MARWICK first-hand content
HANDING DOWN A FAMILY BUSINESS Air Bank’s boss: Millennials are shaping today’s banking 10 tips for gaining Sports, the Czech way? A multi-billion crown business EU subsidies A Brit who seats Czechs at one table with no rules. A magazine for clients and friends of KPMG Czech Republic
© 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Clients and friends often ask me what it is that we do at KPMG, what skills our people have and what we’re working on at the moment. My initial reaction always is: Well, where do I start? The range of our activities is so vast that even an entire book couldn’t cover them. We would nevertheless like to inform you, our clients, friends and the general public about exciting and important projects that we’re working on. We are building on the long history of Horizons, which we have transformed from extensive analytical texts into a more modern, journalistic style. The magazine that you’re reading right now is called Marwick – a platform for interesting and useful business information presented in a fun-to-read format. The magazine provides what we call “first-hand content”, i.e. information obtained directly from practicing professionals whose know-how is used by the largest companies in the country. We have analysed valuable data from our global and local surveys (supplementing them with our experts’ comments), interviewed notable Czech entrepreneurs and shared our experience. The first edition will tell you, among other things, what’s in store for the audit profession, which is about to be reformed; how to be more successful in applying for EU subsidies; what to look out for in the event of a tax inspection focusing on transfer pricing; and what CSR rules will apply to large firms. We didn’t want to make it all about us, however, so we interviewed a range of interesting figures from the domestic business world – from the managing director of dynamic Air Bank to the founder of Socialbakers, an analytical start-up, to a British butcher pursuing a unique gastronomic concept in Prague. And how did we come up with the title? James Marwick, a Scottish accountant, was one of the four founders of the global network of which we are a member. When opening offices across the United States, he travelled over 15,000 miles a year. And that was in the early 20th century! Roger White, a former KPMG partner and unofficial historian of the firm, described him as follows: “My judgment of the Scotsman is that he was a big man in every way, his personality, his stature, and his role as a mover and shaker.” Are there such personalities among us today? Jan Žůrek
3 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
MARWICK SEPTEMBER/OCTOBER 2015 briefing
A bogeyman called transfer pricing Two out of five firms fear transfer pricing. What to look out for? p. 7
Succession in the 21st century They founded successful firms after the revolution. Now they want to retire… p. 8
Students, don’t quit! Data analytics are penetrating academic ground and save both reputation and money. p. 16
10 tips for gaining subsidies Increase your chances for obtaining subsidies from EU funds. p. 18
Millennials are shaping today’s banking “Banks don’t need 38 types of current accounts,” says Air Bank’s CEO Michal Strcula. p. 20
Facebook. What’s next? Lukáš Maixner, founder of Socialbakers, explains why the blue network has had a head start and wonders what will replace it. p. 30
From snout to tail Paul Day daringly seats Czechs at long tables and serves them every single bit of whole animals. p. 34
Marwick – a magazine for clients and friends of KPMG Czech Republic. Published six times a year by KPMG Czech Republic, Pobřežní 1a, Praha 8, Czech Republic. MK ČR E 22213. To subscribe to the on-line version, visit www.marwick.cz. © 2015 KPMG Česka republika, s. r. o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
4 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Fraudsters in the CR and Germany are most often uncovered by colleagues How do employers learn about fraud? In Germany, more than fifty percent of investigated fraud cases were detected by employees and reported via an internal whistle blowing system. In the Czech Republic it also is colleagues who most often detect fraudsters, but only in less than one fourth of the cases does whistle blowing begin the investigation of fraud. Such mechanisms have either not been implemented or are not being properly used. In Germany, internal audit departments uncovered 52% of investigated fraud; in the Czech Republic this happened in only 13% of the cases. This may derive from the fact that a large number of Czech companies either do not have internal audit departments or that these departments are too small. According to respondents, half of German companies use
their data to identify warning signals. In the Czech Republic the number is even higher, i.e. 57%. But, as was revealed during subsequent interviews with these companies, here, any active monitoring of accounting data is not carried out to identify fraudulent acts. Moreover, subsidiaries obviously expect analyses to be made by their headquarters, which can definitely not be the case for small and medium-size companies. In addition, German parent companies do not usually have access to the accounting records of their subsidiaries established in the Czech Republic and thus cannot assess individual transactions, relying primarily on reporting packages prepared outside the subsidiaries’ accounting systems. This undoubtedly obstructs any effort to analyse data to identify potential risks of fraud within the group of companies.
The data derive from a 2014 survey of economic crime in Germany, results obtained from KPMG’s fraud management strategy assessment tool (FMSAT) and the outcomes of KPMG’s Global Profile of a Fraudster Survey.
