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Research Overview Credit Rating Advisory for Tax Advisors

An empirical proof of the implementation by Tax Advisors in Germany

Research Paper (postgraduate) 2011 57 Pages

Business economics - Accounting and Taxes

Excerpt

Contents

List of Tables

List of Figures

1 Introduction
1.1 SUBJECT MATTER OF THE THESIS
1.1.1 Basics on Market Trends in the Tax Consultancy Branch
1.1.2 Competitive Pressures upon Tax Consultants by Other Service Providers
1.1.3 Extension of the Scope of Operations in Response to Market Trends
1.1.4 Definition of Credit Rating Advisory Services
1.2 BREAKDOWN OF SUBJECT MATTER INTO TWO MAIN PARTS AND PARTIAL HYPOTHESES

2 Objectives and Methodology
2.1 THE UNDERLYING CAUSE AND THE THESIS OBJECTIVE
2.2 BASIC THESIS BREAKDOWN INTO PARTIAL THESES
2.3 TRANSFORMING THE PARTIAL THESES INTO HYPOTHESES
2.3.1 Generally on the Hypotheses
2.3.2 Hypothesis from Partial Thesis 1
2.3.3 Hypothesis from Partial Thesis 2
2.3.4 Hypothesis from Partial Thesis 3
2.3.5 Hypothesis from Partial Thesis 4
2.4 METHOD FOR VERIFYING THE PARTIAL THESES
2.4.1 Method for Examining the Credit Rating Advisory Services - Hypotheses 1 and
2.4.2 Examination of the Potential for Credit Rating Advisory Services - Hypothesis 3
2.4.3 Method for Implementation in the Market - Hypothesis 4
2.5 METHODOLOGY OF THE EMPIRICAL SURVEYS
2.5.1 Data Gathering Method under Both of the Surveys
2.5.2 Weighting in the Survey According to Numbers of Authorised Tax Advisors
2.5.3 Bank Selection and Assessment according to Regional Significance
2.5.4 Summary of the Selection Criteria and Outline of the Research Method

3 Desk Research

4 Results
4.1 RESULT FOR HYPOTHESIS 1
4.1.1 Statutory Tasks of Tax Consultants
4.1.2 Activities of Tax Consultants Subject to Agreement
4.1.3 Restrictions to Credit Rating Advisory Services under the Law of Tax Advisors
4.1.4 Legal Restrictions to Credit Rating Advisory Services
4.1.5 Verification of Hypothesis 1
4.2 RESULT FOR HYPOTHESIS 2
4.2.1 Generally on Qualification for Credit Rating Advisory Services
4.2.2 Verification of Hypothesis 2
4.3 GENERALLY ON HYPOTHESES 3 AND 4
4.3.1 Preliminary Note on Hypotheses 3 and 4
4.3.2 The Planned Sample Size
4.3.3 The Sample of Banks to Include in the Selection
4.3.4 The Sample of Tax Consultants to Include in the Selection
4.3.5 Initial Pretest Ahead of the Survey
4.3.6 Implementation of the Data Collection Effort
4.4 RESULT FOR HYPOTHESIS 3
4.4.1 Return Rate in the Survey
4.4.2 Sample Spread
4.4.3 Evaluation of the Results of the Online Survey: General
4.4.4 Evaluation of the Online Survey - Rating Practices by Banks
4.4.5 Evaluation of the Online Survey - Bank Internal Measures
4.4.6 Evaluation of the Online Survey - Impact on Rating
4.4.7 Verification of Hypothesis 3
4.5 RESULT FOR HYPOTHESIS 4
4.5.1 The Return Rate in the Survey
4.5.2 Sample Spread
4.5.3 Evaluation of the Online Survey - Current Credit Rating Advisory Services
4.5.4 Evaluation of the Online Survey - Future Potential
4.5.5 Verification of Hypothesis 4

5 Discussion

6 Conclusion
6.1 SUMMARY AND THE RESULTS OF THE EMPIRICAL SURVEY FOR BANKS
6.2 SUMMARY AND THE RESULTS OF THE EMPIRICAL SURVEY FOR TAX CONSULTANTS
6.3 SUMMARY AND THE THESIS OUTPUT

