, nicht auf Effizienz. Eine durchschnittliche Praxis hat nicht so viele Möglichkeiten, die Effizienz ihres Humankapitals um weitere 15% bis 20% zu steigern, es handelt sich schließlich um fehlbare Menschen und nicht um Maschinen.

Schaut man sich Studien an, anhand welcher Kriterien Mandanten ihre Wirtschaftsprüfer auswählen – oder feuern –, sind Effizienz und Preis kein Thema. Es liegt fast immer an der herausragenden Leistung – oder dem Mangel daran. Wenn Sie sich auf nichts anderes als die fakturierbaren Stundensätze und aufwendige Wirtschaftlichkeitsberechnungen konzentrieren, können Sie keine herausragende Leistung erbringen.

Letztlich müssen Professional Knowledge Firms erkennen, dass sie Unternehmen sind, die Preise haben und keine Stundensätze. Persönlich würden Sie doch niemals mit einer Fluggesellschaft fliegen, die Ihnen 4 € pro Minute berechnen will – und Ihnen die Rechnung für die Flugzeit nach dem Flug zusendet. Professional Knowledge Firms müssen vorab für alles, was sie tun, Preise festlegen – Punktum. Dafür gibt es keine Ausrede. In Tausenden von Professional Knowledge Firms weltweit – in allen Sektoren: ob Werbung, Rechtsberatung, Wirtschaftsprüfung oder IT – bewegt sich erfreulicherweise langsam, aber sicher etwas.

Andreas Noodt: Könnten Sie Ihr Konzept des geistigen Kapitals noch etwas näher im Zusammenhang mit Wirtschaftsprüferpraxen erläutern?

Ron Baker: Das intellektuelle Kapital eines Unternehmens besteht aus drei Komponenten:

1. Humankapital – die Mitarbeiter, die laut Weltbank 80% des Reichtums eines wirtschaftlich entwickelten Landes ausmachen;
2. Strukturkapital – die Systeme, eigene Software, Checklisten, Ressourcen usw.;
3. Sozialkapital – Kunden, Verkäufer, Lieferanten, Bezugsquellen, Alumni-Gruppen, Allianzen usw.

Diese Komponenten sind die wahren Einflussfaktoren auf die Profitabilität einer Professional Knowledge Firm und nicht die Stunden. Außerdem ist nur das Strukturkapital im Besitz des Unternehmens – Professional Knowledge Firms sind die ultimativen Unternehmen ohne nennenswertes Betriebsvermögen.

Wirtschaftsexperten bezeichnen geistiges Kapital als „non-rival asset“ – dies bedeutet, es ist möglich, Wissen weiterzugeben, ohne dass es sich verringert (beide Parteien besitzen danach das Wissen). Tatsächlich nimmt der Nutzen zu, je mehr Personen das Wissen besitzen und es vermehren. Ein „rival asset“ dagegen kann jeweils nur für einen einzelnen Zweck eingesetzt werden – gebe ich Dir meine Krawatte, hast Du sie und ich nicht mehr. Eine fakturierbare Arbeitsstunde ist ein „rival asset“ – wir können nur eine Sache nach der anderen tun. Als Grundlage für ein Geschäftsmodell ist ihr Nutzenpotential sehr begrenzt.

Andreas Noodt: Was würden Sie denen entgegnen, die behaupten, dass das, was Sie beschreiben, weltweit nur begrenzt angewendet werden kann, dass es eher für Nordamerika, Großbritannien und Australien zutrifft?

Ron Baker: Auch wenn ich zustimme, dass der Wirtschaftsprüfermarkt und die vorherrschenden kulturellen, rechtlichen und geschäftlichen Normen von Land zu Land unterschiedlich sind, bin ich mir sicher, dass Berufsangehörige überall etwas mit dem Konzept des geistigen Kapitals anfangen können und die wachsende Globalisierung des Marktes für Prüfungs- und Beratungsleistungen wahrnehmen. Was die Einzelheiten der Umsetzung eines neuen Modells betrifft, vor allem der wertbasierten Preisbildung, wird man sicher einige Unterschiede feststellen können.

Wir von VeraSage glauben, dass dieses Modell dem alten Modell überlegen ist und es letztendlich ablösen wird. Die Abschaffung der abrechenbaren Stunde und des Stundenzettels ist vielleicht nicht in Reichweite, aber sicherlich in Sichtweite.[2]

Referenzen:

Baker, Ronald J., Implementing Value Pricing: A Radical Business Model for Professional Firms. Hoboken, New Jersey: John Wiley & Sons, Inc., 2011 (www.verasage.com).

IFAC, IFAC SMP Quick Poll: 2012 Round-up. New York: IFAC, 2013 (www.ifac.org/news-events/2013-01/ifac-smp-poll-highlights-pervading-economic-uncertainty-cautious-optimism-and-ke).