A typical fraudster enjoys the trust of the company and the people connected with it 36–55 years of age
What motivates a typical fraudster?
typical for 83 % of fraudsters
48 % personal gain 26 % feeling that he can 26 % greed
Trust he often holds a management position and enjoys the trust of his employer
91 % of fraudsters have accomplices
Male autocratic, highly acknowledged, extroverted, friendly and careless
USD 50–200 000 the amount of money that companies are most commonly deprived of
Most common types of fraud 83 % misappropriation of assets 39 % income/assets deriving from fraudulent acts
1-5 years period over which frauds are usually perpetrated
Ilustration: Štěpán Lenk
© 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Changes in audit to affect thousands of corporations The audit business is about to undergo a revolution. Thousands of corporations from all twenty eight EU countries are to be affected by new EU audit rules from 2016. In 2014, the European Parliament approved fundamental changes to audit legislation. National parliaments must transpose these changes into local legislations by June 2016. The Czech Republic will be no exception in this respect, with the Ministry of Finance already preparing amendments to relevant regulations. Major changes will affect public interest entities (PIEs), which involve institutions whose problems may affect the entire society. The new European audit legislation focuses on banks, insurance companies, investment and pension funds as well as on joint-stock companies listed at stock exchanges and large corporations in general. This will involve roughly 300 entities in the Czech Republic and more than thirty thousand in the whole EU. The new regulations introduce the entirely new require-
ment to every 10 years Over 300 companies repeat tenders to select new auditors. In a business will repeat tenders in which auditor-client to select new relationships may go back auditors every eighty years this will be 10 years quite a radical change. The new rules will also reduce the possibility to combine an audit with some other services such as tax advisory. This segregation of services will produce opportunities to the majority of large international companies. Once their competitors win a tender and are appointed auditors, they may offer their tax specialists to the same companies as auditors will often not be allowed to provide services other than audit.
One in every five Czechs has bought groceries via the internet Although the sale of foods and beverages via the internet currently ranks as one of the smallest-size retail segments, its potential for growth is one of the biggest. Research shows that 21 percent of Czechs have already tried shopping for groceries via the internet but only two percent do it regularly. Almost every fourth person (23 percent) is about to try online shopping for food and beverages. In the European Union this mostly applies to citizens of larger cities, which is also true for Czechs: 15 percent of Czechs from larger cities compared to only 4 percent of Czechs living in small villages do online grocery shopping.
“The significantly smaller portion of rural people involved in online grocery shopping is logically caused by the current inaccessibility of such a service as 14 percent would like to try it but do not currently have the opportunity. In addition to the size of the place of residence, the amount of income plays an important role. People shopping for food via the internet are usually people with a higher income. Czechs tend to be much more conservative than the British, Danes or Dutch but I believe that they will find their way to online grocery shopping very soon.” Karel Růžička
Partner in charge of food and drink industry services, KPMG Czech Republic
Which foods are most often bought via online supermarkets?
35 % spices and seasonings
37 % fruit and vegetables
38 % alcoholic beverages
40 % milk and milk products
44 % sweets
55 % soft beverages
66 % non-perishable foods
The data derive from KPMG Czech Republic’s online survey “Shopping habits in the Czech Republic” of 1 000 respondents carried out by the independent research agency Data Collect in March 2015.
6 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Tax administration to scrutinise transfer pricing The term “transfer pricing” makes most people think of transactions carried out between firms within a multinational group of companies. We often hear entrepreneurs say that it doesn’t concern small and medium-sized enterprises or that transfer pricing rules only apply to transactions outside the Czech Republic. The opposite is the case. When multiple entities within a single group participate in the creation and delivery of a product or service, they enter into intragroup transactions that they should invoice to each other using arm’s length transfer pricing. Why must prices be at arm’s length? The purpose of this rule, compliance with which is expressly required by Section 23 (7) of the Income Tax Act, is, among other things, to prevent the transfer of profits from jurisdictions with higher tax burdens to those with more favourable tax regimes (e.g. tax havens). Using prices that are not based on the arm’s length principle may primarily result in additional tax (plus fines and default interest) being assessed. In the past months the Czech tax administration has repeatedly warned that it will focus on transfer pricing. We have also seen an increase in the number of inspections. In addition, the authorities have introduced a new mandatory appendix to the income tax return that Czech taxpayers meeting certain criteria must use to indicate volumes of intragroup transactions by type, separately for each related party. Based on this information, the tax authorities will be in a better position to decide where to perform an in-depth audit. Are there any positives to transfer pricing? In spite of the warning signals, some firms still pay little attention to transfer pricing. And it’s not just the risk management aspect that often gets neglected. There are also benefits that can be derived from transfer pricing, including tax burden reduction. When set up properly from business and legal perspectives, transfer pricing can ensure that a group’s tax burden is not higher than absolutely necessary. Two fifths of companies operating in the Czech Republic are concerned about increased scrutiny by the tax administrator, while one in ten firms considers transfer pricing an opportunity and a tool for future planning. A third of surveyed companies have no transfer pricing documentation in place. As far as tax inspections go, 63 percent of respondents say that transfer pricing has never been a part of inspections. More than a third of firms, on the other hand, have experienced transfer pricing inspections. According to survey respondents, the tax administrator focuses more on invoices for management fees and services, and less on the supply of products and financing terms. The data derive from KPMG Czech republic´s survey among 154 Czech and Moravian companies in May 2015.
