Controversy dogged accounting firm Grant Thornton last year when the former managing partner of its Hong Kong member firm, the well-connected Gabriel Azedo, inexplicably disappeared. A slew of clients sued Azedo and Grant Thornton, alleging that money they entrusted to the accountant and his accounting firm had been stolen. Azedo has not been found until today, though there are reports he had gone to ground in Brazil.
In Accounting War, Grant Thornton Strikes Back
By coincidence, Alex MacBeath, the member of Grant Thornton International’s global leadership board with responsibility for strategy in Asia Pacific, was in Brazil when CFO Innovation caught up with him. Was he, perchance, out to dinner with Azedo? “I doubt that very much,” MacBeath shot back to gales of laughter.
CFO Innovation’s Cesar Bacani spoke to MacBeath to clear up a new kerfuffle, this time arising from reports that BDO, a rival accounting firm, will be absorbing more than 500 partners and staff of Grant Thornton Hong Kong. It is true that the original firm has been asked to leave the Grant Thornton network, MacBeath confirms, but Grant Thornton is definitely not withdrawing from Hong Kong. A new Hong Kong firm has been set up, one that will be closely integrated with Grant Thornton’s member firm in China – and that new firm has been getting feelers from partners and staff that are supposedly all set to jump over to BDO.
Below are excerpts of the interview where MacBeath discussed the firm’s new strategy in China, why the firm formerly led by Azedo was asked to leave, and other issues.
I wonder if you can walk me through the thinking at Grant Thornton International about integrating the Hong Kong and China firms.
Our clients are increasingly regarding China as a single market and they are driving us, and I think will drive other firms, to an integrated approach to the China market. It’s not about one firm controlling another firm. It’s really about firms working together closely, being strategically aligned and serving the client seamlessly across the market.
Whether or not they are separate legal entities is not as important as the fact that they work together in a seamless way. They must cooperate. Even though they may be separate legal entities, they must be integrated strategically and they must work in a very seamless way with clients. We think that is what is going to be successful in China. That’s what our clients are expecting of us, and we expect that many other firms will end up going in that direction in the fullness of time.
It wasn’t possible under the old structure, where there’s an independent Grant Thornton Hong Kong and a Grant Thornton China, to have this seamless integration?
I think a number of the senior partners in the [previous Grant Thornton Hong Kong] understood that. A number of senior partners believed [integration] was the right strategy to go forward. But as a group the firm [in Hong Kong] was unable to agree, unable to work in a cooperative way with the firm in PRC.
We [at Grant Thornton International] will make the decision [on whether to retain a member firm in the network]. Sometimes it’s a tough decision, sometimes they cause some short-term losses, but our focus is on long-term strategic growth, on meeting the needs of our clients in the long term. So we made the difficult decision to ask the firm [in Hong Kong] to leave and we established a new firm in Hong Kong, which includes a group of staff from the former firm.
So it was as much a people issue as it was a structural issue?
Yes, it was. At the end of the day it came down to the partners in the firm not being able to agree on how to work with the firm in PRC. And because it was so important, we needed to make a change and that’s why we [asked the old Hong Kong firm to go].
Your new Hong Kong firm, Jingdu Tianhua Hong Kong, will not be a legal independent entity as the old firm was? It will be a branch office of the China firm?
It’s a separate legal entity because that is required for administration purposes. CPAs must be licensed in Hong Kong. But it will be integrated strategically and will have a similar overall governance structure and so on [as Grant Thornton China]. They [Hong Kong and China firms] will act and operate and practice as if they were a single firm, although for legal requirements, for professional requirements, there needs to be a separate legal entity in Hong Kong.
This new firm will have an audit practice, a tax practice, an advisory practice, and it will be strategically aligned and work very closely with our PRC firm. The overall board will include partners in Hong Kong and partners in PRC. In total, we will have over 65 partners, over 1,500 staff serving [the China] market and we think we have established a very strong platform going forward.
We expect the firm in Hong Kong to grow very quickly. We’re adding partners, we’re adding staff, we are in negotiations with different resources to join the firm. They will have a very strong say and be very strong participants in any governance and management structure.
In my experience, in other countries and the United States, where there’s 40 offices, they work very well together, they cooperate together. There’s a central structure with representatives from all the offices on it. It would be a similar situation in Hong Kong and China.
How big is Jingdu Tianhua Hong Kong at this point? I hear they have only 30 people.
