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Grant Thornton’s CEO ‘Auditing’ Local Market Economy

Published: February 25, 2013 | 12:23 pm
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The COMMERCIAL TIMES

Nelson Petrosyan: “There is no second opinion about the dramatic improvements we have seen from 2004 to 2012. However, in between, there were some ups and downs.”

Georgia holds leading positions in a number of international economic surveys, one of the most prominent of which is World Bank’s Doing Business rating, where the country occupies 9th position. “In the past eight to nine years Georgia has made significant move in the direction of improving investment climate. At the same time, while there have been major reforms, there are still areas where we need to improve. Having the 9th ranking out of 185 countries is a major achievement. And if we have beaten the 176 countries following us, why should we stop trying to pass the 8 countries still ahead of us? It’s possible if we believe in it. We should continue working in this direction,” Nelson Petrosyan, CEO of Grant Thornton told CT during an interview.

- How would you evaluate Georgia’s investment climate compared to its neighboring countries in Caucasus?

- The World Bank’s Ease of Doing Business Index is a rather plausible exercise. Let me try to answer your question by referring to rankings for our neighboring countries, where Armenia is ranked 32nd, Azerbaijan is 67th, Turkey is 71st, and Russia is 112th.  So, while we seem to be doing “just fine” on the regional level, the “Georgian dream” shall be as high as chasing the number 1 ranked Singapore.

Investment climate is something that we have to continuously work to improve. Investment community is very dynamic and in order to keep positive climate parameters you need to never stop making an effort. In this area if we want to stay where we are, then we need to be walking, but if we want to progress we need to be running. It’s like walking or running on a treadmill, if you stop you’re left behind, if you walk you’re at the same place but if you run you have a chance to progress.

When we speak about a business climate, we have an understanding that it has a lot of elements: elimination of corruption, protection of property rights, ownership rights, etc.  On the other hand, one of the things that I’ve been working constantly as a part of our practice at Grant Thornton is to try to look at improvement of investment climate from the perspective of the tax legislation.

It is important to understand how the investment climate is affected by tax legislation and the way to see it is to realize how the business/investor community operates and how it is aligned with the mentality and principles that we have embedded into the tax system. This is where we see the difference, a gap that could be overcome.

When investors make decisions they take into account economic essence of events. When we look at the taxation, which is government’s fiscal policy on participating in shares of overall goods for running state programs, we need to understand the difference between taxing an economic event (sales, purchase, transfer, etc.) versus taxing the subject matter (based on how source documents are formed). This is where the tax legislation significantly differs from the mentality of the investment-oriented businesses. I think we could contribute to improving the investment climate if we can make the next step of reforms in our tax system where rules are based on principles of taxing economic events and understanding an economic essence.

- In January, 2013 Georgia has made changes to the country’s tax code, significantly reducing the fines for taxpayers. What concrete benefits do you expect the recent amendments to the country’s text code will bring?

- Lowering of fines can indeed be perceived by the private sector as the government’s yet another expression of trust between the public and private sectors. This is surely is a positive impulse for the public-private partnership atmosphere in general. From this perspective the government’s move is encouraging.

- In your point of view, which reforms still need to be revised?

- Investor community and the private sector in general have also other expectations regarding the tax legislation. These expectations have been numerously expressed by different stakeholders as areas requiring yet more improvements.

These include general issues and more specific areas. From the general issues I would highlight the need for increased clarity on: taxation rules, frequency of changes in legislation and the overall principles of taxation.

Firstly, we need to continue our professional efforts to minimize instances where legislation allows for multiple interpretations. Let me use example of football to illustrate my point. Rules of the game have to be clear for all – players (taxpayers), coaches (investors), referees (government), and not less importantly, the spectators (society). When referees’ judgment calls are based on the rules of the game which are clear to all, then you would expect fewer objections from players and the coaching bench, and far less disapproving whistles from the spectators’ crowd.

