• The global economy seems very fragile. How do you think the next few years are going to look?

  The recovery from the financial shocks of 2008 has been neither as strong nor as consistent as many would have hoped. And as we sit here today, the serious sovereign fiscal situations (both current-year deficits and overall debts) are staring the world in the face. This is true of many countries in Europe and of the United States.

  While the economies in emerging markets continue to perform very well, many of the fastest-growing economies are beginning to experience inflationary pressures, which may erode their labor-cost advantages, and are also seeing increasing numbers of corporate scandals. In some places we are seeing increased protectionism. Forecasting the future in these circumstances is a risky business. What is clear is that volatility will be with us for many years to come, and we need to be prepared for it.

  Another thing that is very clear is that the level of interconnection between economies around the world will continue to increase. This will be seen in levels of cross-border trade and cross-border mergers and acquisitions. Financial markets and stock exchanges in emerging economies will embrace global standards of governance and transparency and, as a result, become much deeper and more liquid. And all of this will continue to drive a rebalancing of the global economy.

• You mentioned volatility that will exist in the years to come. What are the implications?

  This is a really important question, because volatility is increasing — both in terms of the frequency of disruptive events and in their magnitude. In some ways, it’s the flip side of the world’s increased interconnectedness. When negative events occur they’re immediately transmitted around the world, increasing anxiety and amplifying the effects of the event.

  In terms of the implications, all companies need to do their best to expect the unexpected. They need to spend time planning for different scenarios — not that they’ll ever predict the future exactly, but they will learn enough to help them to act quickly when the unexpected does occur.

  In any volatile situation, size and strength are much less advantageous than speed and agility. So organizations need to look at how they can become more agile through means such as lowering their fixed costs relative to their variable costs. And of course it pays to diversify; to work across a range of countries and to offer a range of products and services.

• Why are regulators so heavily focused on the accounting profession today?

  As a regulated business, not only in audit, but also in other services we provide, we receive regular ongoing attention from regulators and politicians because of the important role we play in the global economy. Regulators around the world periodically increase their scrutiny of our profession, however, in response to different external events. This was true in the aftermath of the Asian crisis of 1997, of the high-profile corporate failures of the “Enron era” 10 years ago, and of the recent global financial and economic crisis. This increased focus comes about because when negative events occur there is a genuine desire to understand the root causes and to learn what measures can be taken to prevent their recurrence.

  The current increased scrutiny the profession faces began as a focus on the relevance of financial reporting and the role the accounting profession plays. More recently, the debate has changed shape somewhat, and is now focused on questions of auditor independence and skepticism, and auditor concentration. We believe this shift in focus risks missing the more important issues that were being looked at originally.

• So what are your views on the issues regulators are looking at?

  In terms of the relevance of financial reporting, regulators are looking at what information is being disclosed by companies and what audit committees and auditors report to investors. That’s because the world experienced a global financial crisis despite almost every company’s financial statements being fairly stated. So I expect companies will be asked to disclose more information, quantitative and qualitative, about both their historic performance and future expectations. That may include information that is increasingly industry specific, can be more easily tailored by end users, is integrated with sustainability reporting, and is reported in much closer to real time than today.

  On concerns regarding the independence and skepticism of the profession, the principal issues revolve around delivery of non-audit services to audit clients and mandatory audit firm rotation or re-tendering. Regarding providing non-audit services to audit clients, although some regulators might favor restrictions or bans on such services, we think the right approach is to establish a set of services that cannot be delivered by an audit firm to an audit client under any circumstances and a set of allowable services that can be delivered under appropriate approval processes. Regarding mandatory audit firm rotation or re-tendering, the profession and the majority of clients believe that in addition to infringing upon the responsibility of the audit committee, both would have a significant negative impact on audit quality. And, in the case of mandatory re-tendering, would create incentives that could negatively affect auditor skepticism.

• We used to have the Big Eight accountants, then the Big Six, the Big Five and, since 2002, the Big Four. Will that number ever change again?

  I think that the large accountancy-based organizations are now pursuing different strategies, so labels such as the Big Four may be less applicable in the future.

  In terms of the audit market specifically, we certainly support appropriate efforts to promote greater choice for companies in their selection of auditors, as well as to remove barriers to entry, real or perceived, for auditors outside the Big Four. This includes prohibiting “Big Four only” clauses in commercial transactions, as well as criteria that effectively result in the same outcome; allowing alternative audit-firm ownership structures, as long as appropriate controls for independence are in place; requiring independent non-executives; and establishing a proportionate liability limit in combination with a capping mechanism to eliminate market bias toward the Big Four based on their perceived ability to pay large legal claims.

