Ernst & Young CEO: 'Re-regulation' and oversight crucial

Editor's note:

In an interview with China Business Weekly reporter Bi Xiaoning, Ernst & Young LLP CEO James Turley shared his views on reshaping regulations, the role of emerging markets in the recovery of world's economy and the accounting firm's response to current economic challenges.

Q: We know that Sarbanes-Oxley Act came out after the Enron scandal. In your opinion, what kind of major reshaping of regulations is likely as a result of the current financial crisis?

A: Without question, we will see some re-regulation come out.

Principles underlying any regulatory changes are how systemic risks are monitored and measured in the daily operation of financial companies.

After the crisis, we may find more financial institutions and even some non-financial companies have chief risk officers or risk committees on their boards.

It's likely that there will be increased regulation of large hedge funds, just as leaders talked about at the G20 summit. It's also likely there will be regulatory changes for rating agencies on their oversight and how they conduct business.

Regulators around the world are talking these things, so we can expect some action from about them in the near future.

It's very positive to see that re-regulation is global. Governments and regulators are working better together across the world than ever before.

Of course, one of the things that regulators focus on is making sure regulatory changes won't squeeze out innovation and entrepreneurship, which are the major drivers for the world to come out of recession.

Q: The Financial Accounting Standards Board recently changed the rules on market-to-market accounting standards to allow companies to use other reasonable methods to evaluate assets. Do you think the change will have an impact on capital markets?

A: In my opinion, it is guidance to help implementation of market-to-market standards, but not substantial change.

This is an extraordinary period - market volatility is extreme and liquidity is highly limited. Companies are frustrated to see current fair values that do not reflect their expectations on the ultimate economic value of these assets.

Despite imperfections, fair value reporting is the best method for providing the levels of transparency that our markets need to function effectively. Any fundamental change to fair value reporting runs the risk of reducing confidence among investors and other market participants, which in turn would restrict the flow of capital.

Q: There have been few initial public offerings around the world and IPOs in China have been suspended. What's the impact of such an economic environment on international accounting firms like Ernst & Young? What will be the competitive landscape of the industry in the near future?

A: The IPO market has largely shut down, not just in China, but all across the world. It has a substantial impact on organizations like us.

According to Ernst & Young's IPO report, first quarter 2009 results show that the global financial crisis has had a deep impact on the IPO market. A total of 50 IPOs worldwide raised just $1.4 billion in capital in the first quarter. Only two deals raised over $100 million. This compares with 78 IPOs worth $2.6 billion the prior quarter.

The recovery of the IPO market will require at least two to three quarters of macroeconomic stability and for confidence to be rebuilt. However when markets open and valuations improve, high quality companies will be poised to take advantage.

In China, Ernst & Young was working on over 100 IPO projects. Before the capital market was shut down, we were one of the leaders on IPO markets and I have confidence that we will remain the IPO leader in China and globally when the market opens up again.

Q: Have you seen signs of recovery? How is Ernst & Young preparing for that eventuality?

A: We are seeing some early signs of recovery around the world, and certainly in China. In my opinion, recovery will commence in the second half of 2009 and it will be a slow recovery.

To prepare, in the short term it's necessary to be with our clients, who need us more in the economic downturn, while managing our people resources more effectively.

We also took some measures to control costs while retaining our key talent. For example, Ernst & Young launched a 20-day unpaid leave of absence program in China in December 2008, which encourages all staff members to take up to 20 days of voluntary unpaid leave by June 30 this year. Recently, we launched another voluntary flexible program, which allow our people to take 40 days off from July 2009 to June 2010 while receiving 20 percent of their usual salary.

There are still many challenges for accounting firms in the coming 12 to 18 months and we prefer to keep our people together to withstand the crisis rather than making deep job cuts in a knee-jerk decision.

In the long run, Ernst & Young will pay more attention to recognizing the needs of people and the shift in capital flows.

(China Daily 06/08/2009 page4)