7 References

8 Appendices
8.1 THE SURVEY FORMS AND SETTINGS FOR BANKS
8.2 THE SURVEY FORMS AND SETTINGS FOR TAX CONSULTANTS
8.3 RETURN HISTORY FOR THE SURVEY WITH BANKS
8.4 RETURN HISTORY FOR THE SURVEY WITH TAX CONSULTANTS
8.5 RETURNS FOR THE SURVEY WITH BANKS ACCORDING TO GEOGRAPHICAL LOCATION
8.6 RETURNS FOR THE SURVEY WITH TAX CONSULTANTS ACCORDING TO GEOGRAPHICAL LOCATION

List of Tables

Tab. 1: Branch statistics for tax consultants in Germany

Tab. 2: Spread of authorised tax consultants according to Federal states in percentages

Tab. 3: Market shares of banks in Germany in 2007 in percentages

Tab. 4: Percentage shares of the different types of banks for the selection

Tab. 5: Weighting table for the empirical survey

Tab. 6: Result summary for the two pretests

Tab. 7: General data for the two surveys

Tab.8: Survey results for banks - return rates according to the three-pillar split

Tab. 9: Survey results for banks - references supplied posthumously

Tab. 10: Survey results for banks - individual weighting

Tab. 11: Survey results for banks - effect of tax consultant involvement on soft factors

Tab. 12: Survey results for banks - direct contact

Tab. 13: Survey results for banks - soft factors preferred

Tab. 14: Survey results for banks- response to poor rating grade

Tab. 15: Survey results for banks - effect of external rating reports

Tab. 16: Survey results for banks - effect on daily business

Tab. 17: Survey results for tax consultants - consultancy size

Tab. 18: Survey results for tax consultants - training and education in rating

Tab. 19: Survey results for tax consultants - practical applications

Tab. 20: Survey results for tax consultants - practical promotion of the services

Tab. 21: Survey results for tax consultants - future marketing

Tab. 22: Survey results for tax consultants - competence through education

Tab. 23: Survey results for tax consultants - invoicing and settlement practices

Tab. 24: Survey results for tax consultants - hourly rates for settlement purposes

Tab. 25: Survey results for tax consultants - outsourcing the credit rating advisory services

List of Figures

Fig. 1: Outlook by tax consultancies in 2005

Fig. 2: Market chances with business economic consultancy

1 Introduction

1.1 Subject Matter of the Thesis

1.1.1 Basics on Market Trends in the Tax Consultancy Branch

According to a study by Sutter1, 56% of tax consultancies in 2005 viewed their position in a twoyear outlook as "rather good“, with 11% even finding the outlook "very good“. On the other end of the scale, the pessimists comprised merely 11% of the respondents, judging their perspective as "rather bad“. 30% had neutral expectations and 2% made no indication.

illustration not visible in this excerpt

Fig. 1: Outlook by tax consultancies in 2005

(Source: Sutter study)

The optimism in the meantime has been rather restrained. The general economic crisis soured the mood of 2005. The 2008 branch report by Sparkassen Finanzgruppe for the branches of auditors and tax consultancies2 draws a conclusion that turnovers of tax consultancies saw a negative development already in the fourth quarter of 2007. The income of tax consultancies in fees mainly depends on turnover and profits of commercial enterprises, which means that the negative market trends for tax consultancies follow with a delay the general developments.

1.1.2 Competitive Pressures upon Tax Consultants by Other Service Providers

The competitive pressure on tax consultants has been on the rise not only as a result of competition within the branch itself but also compounded by allowable service offers of third parties not sanctioned as professional tax consultants3.

Examples include:

- Accountancies and independent account advisors;
- Payroll accountancies including payroll accounting centers, and
- Business consultancies in economic branches.

Solicitors not working to full capacity in their legal line of work also have been encroaching on the tax consultancy market. Auditors not having participated in or passed the required quality checks (peer review schemes)4 have been increasing their activities within the classical scope of services of tax consultants5 as well.

1.1.3 Extension of the Scope of Operations in Response to Market Trends

The branch has been called to order given the changing competitive pressures in the market. The scope of operations of authorised tax consultants in Germany has been extended by means of update to the German Legal Services Act6 as of 2008.