Firms‘ perception of transfer pricing
10 % opportunity for planning uncertainty and increased 41 % scrutiny by the tax administrator
49 % increased admininstrative burden
What to look out for 1. Don’t neglect domestic transactions A frequent misconception among Czech firms is that transfer pricing only applies to international transactions. Czech tax legislation, however, does not differentiate between domestic and international transactions. 2. Don’t forget to invoice Medium-sized and small companies sometimes forget that services provided to related parties must be invoiced. This often leads to peculiar situations where one group company purchases software or develops know-how that is used by multiple organisations within the group even as the cost is borne by just one entity. 3. Don’t pay unnecessarily high taxes There are frequent cases where, for example, distributors within a group will post losses even as their parent company reports excessive profits. Such an arrangement may have an economic basis, but is often simply caused by the absence of a comprehensive approach to the group structure and the division of roles. A poorly designed transfer pricing scheme may result in tax inefficiencies (e.g. the expiry of tax losses) and, ultimately, in a higher tax burden placed on the group as a whole. 4. Don’t underestimate the importance of planning Poor planning tends to result in the need for major systemic changes several years down the road. However, the tax authorities are very sensitive about such changes and subject them to detailed scrutiny. Consideration should be given ahead of time to what functions each group entity will perform and what will be the associated risks, as this influences the selection of the appropriate transfer pricing method.. Daniel Szmaragowski
Director, KPMG Czech Republic
7 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Czech family businesses are building a tradition
Succession in the 21st century
Family firms are an essential part of commerce. Featuring in countless success stories and financial statistics, they have long inspired screenwriters and novelists alike. In Europe, the largest number of them can reportedly be found in Italy. In the US, they account for more than half of all firms in the country. The Czech Republic does not need to feel left behind, either. World-renowned brands such as Baťa, Škoda, Petrof or Tatra all share a familybased background. Text: Lenka Medvecová
Illustration: Tomski & Polanski
8 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
9 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Family businesses in the Czech Republic were first halted by war and then obliterated by communism. When the regime collapsed, many people had to start from scratch. They have staged a comeback on the domestic market and are now just about to be handed down to the next generation.
Keeping it in the family
The founder of RENOCAR, the oldest BMW car dealership in the Czech Republic, has successfully dealt with this challenge. Miloš Vránek Sr passed his firm on to his sons in 2013, and the Vránek brothers, Miloš Jr and Pavel, have been at the helm since then. “It’s a great success that my brother and I are able to agree on things and that we seperate responsibilities based on our skills. My brother became executive director and I enjoy being in charge of sales,” describes Miloš Vránek Jr. Both fully appreciate that taking over a family business is both an opportunity and a big responsibility. “In a family business, you can’t hide behind a business card. Being trustworthy is a matter of the entire family’s reputation,” says Miloš Vránek, who originally studied to be a physician. More than 10 years ago, however, he decided to come help with the family business. Founding a family-run company is not that hard. Things get trickier when it comes to cooperation or succession. Jiřina Nepalová, founder and director of RENOMIA, says that first the family had to learn to do business together and to define responsibilities so that decisions could be made unaided by the family background. “When you have
a rapidly growing company, it’s advisable to involve skilled people in its management. RENOMIA has an executive committee with six members, three of whom are family members. All share voting rights and responsibilities equally. But we still want to perserve the firm‘s family character in terms of the speed of decision-making, flexibility and the friendly environment,” she adds.
Handing down the reins
According to a survey by the Association of Small and Medium-Sized Enterprises (ASME), as many as 90 percent of family firm owners agree that the business should be handed down while they’re still alive. Most respondents consider it inappropriate to leave their offspring with just a testament. Handing down a company is a long-term process. For successors to succesfully take over an established firm without difficulties, preparations need to be made. The owner has to have a clear idea of whom to hand the firm over. If families can’t agree, they should seek the help of advisors who can steer family discussions in the right direction and help find an acceptable solution for all. For owners, tackling succession after turning sixty may be too late. One should first make a plan for handing over the management of the family firm and then focus on transferring ownership. Succession planning must result in all steps being accepted by all concerned parties to prevent a war between the “winners” and the “losers” and the subsequent destruction of the family business and relationships.
10 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
SURVEY: Have you thought about succession in relation to your company?
head of sales at RENOCAR
Courted by business partners
Growing up with the firm Since running a family business is often a passion for the owners, children get to know the firm very early on.Parents involve them and train them from childhood. According to the ASME survey, as many as half of those surveyed employ their children, who often start working in the family business at 18 or 21. For many owners, instilling the right values and keeping the family together are the most important elements. Cohesion is one of the biggest advantages of a family venture. In foreign countries, owners often send their kids to study abroad and to intern at other firms. Children, too, may feel the need to assert themselves, which is healthy for their personal development. To let them develop their managerial skills one needs to support their transition to independence and their desire to try something that hasn’t been prearranged. According to the ASME survey, as many as 68 percent of owners feel it’s important for their successor to have experience from another company.
This year, Czech family firms are struggling to gain access to financing. They still are optimistic as to their future revenue and remain positive about how they are perceived by business partners and customers. “The customer benefits from a firm‘s specific identity represented by the owner. The firm as such benefits from the flexible decision-making,” says Miloš Vránek of RENOCAR. According to Jiřina Nepalová of RENOMIA, family firms are successful because their founders embody the spirit of the venture, develop a unique idea and pursue their vision. “Such founders provide their companies with vision and courage. They unite and provide the know-how, enthusiasm, energy and will necessary to move things in the right direction. They overcome initial obstacles more easily, perform time-consuming tasks, have the will to take care of thousands of details and dedicate all their time to the company. It is this energy, hard work, enthusiasm and dedication that are key and often surpass what an external manager is willing to do.” Facing the critical stage of succession, Czech family firms are attracting an increasing number of people. They are blazing a trail for new generations while building a new tradition in Czech business.
