When I graduated from Istanbul University in 1995, perhaps the most popular profession in the School of Administration was independent auditing. All the well-known auditing firms would visit our school to make presentations on career days and the brochures they left for us would do the rounds of the school. Interesting enough, in the same year the Law on Sworn-In Certified Public Accountancy (CPA) was enacted, thus causing the full certification services to come into force. In conversations with friends, we used to discuss that independent auditing was the best sector to gain experience and that the entry level salaries were better compared to the other jobs in the market even though the working conditions were difficult, especially in the first 2 or 3 years. Another bright sector of the period was banking. Most of my close friends went through challenging interviews and difficult exams to start working in independent auditing firms and the rest started working in various banks. One source of prestige at the time was to present the proudly-carried business card of our independent auditing firm to friends or to other people we met.
This sector, which was inspired by the principles of independence, ethics and integrity and was a source of prestige and pride, received its first major blow from the Enron Scandal in 2001 which deeply shook confidence in the profession's business ethics. The scandal which exploded across the headlines in many media organs around the world did not receive much interest in our country's media. In fact, I remember that, personally, I was really amazed to hear one of the senior managers of Arthur Andersen at the time saying in an interview that we did not need to try to find people to blame and that the Enron scandal was a result of the global economy.
After Arthur Andersen was found guilty, had to pay the heaviest fine to date and was barred from offering auditing services to publicly traded companies in the States, this giant company was shared between other auditing firms. Immediately following the incident, the WorldCom and Global Crossing scandals took place. It is striking that in the same year, the cost of the banks sinking in Turkey's own economic crisis reached billions of dollars and, unlike Arthur Anderson, no penal sanctions were imposed on any of the companies that carried out the independent auditing services for these banks. The Enron scandal led to the enactment of the Sarbanes Oxley Act of 2002 in the Unites States and the financial crisis in Turkey resulted in the "Banking Sector Restructuring Programme" being put into force by the Banking Regulation and Supervision Agency in May 2001. The Principles of Corporate Governance1)are also of particular concern to the auditing sector, especially within the framework of the concepts of independence and ethics. Despite their advantages, these principles (which were implemented by the Capital Markets Board in July 2003 and revised and republished in 20052to reflect the rule of "apply or justify the failure to do so") are still not put into practice by many companies.
On the one hand the sector was being shaken by the crisis and the scandals, whereas on the other hand the new regulations enacted subjected the sector's employees to additional tests. The most striking example of this was the declaration made by the Capital Markets Board, which said that the powers granted to Certified Public Accountants in Turkey by Law No. 3568 were not adequate to offer auditing services to publicly traded companies. The Union of Chambers of Certified Public Accountants of Turkey (TÜRMOB) saw that the auditing power could end up under the complete control of the Capital Markets Board in the long run and brought an action against the Capital Markets Board in February 2008. This meant that the Union of Chambers of Certified Public Accountants of Turkey, who issued the Certified Public Accountancy licence for professional competence, and the Capital Markets Board, who issued the license to offer auditing services to publicly traded companies, were opposing each other. The Council of State resolved the case in favour of the Capital Markets Board. Law No. 3568 had been put into force in 1989 in a manner that also covered Certified Public Accountancy and Sworn-in Certified Public Accountancy. When the regulations and communiqués on the "Full Certification" power of Sworn-in Certified Public Accountants entered into force from 1995, the certification fare tariff announced by the Ministry of Finance in late December every year was used to act as a guarantee of the quality of the certification service.
The Provisional Tax practice, which started in 1999, was actually intended to divide and collect in advance the tax receivables that otherwise would be eroded by the influence of inflation. However, although inflation has stopped and it has been repeatedly promised that this practice would be abolished, it is still in effect. The Provisional Tax practice also conflicts with the matching principle in accounting, as it divides a calendar year into four quarters and causes accounting professionals to go through the same burden four times a year. This practice also causes extended auditing periods. Having to prepare and check the BA / BS forms monthly also takes an incredibly long time for both the executer and the person doing the checking. Since the enforcement of the certification service the responsibilities of auditors has steadily increased. I do not know to what extent this was reflected in the tariff made by the Chamber of Sworn-in Certified Public Accountants. I remember perfectly well that the tariff was strictly complied with in the earlier years. However, in the following years the news spread that with the influence of competition, the prices went below those set out in the tariff. Clients began making such requests. Although the Chamber of Sworn-in Certified Public Accountants of Ankara said that sworn-in certified public accountants who do not comply with the tariff would be monitored, everything went out of control towards the end of 2008. December 2009 marked the first year that the tariff was not published. I do not know whether a tariff still exists – apart from within a few companies that struggle to do their work properly and try to bring quality forward.
The rotation communiqué of the Capital Markets Board which was enacted in 20063 was added to by a subsequent communiqué substantively enacted in 2009. This stated that independent auditing firms with at least 75 employees of auditor and higher position, of which 25 are responsible partner chief auditors, would be exempt from rotation4. This secured the market domination of some companies. As far as I know, no other country has such a practice. I personally think that this approach which says that the clients of larger companies will not be subjected to rotation whereas the clients of smaller companies will be is blatant targeting and causes unfair competition...