The updated act of law opens up new additional areas of operations for tax consultants. Credit rating advisory services rank as one among the new areas.

The first key aim of the thesis is to analyse whether

- Credit rating advisory services are allowable for tax consultants, and
- What qualification options are there in credit rating advisory activities.

Yet simultaneously, also a shift has occurred in the demand for advisory skills and competences. Clients of tax advisors need and expect additional consultancy in order to weather the current general economic environment. The rating grades awarded by banks have become ever since the Basel II accounting regulations to a key variable in credit decisions. The need of consultancy in this particular area has been ignored by the market.

Given the changes in what up to recently has been a rather static tax consultancy market, the particular area of credit rating advisory services and specifically the implementation of the services by the tax advisory branch shall be analysed herein.

1.1.4 Definition of Credit Rating Advisory Services

There is no definition of credit rating advisory services. One possible definition of such services could be that credit rating advisory services comprise all forms of services the aim of which is to improve the internal or external rating grade of a firm by modifying or communicating the relevant hard and soft factors and to effect positive changes in the long term.

That means that credit rating advisory services help enterprises to ideally prepare for the rating process in order to reach the best credit rating possible7. With credit rating thus having gained in weight to become a significant variable for firms, the rating practices by banks with their related assessment criteria open up a potential for credit rating advisory services. The result is a demand for consultancy in both the internal and external rating contexts.

While in internal rating, the consultancy aims at improving on and communicating one’s own strengths to be awarded better credit rating, in external rating the consultancy takes the form of active involvement during and after the rating process held by rating agencies.

As rating advisors, those consultants are referred to who prepare firms ahead of a rating procedure but do not perform the rating themselves8, or undertake for the firm to score better next time once a rating grade has been awarded.

1.2 Breakdown of Subject Matter into Two Main Parts and Partial

Hypotheses

The first main part explores whether credit rating advisory services are feasible and allowable as an activity for tax consultants. The basic assumptions and references used in the process include:

- The law of tax advisors;
- The need of comprehensive qualification in order to be able to provide credit rating advisory services;
- The changed market and competitive environment in the tax consultancy market.

Hence as part of the examinations herein, the first key task is to clarify:

- What regulations are there applicable to consultancy services by tax consultants?
- What qualifications are there for credit rating advisory activities?

In order for tax consultants to be able to implement credit rating advisory services as an additional type of activity and draw benefit from this extension of the scope of their operations, also the respective potential needs to be verified along with the qualification needs this entails.

The second main part hence explores the existence of a potential for credit rating advisory services by tax consultants. As reference data, the results of an empirical survey are used among corporate customer consultants with banks in Germany. Surveys among the clients of tax consultants have been deliberately refrained from as the clients may potentially show negative bias due to the additional cost on their part caused by credit rating advisory services. The aim of the thesis is to verify the need for the advisory services.

Over the course of further examinations herein, the current market of tax consultants is verified for the potential scope and feasibility of credit rating advisory services by tax consultants. The reference data for the purpose are supplied by the results of a second survey among tax consultants in Germany. Based on the examination findings, conclusions are drawn on the potential for credit rating advisory services by tax consultants.

2 Objectives and Methodology

2.1 The Underlying Cause and the Thesis Objective

As held in the introduction, the tax consultancy market has been in the process of change. By means of the Legal Services Act, as of 2008 the allowable areas of operations have been extended for tax consultants. The following visualisation exemplifies the market chances that can be potentially explored by competent and targeted consultancy as additional areas of operation.

illustration not visible in this excerpt

Fig. 2: Market chances with business economic consultancy

But also a shift in the demand has occurred for consultancy skills and competences. The clients of tax consultants need and expect additional consultancy in order to withstand the current general economic environment. The rating grades given by banks have become ever since the Basel II accounting regulations a key variable in credit decisions. The need of consultancy in this particular area is being ignored by the market.

Given the changes in what up to recently has been a rather static tax consultancy market, the particular area of credit rating advisory services and specifically the implementation of the services by the tax advisory branch shall be analysed herein.

The basic thesis is postulated as follows:

"Credit rating advisory services amount to an additional and rewarding area of operations for tax consultants in Germany. There is still a potential to develop this particular type of services further."