“Following Tomáš Baťa’s example, our kids are already getting to know the company from the bottom up. We instil in them values such as reliability, trustworthiness and perseverance.”
director of ROMEX
“No, but the issue of handing down a family business interests me a great deal at present. I have attended several workshops on the topic. Since I’m still in the process of gathering relevant information, I have no concrete plans yet.”
founder and director of RENOMIA
“For us, it’s quite simple. My sons have been involved in the company for almost 22 years. They and the company’s other managers have had the opportunity to get trained in all areas so as to be able to manage their teams properly and be good leaders. They directly decide on key issues. We are creating a structure that fosters the best people and ensures stability, development and expansion for the RENOMIA GROUP. Any of the managers may become the leader, and it doesn’t have to be a member of our family. 11
© 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Hard work is worth more than business theory In times when others worried about the onset of a deep recession, LIKO-S kept developing and introducing new products. “At key moments, instead of just repeatedly thinking things over, you must have a drive,” says Libor Musil, one of the founding members of LIKO-S. In 2014, the Musils received the Best Family Firm award.
Text: Lenka Tinková
In a family business, work problems are dealt with immediately
LIKO-S started doing business in an old sugar factory in Slavkov near Brno. Today, it has branches in four foreign countries and a plant in India. CERN’s world renown research centre uses their products. “Hard work is the way to deal with every situation. Without it, there is no success. We’ve always followed this motto,” says Musil.
Our motivation was freedom
Libor Musil founded LIKO-S together with his father-inlaw after the fall of communism. Instead of a business plan, they had a strong desire to make the most of the new opportunity. With no money, no foreign language and no business know-how, they started in the industry that was the easiest at that time – construction. First, they manufactured steel structures, then started welding more sophisticated parts for the food, pharmaceutical and metal industries. Now they have three divisions, four branches and sales reps in several countries. “We just started doing whatever we could to make money. Only later did we switch to a system of planning and budgeting. I think that today’s young people are too tied down by theory and only few of them launch a business even though there are so many business opportunities on the market,” says Musil. His wife gave up her own business two years after LIKO-S was founded and joined the family business. Now both of their children and their son-in-law are working there, too.
At times, business is discussed even at dinner at the Musils’. “You can’t separate business and private lives in a family company; you can only set some simple rules as to when work should not be discussed. Once, when asked if we really discuss work at home, our children replied that the only time this doesn’t happen is at Christmas, but once we unwrap all our presents, then we talk about work again. think It is important to talk about things openly. In a family, problems mustn’t remain unresolved. They will come out eventually and may cause a lot of conflicts. Every such unresolved issue impacts the company and is eventually reflected in the business,” says Libor Musil, Chairman of the Board of Directors at LIKO-S.
From the start, the kids grew up with the company Mr and Mrs Musil are gradually working on their succession. Business issues have always been discussed in front of their children, who in fact grew up with the company. Kids of business owners grow up differently from their peers. Libor Musil explains: “For them, it is both a responsibility and an opportunity. It is important to implant values in them. We tried to motivate them towards work and modesty from the very beginning.” LIKO-S’ corporate culture is also based on strong values. “Profession and behaviour go hand in hand. Many companies tolerate poor behaviour by their staff for profit reasons. In contrast, people unable to share our corporate philosophy must leave, even if they are qualified experts. That’s what makes us different,” says Musil. Both children first and graduated and worked abroad. After their return they decided on their own to take over the family business. “They are learning how things work from the bottom up, are very responsible and learn from their mistakes. We’ve decided to already leave most of the new things up to them. It’s good to pass managerial responsibility onto them as early as possible, right after they learn the basics. My wife and I were also young and I guess it is easier to solve 12 problems at an earlier age,” concludes Libor Musil.
12 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
This year, LIKO-S has built a modern development centre in Brno. The construction took only 27 days. 13 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
New CSR rules for big players Many years ago in the Czech city of Zlín, Tomáš Baťa built a school for his employees. If he had done so nowadays (more precisely, in 2017), he would have had to report it, as his sizeable firm would surely have fallen under the category of large businesses, which as of 2017 will have to deal with a new dose of requirements relating to non-financial reporting. Many years ago in the Czech city of Zlín, Tomáš Baťa built a school for his employees. If he had done so nowadays (more precisely, in 2017), he would have had to report it, as his sizeable firm would surely have fallen under the category of large businesses, which as of 2017 will have to deal with a new dose of requirements relating to non-financial reporting. Specifically, this entails the annual reporting of activities related to sustainable development and corporate social responsibility (CSR). The potential spectrum of such activities is wide indeed – reducing a company’s environmental impact, supporting the non-profit sector, ensuring that employees are healthy and well-trained, etc. The new requirements are based on an EU directive, which is being gradually integrated by individual member states into their legal frameworks so that the respective laws become effective from 1 January 2017. “Originally, we wanted non-financial reporting to be voluntary and let companies decide whether to apply it. Alas, the EU made it mandatory. Nevertheless, we will at least try to make the process as easy as possible for companies,” said Martin Šabo, a representative of the Ministry of Finance, at a conference on the topic. The new duties will only apply to the truly big players in their respective industries; in the Czech Republic, this will include approximately 30 companies. Under the directive, the requirements will affect so-called “public interest entities” with more than 500 employees and with assets of at least half a billion Czech crowns or a net turnover of at least 1.5 billion, i.e. companies whose problems could jeopardise other parts of the economy as well. This includes banks, insurers, companies quoted on an EU stock exchange, etc. Information about corporate citizenship, as well as about financial performance, forms an increasingly important part of a large company’s presentation. According to
people who prepare reports for major multinational firms, socially responsible companies have better access to bank financing and, not surprisingly, see an improvement in the public perception of their products.
