David Lewis & Mark Edward, BDO - Local Compliance in Global Business

LOCAL COMPLIANCE IN GLOBAL BUSINESS

DAVID LEWIS and MARK EDWARD

Shared Services & Outsourcing Week Orlando FL, 24 March 2010

Copyright © March 10 BDO LLP. All rights reserved.

AGENDA

Brief introduction to BDO

Consequences of non compliance

Local compliance in global business

LOCAL COMPLIANCE IN GLOBAL BUSINESSPage 3

BDO INTERNATIONAL

BDO International is the world’s fifth largest accountancy network

5 46,000Over 46,000 partners and staff world wide

1,000+More than 1,000 offices

115Present in 115 countries

$5.026bnTotal combined fee income of US$5.026bn (as at 30.9.09)

Accountancy 57%

Tax advice 21%

Other 22%

Flexible characteristics of local firms, supported by world-wide network and strength of a global player.

THE LEADING ALTERNATIVE TO ‘BIG-4’

CLIENTS FROM ACROSS THE GLOBE

� Audit, tax compliance and company secretarial for 11 countries in EMEA

� Central audit at SSC in Dublin

� Stat accounts & tax – 20 European countries plus North America

� Currently in transition

� Full scope (including payroll, back office, CoSec, bank signatory etc.)

� 25 EMEA countries

� Stat accounts & tax – all EMEA countries

� Includes FAS 109 / Fin48 quarterly reporting

� BDO local teams work direct with SSCs

� CoSec and local signatories in 95 countries

� Full scope in 21 LatAm countries

� Stat accounts & tax – 65 countries worldwide

� Includes stat audits where permitted

� BDO local teams work direct with SSC

Global

Software

Company

Global

Telecom

Services

Provider

Global

Telecom

Services

Provider

Global

Software

Company

Global

Aviation

Technology

Global

Hotel

Group

AGENDA





THE CONSEQUENCES OF NON-COMPLIANCE

Contents

• Introduction to the study

• What’s the worst case scenario for non-compliance?

• How can that scenario arise?

• In cases of non-compliance by a local company or branch, can the authorities attach penalties to the parent?

• What are the personal liabilities faced by directors?


DIRECT CONSEQUENCES OF NON-COMPLIANCE

• Fines and penalties.

• Interest on late payments.

• Restrictions on business operations.

• Closure of business.

• Fines for directors.

• Imprisonment.


INDIRECT CONSEQUENCES OF NON-COMPLIANCE

• Management time.

• Extra fees to sort out problems.

• Opportunity cost – not concentrating on core activities.

• Management worry.

• Poor track record with local authorities - more likely to get audits in future.

• Sarbanes Oxley.

• Poor credit rating.

• Loss of contracts in the country.

• Loss of global contracts.

• Any more from the floor?


67 COUNTRIES INCLUDED IN ANALYSIS

AMERICAS EUROPEMIDDLE EAST /

AFRICAASIA PACIFIC

Argentina Austria Italy Armenia Australia

BVI Belgium Luxembourg Cameroon China

Canada Bulgaria Malta Cyprus Hong Kong

Chile Croatia Netherlands Egypt India

Colombia Czech Republic Norway Ghana Indonesia

Dominican Republic Denmark Poland Jordan Japan

Jamaica Estonia Portugal Lebanon Malaysia

Netherlands Antilles Finland Romania Mauritius Nepal

Panama Georgia Serbia Namibia New Zealand

Paraguay Germany Slovakia Nigeria Pakistan

Peru Greece Switzerland Saudi Arabia Philippines

USA Hungary Ukraine South Africa Singapore

Venezuela Ireland United Kingdom Tunisia Thailand

Turkey Vanuatu


WHAT IS THE WORST CASE SCENARIO FOR NON-COMPLIANCE?

A A polite letter 0

B A fine payable by the local company / ultimate parent 24

C Imprisonment of directors 21

D Closure of business 11

EA fine payable by director(s) of local company / ultimate parent

11


HOW CAN THIS WORST CASE SCENARIO ARISE?

Wilful or gross negligence, or

fraud

Persistent breaches

Non-compliance

Fine to company

Fine to d

irector

Closure

Imprisonm

ent


WHAT ARE THE PERSONAL LIABILITIES OF THE DIRECTORS (LOCAL AND FOREIGN)?


SUMMARYAs a final summary for our study, we used a traffic-lighting system to show the risk posed by non-compliance in each geographical region. The risk levels were based on the worst-case scenario, and the ease of that scenario occurring.


SUMMARY

• In some countries, non-compliance just means a fine (although sometimes large).