2.2 Basic Thesis Breakdown into Partial Theses

In order to be able to verify the basic thesis, it is split into a total of four partial theses9. The first two partial theses address the tax advisory branch.

Partial thesis1:

"There are regulations governing the provision of credit rating advisory services by tax consultants in Germany."

Partial thesis 2:

"For due implementation of credit rating advisory services, sanctioned education is needed."

The other two partial theses explore the existence of a potential for credit rating advisory services by tax consultants. The partial theses are worded as follows:

Partial thesis 3:

"There is a demand for credit rating advisory services in Germany that can be satisfied by tax advisors."

Partial thesis 4:

"The implementation of credit rating advisory services by tax consultants in Germany by now has been patchy only. This particular consultancy market still entails a significant potential for tax consultants."

2.3 Transforming the Partial Theses into Hypotheses

2.3.1 Generally on the Hypotheses

In order to be able to verify the above partial theses, they need to be converted into hypotheses. That means that criteria have to be provided for falsifiability of the theses with verification or falsification as a result.

In scientific terms, the hypotheses amount to assumptions that typically are verified by means of deductive and nomological models.

2.3.2 Hypothesis from Partial Thesis 1

The regulations need to be examined applicable to the profession of tax consultants. Partial thesis 1 is true if there are actual restrictions on credit rating advisory services by tax consultants. If there are no regulations governing the services, the partial thesis does not apply.

2.3.3 Hypothesis from Partial Thesis 2

In order to be able to verify partial thesis 2, a verification is needed of the actual possibility to gain qualification in credit rating advisory activities. Providing such qualification has become established and needed as a prerequisite for the implementation of credit rating advisory services, then partial thesis 2 is true.

If credit rating advisory services can be offered and practiced even without sanctioned education, then partial thesis 2 is false.

2.3.4 Hypothesis from Partial Thesis 3

In order to verify partial thesis 3, proof needs to be supplied of a positive demand for credit rating advisory services. If there is such a demand, then partial thesis 3 is true providing the demand can be satisfied by tax consultants.

That means the actual gist of the hypothesis from partial thesis 3 is to provide evidence of the need for credit rating advisory services in order to be able to conclude on the respective income in fees and related turnover boost potential for tax consultants. This shall be examined separately from the general need of consultancy to clients in order to determine the actual potential and need for the rating services by tax consultants in an impartial approach.

Partial thesis 3 advances the previous partial theses 1 and 2. Partial thesis 3 would be untrue if there is no demand for credit rating advisory services or the demand not satisfiable by tax consultants.

2.3.5 Hypothesis from Partial Thesis 4

Assuming that partial thesis 3 is true, implementation by now of credit rating advisory services by tax consultants shall be examined. Partial thesis 4 would be true if to date, tax consultants were not offering and practicing the services, or to insufficient extent only. As an additional prerequisite for partial thesis 4 to be true, there must be still an unexplored potential for the services in case of insufficient implementation by tax consultants.

Partial thesis 4 would be untrue if tax consultants already provide credit rating advisory services to an ideal extent or no exploitable potential exists in the market for the services.

2.4 Method for Verifying the Partial Theses

2.4.1 Method for Examining the Credit Rating Advisory Services - Hypotheses 1 and 2

In order to enhance the income of self-employed tax consultants, the option is examined of extending the scope of consultancy services with credit rating advisory services and practical implementation thereof by tax consultants.

Through desk research and by exploring applicable professional guidelines and the law of tax advisors, existing provisions and restrictions are extracted applicable to credit rating advisory services and verification is implemented of hypothesis 1.

In the follow-up, the training and education options for credit rating advisory services are identified via market studies and desk research. For verifying hypothesis 2, the relevant qualification proofs specifically with regard to tax consultants and compatibility thereof with the law of tax advisors are explored.

2.4.2 Examination of the Potential for Credit Rating Advisory Services - Hypothesis 3

In order for tax consultants to explore the particular area of credit rating advisory services and the additional potential the services entail and draw related benefits, evidence is needed of actual existence the potential.