It’s more than that. I can’t tell you the exact number today because some people who have already said they will join have not joined because of a notice period. We expect to have about 150 people by spring of next year and grow from there.
The people from the old firm who may want to join you, will they retain their seniority and benefits and salaries as BDO is promising?
Yes, that will be correct. We respect people that want to stay with the old firm, and we also respect and welcome any that want to join our new firm.
So there are people from the old firm opting to join the new firm.
In fact, the five founding partners of the new firm had all been part of the former firm. There are staff that have left and joined the new firm. We continue to receive inquiries from staff from the old firm. And we are receiving inquiries from staff in the marketplace who see this as a real opportunity, who see this is the way forward, who see that Grant Thornton is committed to growth in China and look for opportunities to work with us.
We’re receiving calls from many clients that want to stay with this firm, want to stay with Grant Thornton, really appreciate the ability to be served in a seamless way, really do expect and want to have access to the 60 partners and 1,500 staff that we have in the PRC. So we have been quite active and receiving a lot of phone calls over the last month.
Hong Kong is a very tight market in terms of accounting talent, so I imagine there’s a lot being done just to entice people to from the old firm to join the new team.
We’re not doing anything special. We always operate in a very professional way. Partners and staff of the old firm, and many in the marketplace, are quite aware of Grant Thornton and the strong brand that we have. They know the partners of the new firm. If they express interest and call us, we will welcome them to join the firm. We will always act in a very professional way and with respect to partners and staff in the old firm.
DOWNGRADING HONG KONG
Hong Kong as part of a ten-city China accounting firm – it just seems that it’s being downgraded to being just another Chinese city.
I do appreciate that sensitivity. I do appreciate that concern can be there. I think what needs to be kept in mind is that Hong Kong is a very important market. Hong Kong is a major financial centre. Often the deep expertise, the experience lies in Hong Kong, in working with listed companies and working with SEC-registered companies in the U.S., working with companies that are listed in other changes whether in Singapore or elsewhere.
They have tremendous experience in Hong Kong and what they do is they add tremendous value. They influence what goes on in PRC. So it would be really incorrect to say that Hong Kong has become just another office of PRC. It will have a real influence and real experience and partners who are used to working with companies and clients that operate many jurisdictions. It’s very much two firms working together, partners working together, people working together that’s important.
Have you decided on the actual structure, governance council and so on?
That’s going to be worked out by the firms [in Hong Kong and China]. We don’t dictate that to individual firms. What we [at Grant Thornton International] work to ensure is that firms are working together, that clients are getting served in a seamless way. But I do know that Hong Kong partners will have a very strong influence in everything going forward.
They will be able to make independent decisions in Hong Kong. They will make independent decisions about hiring staff in Hong Kong, in client acceptance in Hong Kong. What is important is that there will be similar strategy; the standards, the values will be similar across the entire market.
Hong Kong is a large important market. But when it comes to serving clients that work in both Hong Kong and China, it’s critical that the two firms act together as if they were a single firm. It’s no different in North America, where we have lots of potential offerings between Canada and the United States. In each country we have an independent firm, but those two firms work very closely together. We share resources; we approach the [North American] market in the same way. The client should see seamless service between the two countries.
There will be two main offices. The main office in PRC is in Beijing and the main office in Hong Kong, of course, is in Hong Kong. The partners will work together. They’ll be jointly on the board and decisions will be made looking at the market as a single market and made in the best interests of clients.
China is a much bigger market than Hong Kong, so I imagine Chinese partners will have a bigger say.
That all depends over time as new partners are brought in. Usually in most firms, many decisions are made at the local level and then the important strategic decisions are made at the higher level. When you have a multi-office firm in any country, what you have at the office level is a lot of local operating decisions, the hiring decisions, client decisions made at a local level, so there is a lot of independence to the local firm. The important strategic decisions on how those firms work together are made at the senior level.
In California, all the local operating decisions in hiring and plans are done, same as New York does. But what is important is that overall, from the strategic point of view, they make the decisions jointly. A client that operates in New York or in California will be treated as a single client of the firm. They would see no difference between one place and another place, as we would see in Hong Kong and PRC.
THE AZEDO LAWSUITS
You’re in Brazil at this moment and Mr. Azedo was supposedly last seen there. You haven’t been having dinner with him, have you?
(Laughing) I doubt that very much . . .