What should a CSR report look like?
To find examples of firms that do not take corporate responsibility lightly, one doesn’t need to search abroad, though. In the Czech Republic good quality reports are awarded by Business for Society, an association of firms abiding by CSR principles. “The award is reserved for companies that comprehensively, transparently and effectively measure and communicate their social responsibility and sustainability activities,” says the website presenting the competition. “We prepared our report in accordance with the GRI G4 – Core Sustainability Reporting Guidelines, which helped us cover the topics that our stakeholders find most relevant. We offer the same tried-and-true approach to our clients,” says KPMG Legal’s Viktor Dušek, who has been specialising in this field for a long time. “The exact shape of the legislation that will be adopted in the Czech Republic will also play an important role. We base our work on international methodologies, while the directive expressly requires member states to allow companies to use domestic, EU-wide or international frameworks as a basis. It’s also possible that the law will not mention specific methodologies and companies will have the freedom of choice, as everything which is not forbidden is allowed. However, since member states have until 6 December 2016 to implement the new rules, we must wait and see what approach is selected by the Ministry of Finance (which is responsible for implementation) and how the entire legislative process plays out,” concludes Viktor Dušek.
14 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The future face of audit Why did the last financial crisis occur and why on earth did auditors fail to warn us against it well in advance? Questions like this usually derive from a low awareness of where the core of an auditor’s work lies, which results in inadequate and excessive expectations. On the other hand, however, the crisis should have led, and to some extent did lead, to the identification of areas for improvement in the audit process, establishing a plan on how to develop this profession in the future.
How to rationalise fees for software that you actually use? At present, a number of companies are dealing with the non-existing administration of software licences, which is primarily reflected in the difference between the actually deployed and used software and the number of licences purchased. Only a minor part of these companies are gradually implementing an integrated approach to Software Asset Management (SAM), which helps them save funds. Moreover, the companies are usually exploiting this option once they have been audited and have incurred unplanned, heavy expenditure in addressing audit findings. A proactive approach to SAM implementation results not only in cost savings, but also enables more precise internal accounting and budget planning, easier software administration and, above all, minimises the risk of occurrence of audit findings. Implementing SAM can save up to: (percent of the acquisition cost of software)
De facto, an audit only confirms historic financial information stated in the financial statements. For decision-making purposes, however, shareholders and other parties concerned increasingly need information stated outside the statutory accounts since the financial statements often do not provide sufficiently deep and current insight into an organisation’s operations. What can we do about this? First, we should focus on where an organisation’s values are really created and not spend an excessive amount of time on dealing with regulatory requirements, as these may actually reduce the willingness of auditors to examine an organisation’s operations with an inquisitive eye. This primarily applies to auditors who are new to the profession. Second, we must make better use of our position as persons who may get under an organisation’s skin much more easily than others. In addition to standard audit reports, auditors should thus provide their clients with their views of the organisation, analysing and interpreting its various functions such as IT, HR, legal, finance, controlling and risk management. Auditors could thus provide their clients with broader assurance regarding information outside the financial statements, for example, non-financial information such as the fluctuation of employees, waste management, etc. since such information may bring added value to its users. Auditors have a unique chance to do just that. It is up to them and the regulators how well they will utilise this chance. Petr Škoda
Partner in charge of audit KPMG Czech Republic
4–8 % 2–4 % 2–3 % 1–2 %
by monitoring requirements for installations according to time priorities; by re-distributing licences and infrastructure changes
by negotiating better prices for licence centralisation and by aggregating demand by cancelling maintenance and support no longer needed by restructuring installations
by removing duplicity software
Why are only a few companies focusing on SAM? Apart from the need to focus on “more strategic” projects, this might be due to a lack of professional resources on the market and the complexity of the entire issue. SAM professionals combine their technical skills with a thorough knowledge of the licence conditions of their suppliers. A major challenge is the implementation of necessary processes and controls for the management of SAM in real time, as it involves areas such as HR, finance, procurement, etc. Another cause might also be the difficulty of finding the individual licences’ history. What should therefore be your next step? You are probably becoming aware of the complexity, benefits and investment necessary for the SAM projects. You might soon find yourself the subject of an audit initiated by your suppliers who are increasingly interested in compliance with contractual conditions. Be that as it may, the worst you could do would be to wait and address the audit findings only after they arise. In the next issue of Marwick we will describe specific measures to identify risk areas in the management and administration of licences and, last but not least, the basic steps for a SAM implementation.