Even if we assumed that despite all these developments everything continued to run as normal (!), the price-oriented competitive environment where quality was largely ignored during rotation, coupled with the influence of the economic crisis, played havoc with the sector. Independent auditing prices went down by 50% or more. During rotation, some companies announced tenders for certification services, and changed their CPAs. We heard that some companies announced that they would be offering free supplementary independent auditing services along with their certification services and some others obtained Capital Markets Board licences and shifted business that was subject to rotation to their subsidiary companies as they did not want to lose their old clients. It is up to the competent authorities to prove that this was the case... In such a pricing environment, the shrinkage in the market was maximised when the new Turkish Commercial Code expectations fell off the agenda. And, of course, the companies who were trying to replace their lost independent auditing clients with certification clients started acting very much in conflict with professional ethics by calling each other's clients to say "I will do the same job for you for half the price you are paying now including VAT." As the 140 companies that were subject to rotation had to make their decision by the end of March and the certification agreements needed to be signed by the end of February 2010, the competition for certification services ended in February 2010. Still, we know that many CPA firms found themselves in a difficult position as they lost their clients and some even had to wind up their companies. Sadly, unlike the sector giants, it is not possible for these companies to be aided by special overseas funds in cases of loss...
Let's now move on to the original subject this article aims to cover, the future of the profession.
Currently, we are also watching the developments in the cases where some financing services firms like Lehman Brothers went bankrupt and some others were brought under suspicion due to the global crisis. But, personally, I do not think that this time independent auditing firms will be made to pay a price that would make them disappear from the market. I believe that one of the reasons for that is the fear that if one or two giant companies disappear, the others will become stronger in the world market, which is already becoming a monopoly. On the other hand the new Turkish Commercial Code unfortunately does not seem to be coming in the near future. Even if the Turkish Commercial Code is enacted, I do not think anybody knows how to keep accounting in line with the International Reporting Standards (IFRS), let alone being able to audit approximately 2 million enterprises. It would not be a huge exaggeration to say we would need to declare a mass-mobilisation to do that. This year, there are 23 companies which are subject to rotation. As the agreements are long term, it is clear that the same prices will apply for at least one more year. Considering that there is no significant increase in the number of companies opening themselves to stock market flotation or coming to Turkey with foreign investment,5 we should be able to say that the size of the independent auditing market will remain pretty much the same. Of course, this means a loss for many companies when combined with the drop in the prices. No wonder that such a loss will be made up for by the full certification market. It is not known whether the Ministry of Finance will be publishing the tariff or not. Even if it is published, it has become pretty obvious that nobody is willing to conform to it. This shows that 2011 is pregnant with cut-throat competiton, particularly in the certification market... What will happen to auditor fees then? There will either be a minuscule increase, or none. This is the best-case scenario. Unpaid leaves and dismissals have already started. If the certification services continue to be the way they are now, quality will wither away and the profession will be in danger in the long run. Some friends in the taxation field have already begun sitting the Capital Markets Board examinations due to their concerns for the future... One other thing I am curious to know is whether enterprises will be demanding both these services if the Turkish Commercial Code, which our economy definitely needs, is enacted one day. Wont people ask, "Well, I am already receiving independent auditing services for such-and-such an amount, why should I need certification services?" And what about the Sworn-In Certified Public Accountants? How much longer will they be able to offer full certification services, which require so much responsibility and risk-taking, in return for so little pay?
To be honest, I do not think that the certification service will last for long when it is being so badly damaged. My opinion is that this service will be replaced by the pre-1995 tax consultancy and revision services.
The real danger here is to lose the confidence that is the foundation for this service. Price pressure on the one hand and cruel and non-ethical competition on the other will certainly be reflected in personnel salaries, professional and personal training and investments in advancement. The desire of the graduates of good schools to enter the auditing sector will continue to decrease as they become aware of all this. As a result, quality will unfortunately drop, no matter how much one tries to hide behind the names of the big brands. This means that the companies who have been very pleased so far will become dissatisfied with the services they receive. It would be to their own advantage if companies quickly gave up their price-oriented policy of setting the auditing firms against one another. It is difficult to estimate how much longer the independent auditing firms in the sector can survive this situation by using cost-cutting policies. Everybody is after expansion(!). Thus I believe that the sharp line that was drawn between the auditing and consultancy services after the Enron scandal will dissipate and they will once again converge.
I believe that the transfer pricing service introduced to Turkey in 2007, which is thought to have the same meaning as tax but in reality is something which requires a separate type of expertise and approach, has fine prospects ahead of it. On the other hand, internal control has already started giving signals that without any BASEL II type obligations it will be moving backwards or that its progress in future years will be very slow.
In light of all these developments, I believe that those who focus on what they know how to do well and do not sacrifice their main principles, professional ethics, independence or quality will be happy in the long term. Or this is what I want to believe...
1 For the study on the implementation of the Principles of Corporate Governance in the enterprises traded in the Istanbul Stock Exchange, please see "Yönetim Kurulları için Kurumsal Yönetim Prensipleri (Principles of Corporate Governance for Boards of Directors) / TÜSİAD, July 2010"
2 Kurumsal Yönetim ve Risk (Corporate Governance and Risk), Prof. Dr. Mustafa Aysan, Preface p. 5
3 Communiqué Series X and No. 22 on the Standards of Independent Auditing in the Capital Markets. 12 July 2006