In a previous blog post we answered many of the common model auditing questions, including the rationale behind model audits and exactly what work Operis performs when undertaking a model audit. We also mentioned that work usually includes the review of applicable tax and accounting regimes.
This leads to another question from our clients: as a firm with offices in London and Toronto, how do we reliably audit models that involve tax and accounting treatments in countries where we do not have a presence? Are we able to review tax and accounting treatments for a highway project in Peru, or an oil pipeline through Kazakhstan?
Where Operis has high levels of expertise
Many of the projects we are engaged on involve tax and accounting treatments fully governed by the laws and practices of the United Kingdom and Canada. For these countries, our in-house experts can comprehensively evaluate all tax and accounting treatments.
We possess intimate knowledge of International Financial Reporting Standards (IFRS). In many countries, IFRS is the applicable accounting standard for our clients and there is a general convergence to IFRS across the globe. Operis can audit IFRS accounting or UK and Irish GAAP accounting aspects of a model without outside help. This reduces potential unknowns to tax issues only.
Your options in other jurisdictions
Naturally there are jurisdictions where Operis has more limited knowledge of local tax laws and accounting practices but that does not preclude us from comprehensively auditing a model. In situations where we do not have such in depth knowledge and expertise, we offer three alternate approaches:
1. Use existing reports and advice
Acquiring local advice involves costs, both monetary and in terms of time frames. In many cases, you will have acquired extensive local advice while building the model and structuring the transaction, often including comprehensive reports on local tax and accounting laws and practices. If that is the case we can check a model against this existing advice, thereby providing sign-off that it has been correctly interpreted and accurately applied in the financial model.
Under this option our tax and accounting team will review the reports you have received and ensure that the Model correctly reflects this advice.
2. Engage independent local expertise
An alternative option is for Operis to work with a reputable local accounting firm, typically a firm that is a member of an international network. Although the review will still be undertaken by our in-house team, we will seek the necessary advice from the local firm where we have queries relating to the tax and accounting treatment adopted. The firm we select would be cleared for conflicts to ensure full impartiality and conflict-free advice. Using this approach, we offer a fresh set of eyes and a fully independent stamp of approval, which is precisely the purpose of engaging a model auditor.
3. Bypass the tax and accounting factors
The third approach, and probably the one we are least likely to advocate, is to eliminate the review of tax and accounting treatments in a model. This choice might be chosen for the sake of expediency or simply because the model is not really affected by tax and accounting regimes. If this approach is selected, we would still review the underlying calculations behind the tax and accounting treatments, but would avoid the need to check compliance with local laws.
Advantages and disadvantages of each option
1. Using existing advice
Where Operis utilises existing advice during the audit process, our involvement still serves an important purpose: we ensure the advice has been correctly understood and applied. Auditing a model based on existing advice ensures that advice is correctly implemented while reducing the chance of ambiguity. This is likely to be the quickest, cheapest and easiest option in situations where you have already procured advice.
Note that under this option incorrect advice might not be flagged and can in turn be retained in the project model. Removing independent local advisors from the auditing process can mean that erroneous tax or accounting treatments may never be corrected.
2. Engaging independent local expertise
Involving fresh local expertise is the only way to realise a fully independent model audit. A new set of eyes with a conflict-free interpretation of the facts is the chief advantage of engaging independent local expertise. It is of particular importance where tax and accounting assumptions are central to the model and where you have not appointed your own local tax and accounting advisor.
Whilst other providers do have offices in a number of jurisdictions, it is likely that engaging Operis to undertake a model audit in a jurisdiction in which we would need to procure local expertise will be no different to you engaging a larger provider who will still need to liaise with their local office to provide you with the relevant advice. We have vast experience in engaging local advisors and will therefore aim to ensure that this is a seamless process.
However, where a model was built using specific local advice, the act of involving another tax and accounting advisor can lead to us obtaining advice which is not in line with the advice used to build the model especially where laws and practices are open to interpretation. There are also cost and time considerations that can make this option suboptimal. For these reasons sticking to existing advice can sometimes be a better choice.
3. Bypassing tax and accounting
Where models hardly involve accounting principles it can be a realistic option to skip their review entirely. The implications of tax laws can also be relatively minute and as such omitting local tax and accounting regimes when auditing a model can speed up the model review process. You should still be aware that models that are not heavily dependent on tax and accounting treatments can be exposed to large errors if tax and accounting sign-offs are not sought.
Choosing an option
Since our firm’s inception we have worked on over 1,000 infrastructure assets around the world, close to half of which have been located in countries other than the UK and Canada where we have our offices. Because of this we have developed approaches to ensure the advice we provide is the equal to a rival auditor with a global presence.
You may take the view that retaining independent local expertise is the only way to ensure the goals of a model audit are fully met. However, as just explained, there are circumstances that can indicate a different approach: to review a model based on your existing advice, or to skip the intensive review of tax and accounting aspects altogether.
At Operis we have evaluated countless models that reflect jurisdictions from around the world. Before we start an audit we will seek to understand the circumstances of your project and we will provide guidance on which option for reviewing tax and accounting issues is best suited.
As always, do get in touch to discuss your particular model audit needs. It is likely that a conversation at the start of the model audit process with one of our experts will be extremely beneficial in identifying the best way forward given your project’s needs.