Don’t want to wait? Contact KPMG’s SAM professionals at : firstname.lastname@example.org. 15
Data analytics can help students and save a university’s reputation and money
“My study results aren’t good enough for me to qualify for a merit-based scholarship. I have to commute two hours every day and the school costs a lot of money. Should I consider quitting school and finding a job instead?” Many a university student has followed a similar line of reasoning. This is a problem for all universities, not only for those charging high tuition fees like in Great Britain. When university students make the final decision to prematurely leave their studies, it is a tremendous loss for all. Such students do not obtain degrees, wasting the time spent at universities. Their future work life gets more complicated (also financially; in Great Britain, the lifelong income of an individual without a degree is lower by about 150 000 pounds than the income of an individual with a degree). Universities lose their reputation and income. And society? According to research, the loss inflicted by students prematurely leaving universities on the British economy is about GBP 7 billion a year. What can be done about this? A phenomenon of recent years – data analytics – may help tackle the problem.
A student lost is a loss for all Students quit their studies for various reasons – the highly demanding nature of their studies, hefty tuition fees or sometimes health or family problems. University students in Britain generally pay tuition fees of up to GBP 9 thousand a year. If they quit their studies prematurely, universities obviously lose a substantive source of income that may otherwise be used as an investment to improve students’ environment, services, research and infrastructure. “Of course, this is not
only about income. It is in the interest of both students and universities that the students complete their studies as graduates have a better chance to find good jobs and universities improve their reputation by being able to place their graduates into the labour market and also attract new students,” says David Slánský, specialist in data analytics at KPMG Czech Republic. Who would not like to go to a school that helps students during their studies? The total student population is expected to decrease soon, thus a school’s reputation and students’ interest are now matters of the greatest importance.
16 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Students taking away 30 million pounds a year In cooperation with one of the most renowned universities in Great Britain, KPMG carried out a project which revealed that owing to students quitting their studies, this university loses both prestige and money estimated at GBP 30 million annually. The figure will not be as dramatic in the Czech Republic but the principle remains the same. Czech state universities may lose their good reputation (leading to a decrease in the interest shown by secondary school students) and state contributions paid to universities per student, while Czech private universities may have problems enrolling new students and forgo income from tuition fees in the same way as in Britain.
Best practices penetrating the education sector Naturally, universities are making a real effort to find solutions. And, unsurprisingly, they tend to search for
best practices in other market segments, for example, in banking and telecommunication sectors. Increasingly often we can encounter “student´s experience” practices or practices that are based on an individualised approach to students deriving from the perfect knowledge of a student’s situation. Great Britain introduced the concept of a personal tutor, usually a professor, a doctoral candidate
Thanks to data analytics, 20 % fewer students may drop-out. or an officer of the registrar’s office who takes care of about twenty students. These tutors have to know as much as possible about their students. Data analytics may help them in their task. However, a machine can only help collect and save data at one place and assess it; effective action must be undertaken by the personal tutors or the students themselves! Universities and, for example, financial institutions have at their
disposal an enormous amount of data about their students/clients and may to a large extent predict their behaviour. Banks, insurance companies and other institutions have long been using analytical systems to identify clients that may leave, or conversely, those that may be acquired. But while one bank client can be replaced with a new one the same day, a student who quits is irreplaceable. Schools as well as banks and other institutions have ascertained that an individualised approach to students/clients makes sense. Tests have shown that data analytics may anticipate and respond to up to 20 percent of students’ premature departures from university. Considering the university we discussed above, this would mean a positive change for hundreds of students, savings of about GBP 6 million a year and an immeasurable amount of reputation. This figure would easily cover the expenses incurred for data analytics including their implementation.
From anonymous data to specific students KPMG Czech Republic along with their British colleagues carried out a project focusing on the use of data and advanced analytics at one of the most renowned universities in Great Britain. What were the main principles? We extracted relevant historical data relating to students from the university’s internal systems. This data involved, for example, socio-demographic information, study results from a lower stage of education, subjects and timetables, study performance, interests, accommodation, temporary jobs, printed pages, access to libraries, utilisation of cafeterias, books borrowed and access to various school portals. We also supplemented the
data with publicly available information such as students’ background and information on where they currently live, etc. We then applied decision science methods to this data to be able to anticipate when and why a particular student would quit the university. Our task was quite complex as we took into account more than 1 500 signals applicable to students’ behaviour and identified tens of possible combinations of reasons why it was quite certain that a particular student would quit, anticipating with high probability the departure of individuals four to twenty months beforehand. We used comprehensive predictive models based on which we were able to propose solutions for each individual student.
All the above functionalities were integrated into an analytical platform titled KPMG Always-On Engine. Our system includes, inter alia, a portal for work-flow management, student feedback collection and pre-prepared reports or dashboards for various executive and management levels. The project’s implementation, accomplished by putting the platform (i.e. a service) into use, takes only three to five months and does not require much time or effort from university employees. Jan Pém
Data&Analytics, KPMG Czech Republic
10 tips for gaining subsidies Who would refuse some additional money for their entrepreneurial activities? Subsidies from the EU funds can be used in the innovation of your products, energy savings or the establishment of an IT centre or something entirely different. You know best in which area you need some additional money. Do not miss out on the opportunity to obtain funds for developing your business and apply for the subsidies provided within the programming period 2014–2020. 1
he early bird T catches the worm
Submit your application early enough, definitely before making the first project-related orders or concluding a project-related contract. If you fail to do so, you will lose or reduce your chances to get a subsidy. The subsidy programmes are not 24[7 shops, but instead are being opened exclusively on the date stipulated in the calls for applications.