From what I’ve heard of Mr. Azedo, he seems to have basically had a fiefdom that Grant Thornton International left alone to build up his own way.
Well, I was not involved when Mr. Azedo was there. He certainly was a dominant figure in that firm and operated in a very different manner [from other Grant Thornton member firms]. But all of these decisions and strategy going forward have nothing to do with Mr. Azedo. I really can’t comment very much [about him] because I was not involved.
So you would have gone ahead with the new Hong Kong/China strategy whether or not Mr. Azedo had disappeared.
That’s right. That is irrelevant to this decision.
Although I imagine, if Mr. Azedo were still there, you may have had a harder time. He seems to be a very strong-willed person . . .
Well, that’s in the past now and we are where we are.
The lawsuits against the old firm, will the new firm be liable for those lawsuits against Mr. Azedo?
No, we have established a totally new legal entity. It is totally separate and apart from the old firm. I can’t comment very much beyond that.
This action [of asking the old firm to leave the Grant Thornton network] has nothing to do with any litigation outstanding or litigation that was ongoing. This has everything to do with strategy and clients. So any of that litigation was not a factor in that decision. This is very much a new firm, that is a new entity.
INTEGRATION IN ASIA
The Grant Thornton member firm in Taiwan, will that be brought into the new integrated structure as well?
At this point in time, they remain independent and separate. We have a very good firm in Taiwan but it’s a very small firm. Right at this point in time, most of the clients that are looking for service in China are operating in Hong Kong and the PRC and not as much in Taiwan. As that expands, there will be further integration.
Once again, all of these things get driven by what the clients require and what the market is driving and right now the immediate matter is driving the market and the clients are driving an integrated approach to the mainland and Hong Kong.
Do you anticipate going forward that this will be the same structure and governance for the rest of Asia, Singapore and India and the Philippines and so on?
I think what you’re going to see is increasingly looking at practices on a regional basis. We’re seeing our firms in Asia Pacific increasingly cooperate, working together, sharing staff, whether that be in Australia and China, or whether that be India and Singapore. Our firms do work very well together. There is a real understanding that clients are working cross-border, and we can no longer look at markets as independent markets. So I think what you will have is an increasing cooperation and an increasingly integrated strategy across regions.
But not to the point where it will be the same as where China and Hong Kong are headed, where there is one corporate governance structure . . .
We have an open mind about that. We’ll see how the market develops, we’ll see what the client demands are and we will continue to monitor that going forward.
I think the model of independent firms in each market will continue to evolve and will change over time not only in Asia Pacific, but also in other parts of the world.
You will see increasing cooperation across borders, you will see increasingly cross-border investments. You will increasingly see practices that operate in two or three different jurisdictions. We have practices in specialty areas that are two and three and four firms working together in a particular practice area. We’re seeing where a particular country may have a desk in [another country], so we might have a Japan desk in China to serve Japanese clients that are operating in China.
You’re seeing different structures evolving and emerging in order to meet client needs. We’re looking now at practices in corporate finance that operates cross-border. In the Middle East, we have joint venture among 12 or 13 firms in Middle East that together are operating a corporate finance practice, because that’s what the market is requiring, that’s what the market expects. So you will see different models to meet different situations.
As we’re seeing in Hong Kong, though, the process is not going to be pain-free. Some member firms will fall apart because they don’t fit the new paradigm.
We made the decision [to ask a member firm to leave] in other places where firms were not able to get along, not able to cooperate or not able to share clients in a seamless way. We did the same thing in Germany, and we will do the same in other markets.
We have asked other firms to leave this year, they were not aligned with the strategy, they were not able to serve clients in the way that we expect. And if firms are not able to meet the standards that we have set, the standards that clients expect, then yes, we will make a change. We have done that at other places, not just Hong Kong and China. We have done that in other places in the past year.
Which other places would these be?
Well, some of those are confidential. We’ve done it very quietly and there’s been three or four different firms that we have asked to leave the network this year.
Are other firms including the Big Four moving in the same direction?
Certainly in other parts of the world you’re seeing increasing integration and regional structures. A couple of the Big Four have moved to regional structures in Europe and the Middle East. I believe one of the Big Four, I can’t speak for sure, but I believe one of the Big Four has an increasingly integrated Asia strategy. It is something you are seeing in other parts of the world and I think you will increasingly see it in Asia.
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