Q&A with Jim and Mark

The banking crisis, which became an economic crisis, which became a sovereign debt crisis, has at times seemed to be playing out in slow motion. The same can be said for the recovery. But I think in 2013 we just might be turning the corner. Recovery is still patchy of course, and we’ve recently seen blips in the US and the UK. But China looks to have avoided a hard landing, Europe still has big challenges but is in a better place than it was a year ago, and businesses and consumers are starting to spend money again.

Austerity programs versus growth platforms, and fiscal matters more broadly, are likely to continue to be one of the biggest issues throughout the year.

In the last quarter of 2012 we saw the drag on the US economy that the stand-off over the fiscal cliff caused. In the first quarter of 2013, although unemployment and underemployment remain concerns, there are lots of positive signs in the US: many sectors are growing, the housing market has stabilized in much of the country, and stock markets are hitting new highs. This shows that business and consumers are ready for growth again.

Although the US avoided falling over the fiscal cliff, Congress hasn’t resolved fiscal issues such as the sequester, the continuing resolution that provides the budget to keep government running, and ongoing debt-ceiling concerns. All of these are creating uncertainty and acting as brakes on private-sector confidence and economic growth.

The best thing that lawmakers could do in the short term is to get these issues behind them and release those brakes. Whether they can do so is a big if, but it would also allow them to start to tackle longer-term deficit and debt issues, and focus on broader, pro-growth tax reform. These are crucial issues, and ones that I hope we make progress on this year. I think both major parties see the dangers of brinksmanship and the benefits of reform.

We play an important role in tax systems around the world. Our Tax practice is dedicated to helping our multinational clients meet the incredibly complex tax obligations they face. This has become both more important and more complicated in recent years as governments look for additional revenue to rebuild their balance sheets.

We are constantly speaking with tax authorities, and these relationships pave the way for a joined-up approach to solving issues. At the same time, we have ongoing discussions with our clients regarding tax risk. As part of that process, we encourage the consideration of all stakeholders in the business environment that they operate within and the importance of adopting a transparent approach to their tax affairs, operating in a manner consistent with tax compliance requirements.

The heart of the issue about tax planning is that international tax rules today lag the market and how business is practiced today. Changing those rules to reflect the level of globalization that we have today will require the commitment of governments around the world.

You’re right, the regulatory landscape is entirely different today than it was when I took on this role. Over the past decade, we moved from self-regulation to external regulation – and the change has been very positive for the profession.

Today, globally, we are still very much in a post-financial and economic crisis period, where efforts to enhance financial stability, raise revenue and restore investor confidence are top of mind with governments, legislators and regulators.

In the European Union, it’s really still too soon to say what will happen with the Green Paper and other proposals. Member states are divided on some key issues. It’s likely to be well into the second half of 2013, if not beyond, before there is more clarity about the direction of this matter.

The audit profession, the audit committees we serve and our regulators continue to seek measures to enhance auditor independence, objectivity and professional skepticism. We are in ongoing discussions with our regulators worldwide to improve auditors’ reporting and embrace measures that bring greater relevance to our audits.

The US Securities and Exchange Commission (SEC) filed administrative proceedings against five large accountants in China, related to access to work papers in mainland China associated with issuers’ alleged frauds or misdoings.

Accountants are very much caught in the middle between the two governments, since to provide the work papers would violate Chinese laws, contravene the wishes of Chinese regulators and have severe consequences. These proceedings were filed in December and it is very early in the proceedings to know where this will go.

We will cooperate so long as it does not violate Chinese, US or any other laws; and we continue to monitor this matter and to consider alternatives that might be available so long as they have no adverse impact on delivering quality audits in China.

Last financial year our revenue grew about 7%, to US$24.4 billion globally, and this year we’re continuing to see good growth. That said, like our clients, we also have to navigate through a lot of uncertainty.

Our audit base is strong, and we’ve continued to win big clients. Tax has become more complex around the world, so there are big client needs there. Although there have been far fewer mergers and acquisitions in recent years, our Transactions service line focuses much more on all aspects of raising and preserving capital these days. And Advisory is our fastest-growing business, where we think we’re benefitting from having a really focused approach.

As a highly globally integrated professional services organization, we are well positioned to help our clients navigate the changing conditions brought about by globalization, whether it is significant new audit wins or major advisory projects. We are also helping those clients based in the emerging markets looking to expand into developed markets, and conversely, we are working with developed-market clients looking to understand the challenges of operating in an emerging market. Increasingly, we are also being asked to advise clients from emerging markets who want to invest in other emerging markets. As an example, we’ve just set up a China-Africa tax desk specifically to help Chinese clients looking to expand into that continent.

Our business strategy is focused squarely on shaping a culture that motivates employees to go the extra mile, building high-performance teams, and leading to a greater competitive edge.

Globalization presents huge opportunities, but a new breed of manager needs to be able to manage effectively across borders. This requires a shift from a ‘one-size-fits-all’ style of management to one that is more inclusive.

At Ernst & Young, we are always looking at how to increasingly engage our people through empowering them as they move through their careers. We want all employees’ relationship with us – whether they stay three months as an intern or 30 years as a partner – to last a lifetime. In an increasingly networked world, it’s these relationships, connections and experiences that deliver results for our people and our clients.

At the end of the day, though, as an organization, we can only encourage and facilitate. What really creates the great culture at Ernst & Young is our 167,000 individuals working together to make it great.

My main focus is implementing our Vision 2020 plans, which set out how we will fulfill our purpose of building a better working world while doubling our revenues over the next seven years. We’ve developed Vision 2020 over the past few months by taking an in-depth look at how the world is changing and where we see our place in it. We want that place to be as an organization that will set the pace for how the profession should serve both our clients and the public interest with greater relevancy, transparency and professionalism. It’s been a rigorous and fascinating project, involving great thinkers from inside and outside Ernst & Young. Now comes the hard part: over the next two years we’ll put changes in place so that we have the highest-performing teams, delivering exceptional client service, worldwide, and improving every aspect of Ernst & Young by capitalizing on being the most globally integrated organization in our profession. We will do all this, while maintaining our unwavering commitment to quality.

These are exciting times, and I’m looking forward to tackling the challenges ahead.

I feel privileged to have done this job for the past 12 years and to have worked for this great organization for the past 36. It’s for others to judge, but I hope that I’ve helped to steer Ernst & Young through a period that saw some of the biggest changes our profession has experienced and helped it become the most globally integrated organization in our field.

Above all else, I hope people will say that I helped to promote an Ernst & Young culture based on our shared values. That’s always been what I felt was the most important part of what I’ve done, both by emphasizing for our people that nothing is more important than their personal integrity and by setting the right tone at the top.

On a personal level, this has been the most challenging, the most fascinating, the most exhilarating – and sometimes the most exhausting – job I could have hoped for. Looking ahead, I’m confident that Mark is a great choice to be the next Chairman and CEO, and I look forward to watching the next chapter of Ernst & Young’s story unfold.