• In others, it can mean the mandatory closure of the business and/or personal fines or imprisonment of directors.

• Often the indirect consequences can be greater in the form of inconvenience and opportunity cost.

The good news

• No respondents mentioned death to overseas directors!

• The worst consequences are usually reserved for fraud rather than error.

You can avoid non-compliance!

• Centrally outsourced compliance delivered locally by a global firm.

• A client portal to provide project management, central control and clear visibility over the status of local filings.

AGENDA





LOCAL COMPLIANCE IN GLOBAL BUSINESSES

• Demographics.

• Common factors.

• Drivers, blockers and enablers.

• The models.

• Issues and solutions.

• Participants perspectives.

• A BDO View.

• Discussion.

23 global companies on a journey

Approaches to local

compliance

The future


23 GLOBAL COMPANIES ON A JOURNEY

0 1 2 3 4 5 6 7 8 9 10

7>20

510-20

25-10

61-5

3<1

Annual revenues £bnParticipants roles

0 1 2 3 4 5 6 7 8 9 10

6>100

950-100

825-50

Number of countries

Global/Regional Head of Finance

Global/Regional Head of Tax

Global/Regional Head of SSC

Heads of accounting or financial reporting

Other


DRIVERS FOR CHANGE

“ We are under pressure from low-cost competitors in emerging economies.”

“ You wouldn’t want to be late filing in Libya.”

“ We want finance to be seen as a business partner, not a business blocker.”

“ The explosion of opportunities in emerging markets means that we are under pressure to set up new companies and the requirements are often challenging our current models.”

COST• Pressure from

investors.

• Pressure from competitors.

RISK• SarbOx.

• History of late filings.

• History of restatements.

• Service provider with SLAs.

• Support the business, not fight fires.

• Front, mid and back office.

SCALABILITY• Fast growth.

• Need standard model.

• Following clients into new territories.

FINANCE ADDING VALUE



• Demographics.

• Common factors.


• The models.



• A BDO View.

• Discussion.


Approaches to local

compliance

The future


ISSUES WITH LOCAL COMPLIANCE

“ Compliance is a necessary pain of the day job.”

“ Aim to streamline process enough so that the remaining functions can be outsourced.”

“ I worry that I don’t know what I don’t know. We no longer have the in-country resources to tell us when the regulations change.”

“ I’m left with one good guy in Finland – and not sure how we’ll cope when he leaves.”

Not strategic

Small scale operations

Opportunities People

Implementing ERP

Variety of local regulation

Small scale operations

Language

Retaining local knowledge

Career progression

Cover

Coordination

Winning new contracts

Payroll

Infrequent processes

Lack of SLA’s

Patchwork of

providers

Fragmented responsibility


MODELS FOR COMPLIANCE

Advantages

• Suits organisations with large operations in each country e.g. manufacturing.

• Local knowledge under control of local entity.

• Sometimes used in larger countries where resources available in-house.

Disadvantages

• Difficult to maintain in combination with a shared service centre.

• Limited career progression.

• Cover for staff absences.

1. IN-HOUSE, IN-COUNTRY

• Finance functions in-house.

• Each country responsible for own compliance– no visibility at centre.

• Companies without SSC’s use this model everywhere.

• Not viable in smaller countries combined with SSC model.

Regional

Local

Global


MODEL 2: LOCAL OUTSOURCING

Advantages

• Addresses continuity issue.

• Apparent low cost outsourcing.

Disadvantages

• No central coordination (or in-house).

• Multiple points of contact.

• No escalation if service poor.

• Lower visibility and control.

• Time demand on management.

“ I have no-one to lean on if the local firm doesn’t perform.”

Regional

Local

Each country appoints local service provider. Usually small local firm.


MODEL 3: CENTRALISED OUTSOURCING, CENTRAL DELIVERY

Advantages• Can be cost effective for larger countries.Disadvantages• Less suitable for smaller countries with one or

less full-time role.• Must be desirable SSC location.• Risk of disruption through staff turnover.

Advantages• Technology provides cost efficiency where

scalable.Disadvantages• Rubbish in, rubbish out – lose sense checks by

local experts.• No local presence for local authority audits• Change in local regulation.

Move the people –employ foreign specialists located at SSC

Regional

Local Direct filings from centre with local authorities

Local in-house specialists employed at

centre

Central processing –e.g. VAT returns

or

Automate – develop software for local processes to run from SSC or processing centre


MODEL 4: CENTRAL OUTSOURCING, LOCAL DELIVERY

Advantages• Local service delivery and local presence.• Global visibility for local compliance issues when

needed.• Central coordination reduces management time.• Defined escalation path.

