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A graduate of TCD, who trained first as a Chartered Accountant, and subsequently for the Bar, Paul Smith (53) was recently re-elected Managing Partner of Ernst & Young for an unprecedented third term. Feeling brave, and perhaps hoping to catch him unawares, I began by asking Paul Smith if it was true that the partners at Ernst & Young had to change their rules to elect him for a third term and, if so, whether that represents an endorsement of what the firm has achieved under his leadership over the last six years. “Yes, not so much to change our rules, but we had to have - in EU terms - a derogation from our rules, to enable me to be Managing Partner for another three years. My fellow partners were kind enough to do that first of all, and then put me through an election process, to be re-elected. I think it is the first time in our history that we have had a Managing Partner who is going in for a third term.” And is his re-election an endorsement of what the firm has achieved since 2000? “You'll have to ask my fellow partners that because they are the people who make that decision!” laughs Paul. “We have had a successful six years. It is important to remember that it has been a period of very significant turmoil for the profession. Sometimes turmoil equals opportunity. We have grown our business very significantly - more than doubled in size - and have 60% more people working for us. We have added 50% to our partner numbers and there has been a change in the age profile of the partners with almost a third now aged under 40. I don't think there is any doubt whatsoever that the best way to grow our business is to increase the number of good people that we have working with us and to give them boundless opportunities.”

TAX POLICY

Paul's own background is strongly tax. He had a stint working in the United States - “a most amazing country with a most amazing economy” - a time he clearly enjoyed and during which he gained a lot of insight into how American companies operate and the issues that matter to them. As Managing Partner, he has been able to draw on that experience in his dealings with US clients. “Network building is one thing”, he says, “but understanding the things that motivate people is also very important indeed.” Although no longer involved day to day in tax issues, Paul retains an interest in tax and I took the opportunity to ask him for his views on harmonisation in the EU and the importance of Ireland's corporate tax rate policy. “On the corporation tax rate in Ireland I think it is extremely important that we maintain our 12.5% corporate tax rate. That has been the stated policy of all of the Government and opposition parties over the years and I think that coherence around stability in tax policy is absolutely essential for Ireland to maintain, and to continue to attract, foreign direct investment (FDI). Although important, the low rate of tax itself is not the most important thing. The really critical factor is the stability of the policy. “It has been a very important part of creating the business conditions under which we have done terribly well, not just from an EU point of view, but from a world point of view. We talk to politicians and people in Government in all sorts of jurisdictions and we constantly convey that message. So long as we do that and we have good, highly trained people to work we will continue to attract our fair share - and hopefully a lot more than our fair share - of FDI.” On the EU question, Paul says a lot has been done in relation to harmonisation of the tax base, harmonisation of the withholding taxes, exchange of information and so on. “All of that is fine. But it doesn't mean that we have to have the same rates throughout Europe. Not every economist would agree with this - but I think most of the thinking men's economists would say if there is going to be rate harmonisation, it should certainly be harmonisation downwards not harmonisation upwards”, he says.

A BRAVE NEW WORLD

Although the last few years have been turbulent for the accountancy profession, Ernst & Young has enjoyed a period of strong growth under Paul's leadership. The firm's ork has also changed considerably under all of the service headings. “Ten years ago an auditor was a general business advisor. That's not the auditor's job today. An auditor has a very defined role. Clients have very high expectations which we meet - and exceed as often as we can.” I asked him what he thinks of the new Irish Auditing & Accounting Supervisory Authority’s plans to educate the general public about audit, Paul would see that as 'time well spent'. “Auditors would say that clients don't understand what we do. Clients would say their auditors don't understand what they want them to do. That debate tends to focus around fraud and fraud prevention. It shouldn't only be there. There are other issues. On the fraud agenda, there is no doubt that we as auditors can do more with our clients to help prevent and detect fraud. But that is something over and above the normal expectations of what an audit actually provides. We undoubtedly have a strong case to make that we are the people to do it. The question is are we the best people to do it? Will the reward and risk correspond? That's a debate that I think is only starting.”