Secondly, there is a need for a regulated periodicity for legislative amendments – once a year at the beginning of fiscal calendar year of January 1, or, utmost, twice a year – on January 1 and July 1. Businesses commonly organize their operations based on financial budgets. These financial plans constitute a management tool and are based on effecting tax rates, taxation rules and principles. When tax rate or rules change too often, this creates uncertainties in the business environment. In the presence of uncertainties businessmen usually hold off their investment decisions. Again to use example of football, at the beginning of the game the coaches are not sure whether during the game the referee will allow playing with hand, so they are not sure who to send onto the field – footballers and rugby players, and eventually they may decide not to enter the ball game.

Thirdly, let us start by constituting two of the key principles of accounting and financial reporting: first- content over form and second- principles-based and rules-based approaches. We know that one of the foundational principles of International Financial Reporting Standards (IFRS) is the idea of content over form, which basically means that economic essence of transactions should prevail over the form of recording. On the other hand, in a continual effort to meet needs of the investor community worldwide IFRS has been constantly moving towards more principles-based approach versus the rules-based approach. In simple words this means that when interpreting economic transactions we should guide ourselves more by the principles of understanding essence of economic events and get stuck in the letter of the rules prescribing judgment for every possible situation.

Having reiterated these two principles, let us now see how they could be applied in the light of tax legislation. When investors plan their operations and make business decisions they do so based on the economic essence of transactions. However, in taxation approaches we often see instances where instead of levying tax on the economic event (for example, sales of goods or services), tax specialists base their judgment based on the source documents to determine the subject of transaction. To further illustrate the point, let me share with you an interesting observation I have made on work performed by tax advisors in developed and emerging economies.  When we observe tax advisors in developed economies, we see that underlying objective of their work is to understand and evaluate essence of economic events and then assess taxation basis. Similarly, when we analyze work of tax advisers in emerging economies, we often find tax specialists being caught up in too many documents to determine basis of taxation. Think for a second on how we often stereotype work of accountants and tax specialists – desks piled up with lots of papers as they dig through their work.

If we look at it from the perspective of the entire Georgian economy, investment climate is greatly influenced by tax legislation. So, improvements of tax legislation shall be an integral part of government efforts to promote foreign direct investments.

In addition, further improvement of tax legislation are needed in specific areas such as, to name just a few:  risk-based approach to tax audits and reinstatement of mediation process;  precise application of tax rules on VAT exempted transactions; identifying place of provision of services for VAT taxation; tax treatment and timing of interest expenses; regulating tax treatment of production losses for various industries; regulating determination between representational expenses of business and personal costs of individual, etc.

- Would you say Georgian government (both the previous and the new governments) is open to communication to discuss the issues private sector faces?

- Both, the previous and the new governments have this dialogue approach, which I welcome. There should be constant discussions with businesses. We are part of the same society. Business, as a driver of the economy and the main taxpayer, is the top partner for the government to work with. Otherwise, the state treasury will be empty.

- Your professional experience includes industries such as chemical production, transportation, forestry, software development, food and beverages, retail, media and broadcasting, as well non-profit organizations and foundations engaged in development and humanitarian activities. Which sectors would you say are performing best in Georgia? If you were an investor which sector would you choose to put money in? and why?

- Let me give you a principle by which I would guide myself. If I were to invest money in any of the sectors, I would venture in the field that, if we are romantic enough, we could say would generate export for Georgia, but if we are less romantic and more realistic, it would be the business that would, at least, push out import. When I walk around supermarkets I see a lot of foreign-produced food products. I would definitely invest in agriculture, even if not to export, at least to push out import. Mushrooms production is a good example. Just a couple of years ago we had a new factory built in Rustavi, which literally pushed out import of mushrooms. There is also a potential for export, especially to the Emirates and even some European countries as well.