  At the same time, we also believe that there should be contingency planning among auditors and their regulators to reduce the threat of a large firm exiting the market, or to mitigate the impact of such an event and ensure continuity of auditing services.

• As you look ahead, do you see the profession returning to the days of the “one-stop shop,” including IT implementation and outsourcing, strategy consulting, legal services and other services?

  I would expect that different organizations in our profession will adopt different approaches as to the services they intend to offer, much as we are beginning to see today. In many ways it will parallel the fact that some companies choose to buy a variety of services from the same provider, while others routinely seek to buy services from a range of specialist providers that they believe will provide increased value and objectivity.

  We know that some clients prefer a one-stop shop. There are very few service providers able to deliver on a full-scope mandate at a world-class level across the globe, however. And many clients would question the objectivity of the organizations that claim they could. Increasingly sophisticated buyers today are selecting their advisory services providers based on deep competencies and the ability to work together to build deep relationships — core Ernst & Young strengths.

  We believe that the decisions regarding what services Ernst & Young provides should be driven by a careful analysis of several factors. These include the fit of the service with other offerings of Ernst & Young, the revenue and profit growth prospects of the service, the capital requirements for success in the service, and regulatory and other factors that could impact the delivery of the service.

• What impact will demographics have on economic growth and on Ernst & Young? Will it challenge your business model?

  Demographic shifts represent one of the biggest and most powerful forces in the changes we are seeing in the world. The populations of Western Europe and Japan are the oldest in the world, and we are approaching the point when they will be 20 years older, on average, than those in the youngest regions of the world — India, the Middle East and Africa. This generational difference will have an enormous impact on everything from consumer spending, to education policy, to the ability of a country to pay for retirement income and health, to immigration policy. And, of course, this is one of the drivers of expected differences in economic growth rates.

  But just as important as the age differences, there will be continuing changes in the makeup of the workforce in the years to come — across multiple dimensions, including gender, race, ethnicity, religion and sexual orientation. So being an organization that all people want to be part of, and one in which all people can find success, will become much more important in the decades to come.

• How does Ernst & Young try to be that kind of organization?

  We work hard to create a leading people culture everywhere in the world. We’re interested in building relationships with people, not only while they’re here, but also after they leave us — and even before they join us. We want everyone to feel that their time at Ernst & Young has helped them launch or enhance their careers; that it’s helped them grow as people; and that it’s helped them build a great network that stands ready to help them. We focus on inclusive leadership — the ability to leverage the inherent strengths and individual talents of everyone on a team for better business outcomes.

  By doing these things we’re creating a culture that attracts and retains the best people, and helps us providethe best results for our clients.

• After more than 10 years as Chairman and CEO of Ernst & Young, you’ve recently announced your retirement. What are your thoughts on the past decade?

  I’ve announced that I will retire at the end of June 2013, because it’s important to ensure a smooth handover to the man or woman who will lead Ernst & Young next. The search for that person has begun, and we plan to name my successor in the first few months of 2012. What I feel very good about is that we're the type of organization that continually develops large numbers of great leaders, so I see many men and women who could lead Ernst & Young successfully into the future.

  And I have to say it’s been an absolutely fascinating time period in which to lead our organization. I was appointed in July 2001, and over the next few months events took place that in many ways helped to define the past decade, both in the world and in our profession. September of that year saw two very different world events in the 9/11 attacks and China’s accession to the World Trade Organization, and we’ll feel the effects of both for years or decades to come.

  Ernst & Young has had a successful decade — in terms of the share of market-leading companies we are honored to serve, the revenues we are paid, the number of people we employ, and the reputation and brand we have earned. And although the work isn’t yet done, we have accomplished what we set out to do 10 years ago when we decided to become the most globally integrated organization in our profession.

  On a personal level, although every day in this job comes with a pretty long to-do list, all of those to-dos tend to tie back to one thing — making sure that there’s no gap between the values we talk about and the values we live. Throughout my time as Chairman and CEO, I’ve seen my most important responsibility in this way: ensure I set the right tone from the top so that our people have a clear sense of what is right and what is wrong, and are confident that no matter what happens, nothing is more important than their own personal leadership and integrity.

 

 

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