The World Bank, The Changing Wealth of Nations. Washington D.C.: The World Bank, 2010 (https://data.worldbank.org/data-catalog/wealth-of-nations).

Zusätzliche kostenfreie Informationen für kleine und mittelgroße Prüfungspraxen, einschließlich weiterer Beiträge sowie die gesamte Ausgabe des Guide to Practice Management for SMPs, finden Sie unter der Rubrik: Resources and Tools im Bereich „SMP Committee” auf der IFAC Webseite (www.ifac.org/SMP).

High-quality internal and external reporting is critical for all organizations. High-quality reports promote better internal decision making and high-quality information is also integral to the successful management of any organization.

Therefore, it is clearly in organizations’ best interest, for their internal decisions and management issues as well as external stakeholder needs, to provide stakeholders with high-quality business reports. The most effective way to accomplish this is to implement effective reporting processes throughout an organization. When done correctly, effective reporting processes ensure that all internal and external stakeholders receive appropriate high-quality business reports in a timely fashion.

Principles for Effective Business Reporting Processes, new International Good Practice Guidance from the Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC), helps organizations enhance their reporting processes. This guidance was written for all organizations, regardless of their size or structure, private or public, to address the need for effective reporting processes to produce high-quality reports.

Professional accountants in business are often involved in the implementation—including design, planning, execution, audit, evaluation, and improvement—of their organizations’ reporting processes. The key issues professional accountants in business need to address when implementing effective reporting processes in their organization are discussed in the guidance.

At the heart of the new guidance are 11 key principles for evaluating and improving business reporting processes (see below). These principles are complemented by practical guidance that outlines the critical arrangements that need to be in place for effective business reporting.

The guidance also includes a limited list of relevant resources from IFAC, its member bodies, and other relevant organizations. It can be downloaded free of charge from the IFAC website.

In a late-2012 poll conducted by IFAC, pressure to lower fees was identified by practitioners as one of the biggest challenges facing their small- and medium-sized accounting practices (SMPs). For some service offerings, like business advisory, the traditional hourly billing model may place a strain on the practice. Value pricing—which sets prices primarily, but not exclusively, on the value to the customer rather than on the cost of the service or historical prices—may be part of the solution to alleviating this pressure.

Ron Baker is known for his quest to “bury the billable hour and trash the timesheet.” Along with six best-selling books, he founded VeraSage Institute, dedicated to helping professional firms become “free and independent from the tyranny of time.” Andreas Noodt, member of the IFAC SMP Committee and practitioner at FIDES, a German Praxity member firm, recently caught up with Ron for an interview. This article introduces the concept of value pricing; future articles will look at the “how to” of value pricing.[1]

Andreas Noodt: Ron, you’ve been pursuing your worldwide quest to bury the billable hour and timesheets for the purpose of pricing for over 17 years now. What changes have you seen in that time?

Ron Baker: Overall, I’m encouraged by the progress we’ve been able to make. We are trying to diffuse a new theory into the accounting profession, which is measured in decades—sometimes centuries, as with germ theory in the medical profession— so I’m encouraged, while admitting we have a long way to go. At least the billable hour and timesheet are now on the defensive.

Andreas Noodt: In your latest book, Implementing Value Pricing: A Radical Business Model for Professional Firms, you propose a new business model. But first let us understand your definition of a business model, and your criticism of the traditional firm business model.

Ron Baker: A business model is how your firm creates value for clients and how you capture a portion of that value, so it’s inextricably linked to your pricing strategies. Throughout my accounting career, I was taught the following business model, which I think of as serving “The Firm of the Past”:

                        Revenue = People Power x Efficiency x Hourly Rate

There are several problems with this theory. First, once firms pass breakeven, it gives them a false sense that any revenue is good. Consequently, they accept low-value clients, taking up a firm’s precious capacity, and preventing it from reserving capacity for its most valuable clients.

Second, the way most firms were built in the last century was by leveraging people hours—the pyramid structure. As technology arrived––especially when the computer hit the desktop––the pyramids began to flatten. Most firms, however, still put revenue before capacity, always playing catch-up to the workflow and client demand. This inhibits innovation, client service, investments in CPE [continuing professional development] etc.

Third, most firms focus on efficiency by measuring utilization rates and billable hours. Yet, if you study statistics going back seventy years, you’d find utilization rates and billable hours are within a very tight range. So, whether firms are using a quill pen or a laptop computer, they can charge only so many hours in a year. The theory also compels leaders to believe efficiency is the talisman of running a profitable firm. This is demonstrably false. I’m sure the buggy-whip manufacturers were a model of efficiency before they were replaced by the automobile. What if you are efficient at doing the wrong things?

Last, the hourly rate. The profession has taught approximately three generations of accountants the only thing they sell is their time. This is nonsense, for a very fundamental reason––no client buys time. How can you sell something the client doesn’t buy?