AUDITOR LIABILITY

Asked whether there is a danger of auditors being increasingly reluctant to take on engagements in 'high risk' sectors and how important it is for Ireland to tackle the auditor liability issue with a view to getting in line with the situation in the UK and elsewhere, Paul challenged the view that some sectors are too difficult to audit. “There are clients that are difficult to audit - not sectors”, he said. “You have to be careful about who your clients are, about 'knowing your clients', and having the appropriate relationship with them. We have lots of processes around this. In the first place our job is to evaluate our engagement with clients to make sure that they are people that we are happy to do business with.” While audit has evolved over the last ten years, progress on the question of auditor liability has been slower. In the UK, Government is moving towards reform. Is it time Ireland did likewise? “There are 'at least three legs’ to this. The first is limited liability partnerships which is a structural issue”. The second is liability caps. The third, and most important, is proportionate liability. All of these have either been carried through, or are in the process of being carried through in the UK. We also should not lose sight of developments in the US, in Australia, and other jurisdictions which are big, robust economies”, he says. Paul suggests that the ICAI has a leading role to play in making the case and says that the right place for Ireland as a whole to position itself is “to say that we have a strong growing economy which is regulated up to the right level but which has a corresponding set of protections in place for those people who are involved in making sure that the economy works properly”. Persuading Government may be easier than persuading other stakeholders - like the investment community and international bodies - if the experience in the UK is anything to go by. I suggested to Paul that the profession's engagement with Government in the Review Group on Auditing, the Company Law Review Group, and so on, has led to greater understanding on both sides. He agrees - but says on this issue there is undoubtedly more to be done.

TAX SERVICES

Another service area in the larger firms that has evolved considerably over the last six years is tax. I suggested that the shift there has been a move away from tax planning services toward selling tax compliance and managing risk. “Yes. The emphasis on compliance is greater for all of the obvious reasons and the emphasis on managing tax risk is now a much more important issue . This is an area where we are working more and more closely with clients all time, not just in Ireland but on a global level.” The Irish Revenue are very proactive in the media in terms of pushing the compliance agenda. Is that reflected internationally? “Yes, I think even more so. I don't want to particularise this but all of the accounting firms in the US have had their woes with the IRS and the Department of Justice and the climate around what is considered acceptable tax planning has changed enormously over a relatively short period. That debate has already taken place in the United States and is ongoing in the UK and I have no doubt that we will hear more of it.” In an environment where there is far more expected of companies and far more expected of their auditors, there have been huge opportunities for Ernst & Young. The firm has enjoyed a period of rapid growth and Paul is quick to acknowledge that their success comes down to the quality and integrity of the people. “We are very proud of them”, he says. One area that has enjoyed particularly strong growth is the Business Risk Services (BRS) business - a lot, but not all of the growth there is around internal audit. Paul expects growth to continue in that area adding that, not surprisingly, technology risk is a significant piece of that business. “The most high profile stuff is around technology risk, technology security, but also technology services in the sense of helping clients who are implementing technology platforms. That's not big IT consultancy contracts - we don't do that. But there is a huge piece where we help our clients manage their technology risks and other risks like financial risk.”

IS IRISH BUSINESS OVER-REGULATED

Almost inevitably new regulations are introduced in order to deal with a situation where something has gone wrong. When things go wrong, confidence falters. But, is there a danger of going too far and that over-regulation might undermine our competitiveness? “I think there is always a risk as the regulatory framework changes that we will do too much. The risk in doing too little is that we will find ourselves or our people or our companies or our institutions operating in an environment where 'bad things happen' and therefore the damage done to our reputation as a place where business is done properly would be very considerable.”