Hydropower generation, and energy sector in general, is also a sector I would invest in. There’s an increasing demand on electricity export from Georgia. In terms of energy, on the one hand, we have increasing domestic consumption, in 2012, for the first times in recent years Georgia has even been a net importer of electricity. On the other hand, we have unlimited export market to transit our electricity to Turkey, one of the world’s top 20 economies with ever increasing demand for electricity, triggered by significant industrialization of their economy.

Thus, agriculture and energy sectors are the top two best attractive areas to invest in.

- You lead audits of donor-funded projects financed by the World Bank, the Asian Development Bank, the United Nations, KfW, EBRD, Millennium Challenge Corporation, USAID and other International Financial Institutions. How would you assess the importance of the projects funded by IFIs in Georgia? Could you please recall the most significant cases?

- If we look at the IFIs, some of them work only on the public projects while others also get engaged in private sector as well by providing equity and loan financing to businesses. IFIs do a very important job in Georgia. Some of the results we see on a short-term outlook, some in a mid-term, but on a long run we will surely see how positive these efforts contribute to Georgia’s development.

- You joined Grant Thornton in 1999 and now you hold the position of the Director/Partner of Grant Thornton Georgia. How would you evaluate the local business climate development through the years as far as audit sector is concerned?

- There is no second opinion about the dramatic improvements we have seen from 2004 to 2012. However, in between there were some ups and downs. Things happen, we need to understand that there are internal and external factors that affect economy. Internal factors are the areas which could be more or less controlled locally. As for external factors, if we look at the world financial crisis, it depends on how integrated Georgian economy is with global markets. When the level of integration is low less affect is expected. Because of our not so much integration into the world economy, the affect has not been as dramatic as in other countries.

- Grant Thornton is one of the world’s leading organizations of independent assurance, tax and advisory firms. These firms help dynamic organizations unlock their potential for growth by providing meaningful, actionable advice through a broad range of services. Which services offered by Grant Thornton are demanded most in Georgia?

- Audit and other assurance services, business advisory – these are most demanded services we provide on the Georgian market. We perform significant work before businesses make their investment decisions to merge with or acquire companies or engage in greenfield investments.

On the business advisory front we also offer business risk services, where we provide advice on internal control environment and systems, corporate governance, risk policies and procedures, information technologies, IT performance audits, etc.

We are also observing increased demand for accounting outsourcing and tax advisory services.

- How would you describe the benefits offered by the Alternative Audit option?

- I think it’s a positive thing when we see many uncertainties related to tax audits procedures being been gradually clarified. There are now guidelines for alternative tax auditors. Although there was a slow start during the so called pilot stage and people were less optimistic in the beginning, I think, we’re now gaining more and more confidence from business community towards alternative tax audit.

In order to preserve and continue building optimism, we need to continue improvements in this area. From discussions with the Revenue Service, we see that this area remains to be a priority for the government. We, ourselves, have conducted tax audits in 2012 and we continue this trend in 2013 as well.

- What’s the major motivation for companies while choosing Grant Thornton?

- One of the main advantages about Grant Thornton is that we never let down our clients; we’re there for them 365 days a year. We are the trusted advisers of dynamic organizations; we help them unlock their potential for growth. This is key for long-term partnership with our clients as we help them grow their businesses. If we view this from “selfishly”, we are interested to see clients’ businesses growing because when they grow, we grow with them.

Another major factor is that we practice partner-level services. We do not send our junior staff to talk to top executives, we go there ourselves. Decision makers on one side want to talk to decision makers on the other side.

- How tough is competition in the local market?

- I think, there are a quite many service providers in the market. Still, I would not call them competitors; we’re colleagues because our profession is still young and many markets for us are yet at development stage. I believe there’s enough work for everyone. On the other hand, one thing I want to see is the increased attention to the quality of the services offered. If one auditor provides bad service it puts shade on other auditors as well. That’s why I think we need to work as colleagues rather than as competitors.

- Grant Thornton publishes International Business Report (IBR) periodically. What is IBR about and how impressive are Georgia’s indicators in latest reports?