Andreas Noodt: In what ways is your new business model different? Why is it better?

Ron Baker: The old model doesn’t explain why firms are successful, nor does it offer viable alternatives to leveraging the critical success factors in an intellectual capital economy––it is suboptimal. The new business model for “The Firm of the Future” is more optimal:

                        Profitability = Intellectual Capital x Effectiveness x Value Price

This theory has many advantages over the old one. First, rather than focusing on revenue, the firm is forced to think about the profitability of each client. Not all clients are created equal. Many firms could stand to lose up to 40-60% of their clients and they’d be more profitable.

Second, “Professional Knowledge Firms” (PKFs) don’t sell hours. They create and sell—and their clients buy—intellectual capital (IC). This is a far broader view than thinking about leveraging people and hours. Apple and Microsoft didn’t create the wealth they have by pricing by the hour, and I doubt Steve Jobs and Bill Gates kept a timesheet. Third, “The Firm of the Future” will focus on effectiveness, not efficiency. There’s not much the average firm can do to squeeze another 15-20% efficiency from its human capital, which is based on fallible human beings after all, not machines.

If you study surveys of how clients select—or fire—their accountants, efficiency and price is never mentioned. It is almost always because of outstanding service, or lack of service. You can’t provide outstanding service if you are focused on nothing but billable hour quotas and tedious efficiency metrics.

Last, PKFs need to recognize they are businesses, which have prices, not hourly rates. You’d never fly an airline that tried to charge you $4 per minute—and sent you the bill based on the flight time after the flight. PKFs need to start pricing upfront for everything they do, period. No more excuses. Fortunately, in thousands of PKFs around the world—in all sectors, from advertising agencies to law, accounting, and IT firms—this is beginning to happen.

Andreas Noodt: Would you elaborate on the concept of intellectual capital and discuss it in the context of accounting practices?

Ron Baker: A firm’s IC consists of three components: 1) human capital—its people, comprising 80% of developed countries wealth, according to the World Bank; 2) structural capital—its systems, proprietary software, checklists, resources, etc.; and 3) social capital—clients, vendors, suppliers, referral sources, alumni, alliances, etc. These components are the real levers of profitability in any PKF, not hours. Moreover, only the structural capital is owned by the firm—PKFs are the ultimate asset-less organizations.

IC is what economists call a non-rival asset—meaning you can transfer knowledge and it doesn’t diminish (you both now have it). In fact, it grows in usefulness as more people possess it and add to it. In contrast, a rival asset can only be used for one function at a time—if I give you the tie off my shirt, now you have it and I don’t. A billable hour is a rival asset—we can only do one thing at a time. This is a very limiting source of leverage around which to build a business model.

Andreas Noodt: How would you respond to those that claim that what you describe has limited global applicability, it being suited more to the likes of North America, the UK, and Australia?

Ron Baker: While I accept that the accountancy market and prevailing cultural, legal, and business norms vary from country to country, I am sure practitioners everywhere can relate to IC and recognize the increasing globalization of the market for accountancy services. When it comes to the finer points of implementing the new model, in particular value pricing, then we may find some differences.

At VeraSage, we believe this model is superior to, and will eventually supplant, the old model. Eliminating the billable hour and timesheets may not be within reach, but it is definitely within sight.

The ultimate objective of governance is to ensure the creation of sustainable organizational success and stakeholder value; these are the core elements of every organization that strives to be competitive and sustainable over the long term. Governance in an organization should, therefore, be about more than a compliance exercise designed with the sole purpose of satisfying regulatory requirements. Instead, good governance affects the entire organizational cycle of strategic planning, resource utilization, value creation, accountability, and assurance. Such a holistic approach ensures that governance is not “bolt on” but “built in”—integrated into all aspects of an organization.

Integrating Governance for Sustainable Success, a new report from the Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC), analyzes, through illustrative case studies, how professional accountants in commerce, industry, financial services, education, and the public and not-for-profit sectors support their organizations in integrating governance into the key drivers of sustainable organizational success.

The report uses the key drivers of sustainable organizational success, previously identified in Competent and Versatile: How Professional Accountants in Business Drive Sustainable Organizational Success, as the building blocks for integrating governance in all aspects of an organization. The report also includes illustrative case studies from around the world to provide an analysis of how professional accountants in business support their organizations in integrating governance into these drivers.

Since professional accountants in business are typically involved in the planning, implementation, execution, evaluation, and improvement of governance in their organizations, they are critical to integrating governance throughout an organization. In addition, many professional accountants in business have a responsibility to provide objective and accurate information and analyses to support all of these activities, and may have overall responsibility in governance areas, such as external business reporting. This puts professional accountants in an excellent position to ensure integration of governance throughout an organization—into its very DNA.

Compliance Week - Auditors overseas may soon face a new requirement to look past the specific information they are auditing to better understand the facts they are checking and assure it all tells a consistent story about the company's financial condition.