The proof takes the form of an empirical survey among corporate customer consultants with banks in Germany. Surveys among clients of tax consultants have been consciously refrained from due to potential bias of the clients given the additional cost on their part of credit rating advisory services. The aim of the thesis is to verify the need for the advisory services. In this context, an assumption applies of the respective tax consultant promoting the additional services with his or her own marketing tools.

The empirical survey is implemented by also including an initial pretest and a scientific optimisation of the survey scope and method.

- What changes in the consultancy market are relevant to self-employed tax consultants within the context of credit practices by banks and rating grades that precede it?
- To what extent credit rating advisory services already have been offered and practiced by tax consultants in the market?

2.4.3 Method for Implementation in the Market - Hypothesis 4

The extent of the implementation to date of credit rating advisory services in the market by tax consultants is explored by means of the second empirical survey.

For the purpose, self-employed tax consultants have been queried whether and to what extent they had been already offering and practicing credit rating advisory services. In this case also, the actual survey was preceded by an initial pretest in order to get relevant results.

2.5 Methodology of the Empirical Surveys

2.5.1 Data Gathering Method under Both of the Surveys

The verification of Hypotheses 3 and 4 is implemented by means of surveys with banks and tax consultants respectively. Both the surveys employ the same data gathering method in order not to compromise the relevance of the results.

2.5.2 Weighting in the Survey According to Numbers of Authorised Tax Advisors

The total number of officially sanctioned tax consultants amounts to quantitative selection range in the geographic sense. Based on branch-specific statistics by the German Federal Chamber of Tax Consultants10, the trends in member numbers have been as follows:

Tab. 1: Branch statistics for tax consultants in Germany

illustration not visible in this excerpt

Now the numbers of officially sanctioned tax consultants and tax consultancies can be further refined according to regional professional chamber membership11. For the purpose, not just self- employed tax consultants but corporate tax consultancies as well are referred to in line with the aims pursued herein.

The share of self-employed tax consultants in the total of all tax consultancies is at 71.80%12 and tendentially in a decline from previous periods. A breakdown of self-employed tax consultants according to regional professional chamber membership or Federal states does not take place as the share of self-employed tax consultants relative to the total of all tax consultancies only is published summarily at the Federal level organisations.

That means that for purposes of cross-checking the survey results, according to the numbers of authorisations per Federal state.

Tab. 2: Spread of authorised tax consultants according to Federal states in percentages

illustration not visible in this excerpt

2.5.3 Bank Selection and Assessment according to Regional Significance

Banks also need to be selected on an a priori13 basis. In the effort, the selection takes place according to bank significance for the sake of scientifically relevant and controlled results.

With regard to the procedure, it should be held first that the banking system in Germany relies on sc. three pillars. The three-pillar system signifies a model under which the German banking sector splits into private banks, cooperative banks and public savings banks/regional banks ("öffentlich-rechtliche Sparkassen" and "Landesbanken" respectively)14.

For a proof of the effect of marketing tools on the rating grade a tax consultancy obtains, the general mode of operation of the banks and their system-inherent structure is key as opposed to mutual relations of individual banks or the current competitive environment of German banks. Changes in the system would entail follow-up changes also for all the other branches, which in turn would mean changed but identical framework conditions again for the empirical proof herein.

The significance of a bank generally is reflected by its balance sheet total as from the figure, its size of operations can be concluded. In order to work with relevant information for research purposes herein however, the significance of banks is measured by the amounts of credits provided to firms and enterprises as opposed to the bank balance sheet total. This allows to refine the selection criteria in a focused way.

Table 315 shows the market shares of banks assignable to a category under the three-pillar split. Mortgage banks, special banks and savings and loan banks (Bausparkassen) in this context are left out of the summary as they provide no or insignificant loans only with rating relevance to enterprises. The 2009 market shares only were published after the data survey had taken place (on 22/10/2010).16 However, the differences are insignificant, hence can be ignored.