Disadvantages• Few firms offer full service and global cover.• Complaints about extra fees from some big-4

service providers.

Company Outsourceror

Regional

Local

THE BDO MODEL


Smaller countries East Europe and Nordics

Large West European countries

EXAMPLE OF HYBRID MODEL

EMEA Outsourcer

US

CENTRALLY COORDINATED, LOCAL OUTSOURCING FOR COMPLIANCE AND BACK OFFICE.

COMPLIANCE IN-HOUSE, IN-COUNTRY.REGIONAL SSC FOR TRANSACTIONS.



• Demographics.

• Common factors.


• The models.



• A BDO View.

• Discussion.


Approaches to local

compliance

The future


THE FUTUREFinance as world class, low cost business partner

The drive for standardisation

• Improve quality/reduce cost/reduce risk.

• Facilitate rapid growth.

Focus on streamlining

• Automation of compliance processes:

- tax service centres

- software.

• Local hubs.

• Global or regional coordinated outsourcing.

“ This has the potential to increase the compliance grief.”

“ Key lies with people capability.”

“ Build and get ready for future growth including deskilling – won’t need so many senior employees.”

“ There is a debate on high risk countries such as Brazil and Russia, should they be outsourced or stay in-house.”

“ It will be a mix: fewer staff in payroll and management accounts, more outsourcing of standard processes and outsourcing of statutory accounts preparation.”

“ Now we’ve got the safety net out, we need to be right first time, more times.”


THE FUTURE FOR COMPLIANCEA BDO point of view

Addressing the problems

• Compliance issues not on the strategic roadmap - perhaps they should be.

• The division of responsibility between Finance, Tax and Legal means that local compliance is rarely addressed as a single issue.

• As fewer finance staff are located in country, local regulatory requirements will act as an increasing barrier to change if the issues are not addressed sooner rather than later.

• Managed service providers are increasingly entering multiple new countries through the award of a single contract.

Possible solutions

• Develop clear processes for regulatory compliance. Use the same rigour applied to ‘in scope’ activities for SOX.

• Use web based tools to track compliance and progress with the processes needed to ensure compliance.

• Introduce clear service level agreements between finance, tax and legal?

• If you outsource your compliance functions apply the same rigour that you apply to other aspects of your business: look for suppliers with global reach, adopt a common framework and reduce your number of suppliers.

• Managed service providers should have a compliance roadmap, possibly in alliance with an outside provider, which they can build into their proposals and be ready to execute on contract closure.

“ We’re looking to outsource statutory accounting. It’s the last mile in the journey.”


WHAT TO LOOK FOR IN AN OUTSOURCED COMPLIANCE SERVICE PROVIDER

GLOBAL REACH A global firm with offices in the countries where you operate.

CENTRAL COORDINATION

A single point of contact and a defined escalation procedure.

LOCAL DELIVERY Service from in-country specialists, not from a central processing factory.

GLOBAL EXTRANET For communication and visibility over the status of filings.

FULL SCOPE As well as statutory accounts and tax compliance, you may require payroll, back office accounting, local directors, company secretarial and cash handling services. You may also want tax advice and simply filing the returns.

TRACK RECORD Experience of successful transitions and strong client references.

NO CONFLICTS The group auditor of a listed company cannot provide all the above and you may like to keep another firm free of providing services that would prevent them taking over as auditor.

Where to find out more

• Contact your local BDO office; or

• Contact David Lewis at BDO’s Global Coordination Centre in Reading, UK

• Read our study report - Local compliance in global business

• Visit www.bdo.uk.com and click on services/business outsourcing

DAVID LEWISOutsourcing Director

+44 118 925 8529

[email protected]

David is a director in our Business Outsourcing and Advisory department in Reading UK. He has held various European roles with global businesses including Unisys and Novell and also spent 8 years with Ernst & Young. David has presented on local compliance issues at seminars and conferences in Europe and USA and recently completed a BDO study into how global companies manage local compliance in combination with a shared services model.

Mark EdwardAssurance Partner

301-634-4918

[email protected]

Mark Edward leads the Mid-Atlantic Region’s Outsourced Financial Services Group and BDO’s Baltimore Office. Mark has over 24 years of client service experience with BDO and previously with Deloitte & Touche in London. He has extensive experience in consulting, including strategy, business processes and operational efficiency; internal control analysis; and all phases of financial audits. Mark has authored and co-authored articles for Association Trends and the Journal of Accountancy on Financial Services Outsourcing issues. He is chair of the BDO Counts! task force, the firm’s national community volunteer initiative.