A project does not end at the moment of subsidy approval
Before opening a bottle of champagne to celebrate getting the subsidy, do plan your next steps carefully. If you fail to keep the time limits and specific indicators, your plans can easily come to a premature end.
Watch out for possible traps and problems 3
Carefully read the rules for allocating subsidies– including all unclear stipulations and pitfalls. Formal deficiencies can result in the reduction or withdrawal of the subsidy.
etermine clearly who D is responsible for what
As the proverb says, too many cooks spoil the broth. The same applies to project teams. If you do not clearly segregate responsibilities, you risk failing to meet the deadlines. Most types of subsidies involve several departments of a company; as a result it is necessary to clearly define individual responsibilities.
18 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Avoid isolating your project
It is good to plan your project within the context of all potential investments, to assess it on a comprehensive level and to evaluate your chances for obtaining a subsidy. Some projects have no chance for success if submitted individually, but when submitted together with others, they can be successful.
Do not rely on state officials
The state is the provider and administrator of the subsidies, not an advisor providing full service. The state officials usually know only a part of the information about subsidy programmes and are therefore not qualified to answer all your questions. But you probably already know this from your other discussions with state authorities…
The preparation of a project represents an administrative burden and requires the involvement of experienced experts with extensive knowledge of the programme. The time-consuming character of the work tasks connected with preparing a project also does not make it a task to be dealt with by assistants during their lunch break.
It takes more than a secretary to prepare a project
What if your application is rejected?
There is no automatic right to a subsidy so you have to expect that your application may be rejected. Do also consider other options such as investment incentives or using a tax-deductible item connected with research and development costs.
The same rules apply to everybody
The saying rules are made to be broken does not apply in respect of subsidy programmes. We recommend you get acquainted with the terms and conditions of the subsidy programmes at the very beginning of the project and regularly consult them. Failure to meet them may result in sanctions or even withdrawal of the subsidy
Inspections cannot be avoided 10
You can expect inspections both from Czech and EU authorities, repeated and performed even after several years. If one inspection team does not discover a weakness in your project, another one might, which may jeopardise the whole project.
Does this sound too complicated? Your chances for obtaining a subsidy from the EU funds can be increased by timely and thorough planning, a sufficient level of knowledge and experience, good human resources and the necessary competencies. Go to www.kpmg.cz to get more information and brochures about EU funds or to approach our experts at email@example.com. © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Michal Strcula, managing director of Air Bank
Banks don’t need 38 types of current accounts According to the managing director of Air Bank, brick-and-mortar banks are not dead. “We have built our bank on the notion that branches should be an integral part of it,” says Michal Strcula. “They still play a role, albeit a different one. Their purpose is to enable contact with clients rather than allowing people to submit payment orders in person,” he adds. Michal Strcula believes that large financial institutions have too many identical products. “I think no bank needs 38 types of current accounts, because there is only one. Making clients face these kinds of choices and hassles is completely unnecessary,” he argues. Text: Zdeněk Pečený
Photo: Jindřich Kodíček
20 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
21 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
How have Millennials (i.e. people born after 1985) influenced the banking business? A lot. These people have grown up in a completely different environment than the older generations. They are more likely to demand a certain standard, especially if they are expected to pay for it. Young people are simply much more open and not afraid to state their wishes and needs. They quickly adapt to new technologies such as mobile applications and contactless payments, and commonly use the internet to communicate with the bank. Being prepared to communicate with clients where they – not you – want is essential. Your services should reflect that. Millennials, and their requirements, are shaping today’s – and tomorrow’s – banking. They want things that are simple, clear and accessible. From the beginning we have designed our services based on what people expect from the bank, so we have quite a lot of such clients at Air Bank.