- IBR is something that Grant Thornton does in more than 45 countries worldwide, covering over 80% of the global economy. So, these are quite representative studies. We do this research on regular basis during a year. We research the economic issues from inside out, by surveying business executives. IBR focuses on different issues. For example – business optimism and pessimism, where by the way, Georgia is doing quite well on the worldwide scale. Although global economy is not giving many positive signs, still local business executives are more optimistic than their colleagues in other parts of the world.

Another type of research we do is Women in Business and Georgia here is again very well positioned. I myself find it easier to work with women in our professional services because they tend to be more attentive to details and that’s what we praise in our business. Women make up some 70% of Grant Thornton staff base in Georgia.

- How open the local private sector is for creating new jobs? What’s the philosophy of Grant Thornton in this regards?

- On average basis we have up to 30 employees. This year we are already growing by another 25-30% and this is part of our organic growth. But we also look into growing our business in alternative ways. First, it’s strategic investment when we invest in a special knowledge (business risk services, internal audit functions, etc). Second, it’s non-organic growth, which includes mergers and acquisitions.  We believe that there are many good colleagues in the market who think alike us and whose business philosophy is very similar to ours. Together we could be even a stronger team. The stronger we are more opportunities we have export our professional services to other countries. In our profile we have clients from European countries, Central Asia and other post-Soviet countrie, including Mongolia. The stronger we are as a professional firm here in Georgia the better are our chances for exporting our services abroad.

- Grant Thornton employs over 35 000 people across 120 countries. How impressive are the company’s local employment statistics? What are the skills job seekers should possess and what kind of educational background must they have to become part of Grant Thornton?

- We look at different components for different positions. If we’re talking about a new graduate candidate, we look at the academic background, good attitude and enthusiasm towards learning and professional growth. At starting positions that’s what you would expect from newly hires. On more senior positions we would like to see people who have demonstrated professional experience. We always look for people who are able to go places with us. Personal qualities are also very important in our profession.

- As for local leaving standards, salaries, pensions governmental bodies and paid by private sector, would you say Georgia does its best, considering its budget capacity?

- Georgia has an interesting situation in terms of the labor market. Economist use a term “structural unemployment”, which means that until a certain level of professional qualities there are more candidates than available jobs, while above this certain professional level the situation changes and there are more vacancies than number of qualified people. I’m very hopeful that situation will change with consistent economic growth, education reforms, etc.

As for salaries, it is linked to benefits a person brings to the firm. It’s a simple rule. When business grows, so do the salaries and employee benefits.

- Do your family members also live in Tbilisi, Georgia? How successfully are they employed here?

- My wife is employed, my older son is successfully ‘employed’ at school, while the younger one is enjoying his joyful kindergarten times.

- What are your expectations regarding to the Georgia’s new labor code initiative?

- There are two different perspectives. On one hand, I’m really for the principles of protecting the rights of the employees. On the other hand, we need to understand that compliance is a business cost. We have to have a balanced approach and be very careful when we burden private sector with heavy compliance. As my grandmother used to say, when you correct the eye brow, be careful not to damage the eye. Increasing social and other protections for employees is really a good, if done in a balanced way. What’s also important is to have clarity in the legislation.

Discussions regarding the new labor code initiative started very negatively, but then we had a very positive feedback from the Ministry of Justice that this process will be more regulated and business community welcomed the opportunity to comment on draft law. This is an ongoing process, but one of the things that we, as the business community, would like to put forward for discussion is the balanced approach.

- What’s your outlook for Georgia’s economic development in 2013?

- I see positive signs and I’m hopeful that economic growth will be maintained and that FDI flow will continue into Georgian economy and that regional development will also help the local economy move forward. On the other hand, I also have the understanding that we are in a transition year, we had parliamentary elections and presidential elections are coming up and due to some level of uncertainties businesses may possibly hold off their investment decisions and choose to wait in a standby regime.

 

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