Tab. 3: Market shares of banks in Germany in 2007 in percentages

illustration not visible in this excerpt

As within the three-pillar classification system, savings banks and regional banks are comprised under one pillar, the following selection criteria apply with regard to the banks to include in the examination:

Tab. 4: Percentage shares of the different types of banks for the selection

illustration not visible in this excerpt

2.5.4 Summary of the Selection Criteria and Outline of the Research Method

The insights made of relevance to the empirical surveys can be comprised as follows:

In order to implement a meaningful and scientifically relevant survey, the results of the random sample-based inquiries with banks and tax consultants need to be weighted according to the insights gained. As the key respective criterion, the ratio has been chosen between the number of tax consultants per Federal state and the share of corporate loans per bank with split according to the three-pillar classification. The output is the following weighting table:

Tab. 5: Weighting table for the empirical survey

illustration not visible in this excerpt

The weighting table finds use in both the separate surveys with banks and tax consultants respectively.

[...]


1 Cf. Sutter, P. (study). (2005). Agenda 2011. Mehr Effizienz für Steuerberater. Eine Gemeinschaftsstudie von Maisberger Whiteoaks und Agenda Informationssysteme GmbH. Published December 2005. Internet: http://www.agenda2011.de. p. 17 (05.01.2010).

2 Cf. Deutscher Sparkassen- und Giroverband e.V. (Ed.). (2008). Finanzgruppe Branchendienst. Wirtschaftsprüfung und Steuerberatung. Branchenreport 2008, WZ-Code 74.12. Stuttgart: Deutscher Sparkassenverlag. p. 3.

3 Cf. Mayerhöfer, A. (2005): Fibu zu Tiefstpreisen. In: Consultant. Vol. 7. Issue 5. p. 12.

4 Cf. Engelken, E. (2005). Peer Review fesselt den Berufsstand. In: Consultant. Vol. 7. Issue 11. p. 12.

5 Cf. Sutter, P. (2005). As above. p. 32.

6 Cf. RDG. Gesetz über außergerichtliche Rechtsdienstleistungen vom 12.12.2007. BGBl I 2007. p. 2840. Last amended by Article 6 of the act of law of 12/06/2008. BGBl I 2008. p. 1000.

7 Cf. Kabuth A. (2003). Impulse zur Ratingberatung durch Basel II. In: Achleitner, A./Everling, O. (Ed.). Rating-Advisory. Mit professioneller Beratung zum optimalen Bonitätsurteil. Wiesbaden: Betriebswirtschaftlicher Verlag Th. Gabler/GWV Fachverlage GmbH. p. 4.

8 Cf. Gleißner, W./Füser, K. (2003). Leitfaden Rating, Basel II: Rating-Strategien für den Mittelstand. 2nd Edition. Munich: Verlag Franz Vahlen. p. 234.

9 Cf. Diekmann, A.(2005). Empirische Forschung. Grundlagen, Methoden. Reinbek: Rowohlt Verlag. p. 107.

10 Cf. Bundessteuerberaterkammer. (Ed.). (2010). Jahresbericht 2009. Berlin: Eigenverlag. p. 49.

11 Cf. Bundessteuerberaterkammer. (Ed.). (2010). p. 51.

12 Cf. As above. p. 49.

13 Cf. Raithel, J. (2008). Quantitative Forschung - ein Praxiskurs. 2nd Edition. Frankfurt: VS Verlag für Sozialwissenschaften. p. 51.

14 Cf. Fischer, J. (2008). Was versteht man unter dem Drei-Säulen-Modell? Internet: http://conserio.at/was-versteht-man-unter- dem-drei-saulen-modell (05.05.2010). p. 1.

15 Cf. Bundesverband Deutscher Banken. (Ed.). (2009b). Marktanteile der Bankengruppen. Internet: http://www.bankenverband. de/print.asp?artid=793&channel=168247. p. 1 (29/04/2010).

16 Cf. Statista (Ed.). (study). (2010). Marktanteile der Bankengruppen an der gesamten Bilanzsumme in Deutschland. Internet: http://de.statista.com/statistik/daten/studie/166006/umfrage/marktanteile-der-bankengruppen-in-deutschland. (30/11/2010).

Details

Pages
57
Year
2011
ISBN (eBook)
9783656076988
ISBN (Book)
9783656076759
File size
592 KB
Language
English
Catalog Number
v183264
Grade
sehr gut
Tags
Rating Advisory Tax Advisory Tax Advise Rating Advice Credit Rating Certified Rating Advisory

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Title: Research Overview Credit Rating Advisory for Tax Advisors