For larger clients, Paul says a lot of the concern about regulation stems not from Ireland but from the United States or other jurisdictions. “If you talk to our big clients the burden of Sarbanes Oxley has been seen to be a very, very difficult thing to come to terms with. As accountants we have to admit that it hasn't done us too much harm. But at the end of the day it is very important that the burden of regulation doesn't destroy our clients or our clients' businesses. So we have to be completely cognisant of that.” “That doesn't mean that we don't have to be careful here. I think our regulation has to be seen to be independent and transparent, and that it is appropriate. Impact assessment is important and that is not always an easy thing to do - particularly where you are moving from one level to another.” Asked about other threats to Irish business, Paul points to the growth in the Irish economy and suggests that the biggest threat is to make sure that we can live up to our expectations and hopes. It is important that Ireland continues to have the right people and the right mix of skills, he suggests. It is also important that we don't price ourselves out of the market. Energy costs are a concern as is our reliance on the services sector. Most important of all is continued economic stability in the wider world because Ireland's economy is so open. “We're very exposed to Europe, we're very exposed to the US. Growth in the United States is strong, growth in Europe isn't as strong. There are big questions about the US economy going forward - deficit, foreign exchange problems - all of those could potentially seriously destabilise our businesses and they would have a very direct effect on small and medium sized businesses here.” " huge piece of our economy is now services driven and those services tend to be the things that people cut back on when things get tough. There is also a huge piece of our economy around construction and a set back there would have a huge ripple impact."

GLOBALISATION

Talk of the global economy prompts thoughts on the globalisation issue. Recently articles in the British media have floated the idea of global partnerships so I asked Paul what is driving that debate, whether there is any merit in the idea, and whether it could even work at a practical level. “The imperative to have a global accounting firm is not driven by a mad rush to size. The imperative is to be able to serve our clients seamlessly and consistently throughout the world, wherever they are. In Ireland, in particular, we are very aware of that because there is so much foreign direct investment into Ireland, and there is also very significant foreign direct investment out of Ireland. And so for our clients, both inward and outward, it is very important to be able to say that the service that you get from Ernst & Young around the world would be consistent, seamless and of a very high level. So it's around quality and to do that, you need a global organisation. You can't do it by just having completely independent firms operating in their own environment. You need to have a global wrapper. And as the regulatory world stands at the moment it isn't really possible to have a global auditing firm but there is no doubt that as time goes by the argument for such structures is likely to grow stronger.” Observers would suggest that regulatory structures do seem to be increasingly aware of what is being done in other jurisdictions, and there does - at least in some areas - appear to be an awareness of the potential benefits of greater alignment. But Paul is not so sure. “There is no doubt that there is globalisation but you need to be very careful and look at what that really means. The United States, being the greatest exporter of capital, is a very prevailing model but it's not the only one. I think we are some way off having a global regulator and I think we are some way off having global accounting partnerships as well. I don't think it's an equation. Global regulator doesn't necessarily equal global accounting firm either. You can see how they become closer together. Having said all of that, there is a great deal that we in Ernst & Young do to ensure that when clients come into this office or go into an office in Kuala Lumpur they would have essentially the same kind of experience. When it comes to service, quality is the name of the game, and everyone in Ernst & Young recognises that quality and knows what we have to do to consistently deliver.”

CARB

Paul was a member of ICAI’s Strategy Review group. Proposals for a Chartered Accountants Regulatory Board (CARB) grew out of the SRG’s recommendations so I asked Paul what he thinks of them. “For us as accountants it is very important that we have a regulatory regime that we can stand over. The proposals coming from the ICAI whilst not entirely aligned with the SRG report, are absolutely right and should be supported … ICAI should be seen to be leading rather than led on this issue.” He also argues that it is important ‘that the members of the ICAI have no barriers placed between them and their Institute’: “I think there was a real concern that the regulatory function was obtruding between the members and the Institute itself or that the Institute found itself unable to advocate, with complete conviction, for its membership as a whole.”