Jim Turley is not your average accountant. The chairman and CEO of audit firm Ernst & Young is known to let his hair down a little. For example, a YouTube video shows him running through a gathering of E&Y interns giving out high-fives and firing up the future accountants. One of the things he is most proud of is that E&Y is consistently ranked among the best places to work. He has a reverence for the profession that colors everything he does. His favorite mantras are “quality” and “integrity.” With these guideposts, he’s steered one of the world’s largest professional services firms, with more than 130,000 employees in 140 countries, through some of the most difficult periods in the history of accounting. In his view, the profession has emerged much better for wear.
What are the main challenges in running such a large, global firm?
We face many of the same issues as our global clients—navigating the differing laws, rules, and standards in the multiple countries where we operate. Creating a common, global culture committed to seamless, consistent quality worldwide is incredibly important. Having said that, the most important part of my job is to make sure that every person at Ernst & Young wakes up with a personal sense of right and wrong. Nothing is more important than personal integrity and commitment to quality. It is their personal and professional obligation to speak out when something isn’t right, whether at a client or down the hall.
Another challenge is getting great people in the right quantities in the right places, because local supply and demand don’t always match up. In China, for instance, there is just one licensed accountant for every 10,000 people. By comparison, in India, there is a rich source of skilled talent, probably more than the local market can bear. This makes the mobility of our people important. Longer term, we are also working with local universities in certain markets to encourage more accounting programs.
What do board members need to know about IFRS? How will it change the way they view the audit function, if at all?
The movement toward the adoption of a single global accounting standard worldwide is an important development. IFRS [International Financial Reporting Standards] is becoming the dominant norm as more than 100 countries either require or permit IFRS. The United States can’t afford to be an outlier.
I want to be clear: I’m not calling for convergence. When people talk about convergence they usually mean moving different standards closer together. We need a single standard so that companies are transparent and investors can understand and compare one investment against the other, no matter where the company or investor is located. The trend is clearly heading toward adoption of IFRS, and the United States, along with many other jurisdictions, needs to step on board.
When did the importance of accounting in the corporate governance picture take hold, assuming that pre-Enron there were signals that were not yet felt publicly?
Accounting has always been an important part of the corporate-governance picture, but pre-Enron it wasn’t as publicly apparent. Today, the role of our profession is more deeply appreciated. Within companies, the increased focus on internal controls over financial reporting has cascaded and enhanced responsibilities throughout organizations.
On a deeper level, there’s a greater understanding today that the accounting profession matters a great deal to the global capital markets and to practically everyone. We provide assurance that companies are playing by the rules, whether it’s accounting, financial reporting, or tax rules. We help create confidence in financial data, which is critical for the smooth functioning of the global capital markets.
How has the shift in reporting to the audit committee affected your relationship with clients?
There has been a significant change in the roles, responsibilities, and relationships between management, audit committees, and the auditors. It’s a triangle with audit committees on top, management on one side, and auditors on the other. Audit committees hire and fire us, evaluate our performance, and preapprove every service we provide. In many ways, audit committees act as a surrogate for investors, which is extremely important.
Do you find SOX and its implementation through the PCAOB to have been executed wisely?
We moved to being a regulated profession, and we are much stronger as a result. Independent oversight has enhanced audit quality. A recent survey by the Center for Audit Quality found that more than three-quarters of audit committee members rated overall audit quality “very good” or “excellent,” and 82 percent said it has improved in recent years. SOX has had a positive impact, but sometimes it is used as a euphemism for every new development that arose post-Enron. I don’t believe SOX needs to be changed. Rather, we need to focus on developing common standards and practices across the world’s capital markets.
In the argument over the primacy of a rules-based system like we have, and a principles-based system, which do you think works best and why?
It’s not that easy to suggest that one jurisdiction’s system is better or worse. Rules-based standards like U.S. GAAP are rooted in principles, and principles-based standards like IFRS need definition, so there needs to be some balance. We’ll probably end up somewhere in between, but in either case professional judgment is required and needs to be respected.
What impact has activity in private equity had on your business? Are public companies declining in importance?
Private equity funds continue to be active in the current market, but corporates are actually more active now than they have been in the recent past. Corporate balance sheets are flush with cash, and competition from PE funds, especially on larger deals, is less intense, given constraints in the lending market. Corporates are exercising more rigorous and proactive portfolio management by disposing of non-strategic assets.
Are you worried at all about auditor risk when only four firms audit the majority of public companies?
The risk of losing another major firm, whether at the hand of government or civil litigation, is a genuine public concern with global implications for markets, investors, companies, and the economy. If another firm were to fail, my fear is that the best people —who certainly have choices in life—would leave public company auditing. The business model would be proven unsustainable. There is an ongoing debate in the policy community about whether to deal with such issues proactively or wait until disaster strikes. For the sake of everyone, I would advocate the former.
Quarterly earnings reporting is considered a necessary evil. Based on your experience in countries where quarterly earnings reporting is not required, what do you think?
The issue is really about quarterly earnings forecasts, of which I am not a fan. When expectations aren’t met, it leads to volatility, which isn’t good for anyone. The bigger question, though, is how we handle the fact that investors will soon be able to get a wider range of information on a real-time basis, much of which won’t be subject to auditing. Building trust in the reliability of this information will be a challenge, which underscores the need for rigorous internal controls.
What areas of the world are most dynamic in your business now?
The most dynamic opportunities are coming from such areas as China, the Middle East, the former Soviet Union, India, and Brazil, which are experiencing rapid globalization. Having said that, developed markets such as the United States, the United Kingdom, Germany, France, and Australia are important drivers of our business and look set to continue.