Millennials are shaping today’s banking. When you speak of communication, do you mean sales channels or purely service-related questions? It’s not much about sales channels. The thing is, today’s world is much more fast-paced. This generation spends more time on the internet. Whereas before, people would contact their bank with questions only through branches or call centres, today there’s Facebook or Twitter, which can also be used to ask questions. And even though in the past, banks were not used to answer such service-related topics, they have no other option now. Plus, you need to realise that now you’re not answering just one client’s question. The answer will remain posted out there and can be viewed – or commented on – by anybody else. Previously, it was more about one-way communication, but that has changed. There’s Facebook, Twitter, Google+ – anything you can think of. The people are on there and habitually use these tools to communicate with anyone, including their bank. Sales channels, on the other hand, are not that much different, largely thanks to legislation. You can’t sell via Facebook (yet). Not yet. Nonetheless, attempts have been made to transfer money using requests entered via Facebook, and some of them are functional. It’s mainly about communication, though. You mentioned simplicity – by that, do you mean that these clients are not looking for sophisticated, more complex products and services? Every need has a way in which it can be satisfied. Simplicity does not mean that the bank will not have a certain product. Simplicity means that no bank, in my opinion, needs 38 types of current accounts, because there is only one current account. No matter what they tell you, it’s still the same single thing. People nowadays are busy and don’t want to wade through options 1 to 10. Why? Why should they? Making clients face these kinds of
choices and hassles is completely unnecessary. Simplicity lies in how you design your products. They must be easy to understand and user-friendly. Because only then will the client be able to use them. So I would not equate simplicity with not having something. That would be extreme. Having nothing is simple but not very clever, because not many people will buy that nothing… You mentioned that sales channels have not changed much… Sales channels as such are not changing significantly, although the way that clients use them is gradually shifting. For example, people increasingly use the internet to activate products. With respect to banking services, however, branches continue to be perceived as a benefit that clients want. That will not change even in the future. Granted, the role of branches has changed. In the past you had to go there to do most things related to your account; today, it’s much more about perceiving the bank’s physical presence. The fact that you can actually see the branch sort of underscores the stability of the bank. You want to have a place where you can go in urgent cases. Or you prefer to discuss certain matters in person. At any rate, you no longer need to go there to transfer money. That’s where the situation is dramatically different. New technologies are thus primarily changing the role that sales channels play. Before, nobody could imagine using the internet to open an account. At present, more than a third of our accounts are opened that way, without the client having to go anywhere. How do you deal with identification issues? In the Czech Republic, there’s the “transferred identification” concept, which is defined by legislation. It’s currently used by four or five banks. Only four or five? Yes. And they are mostly smaller banks. When you have a large distribution network, you’ll be reluctant to invest in making this channel good enough for people to actually want to use it. Each bank chooses its own business model. So a third of your accounts are opened without you seeing the client? Yes, but 90 percent of our clients end up visiting our branch anyway. We don’t force them to; they simply want to have a look. Frankly speaking, we’re glad. And that’s why we are expanding our branch network. Today we have 26 branches; by the end of September there should be four more, with an additional five being added over the next few months. So we’re talking about some 10 new branches. When you say that 90 percent of your clients visit your branch, it probably has to do something with the way branches are perceived and the fact that, even in 2015, banks can hardly do without them. Yes. I don’t know who ever said that branches are dead. Certainly not us. In fact, we have built our bank on the notion that client centres should be an integral part of it, and that’s why we’ve devoted so much attention to them. We believe they still
22 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Michal Strcula (34) He graduated from the University of Finance and Administration in Prague. In 2014 he became the managing director of Air Bank. He started codesigning Air Bank’s philosophy and the bank’s launch as early as 2009. Upon the bank’s actual inception in 2011 he became the director of its retail banking division. Previously, he spent five years with the GE Money group, focusing on strategy, business and product development in various countries. He started his career at Raiffeisenbank, where he worked in various positions for four years. He enjoys devoting his free time to his two little girls and one boy and the occasional sports activity.
play a role, albeit a different one. Their purpose is to enable contact with clients rather than allowing people to submit payment orders in person. If someone wants to come to the branch to submit an order, they can. We don’t try to stop them. Quite the opposite. But your branches do not offer cash transactions, for example. Not true. As far as cash is concerned, if you bring it, you can deposit it; if you want to withdraw it, you can make a withdrawal. Using ATMs and cash deposit machines. But we don’t do cash transactions in foreign currency and we don’t process coins. That said, we don’t know of any of our clients that miss these services. How much cheaper are cash deposit machines compared with the old-fashioned till and vault? Obviously it’s a cheaper option than having a safe, a counter and someone operating it all. That’s one aspect. Another aspect is that people use cash differently today than they did in the past. The ratio between how much you pay with your card and how often you withdraw money from an ATM is 7 to 1. Ten years ago, it was fifty-fifty. In other words, people no longer queue up to get to that lady at the counter. We don’t miss tills. Those who do will probably not become your clients. Naturally. If someone needs to cash in coins on a daily basis, then we’re not the right choice for them. We focus on clients who don’t need such niche services. For example, if we were to serve a businessman who works with cash a lot, a till would
be indispensable. However, we serve ordinary clients who don’t carry around five million in their briefcase, let alone in change. Will most of our banks remain universal or will they become specialised? That’s a rather difficult question. In terms of investment versus universal banking, there will undoubtedly always be a certain number of investment banks because their business is completely different. What we’re talking about here is the ordinary world of universal banking. I expect the range of services to remain pretty much the same there. The differentiating factor will be the profile of each bank. We are known to have a pretty clear idea of our banking model. If you lack identity, clients will have no reason to want you. So there will certainly be differentiation in how banks offer their services and how they present themselves to clients. But the assortment of services will remain the same.
Ninety percent of our clients visit our branch. We don’t force them to; they simply want to have a look. And what about the product portfolio? Will it expand rather than shrink? It depends. We want to add something meaningful each year. We’ve just launched mortgage refinancing. Why? Because we have 370 thousand clients. From a purely statistical perspective, 10 percent of the population currently have a mortgage. That means 23
that 37 thousand of our clients have a mortgage and we’re forcing them to have it with somebody else because we haven’t offered the product so far. That’s why we’re launching refinancing. As the next step, we’ll launch mortgages for new clients as well. Any other new additions? For instance, right now we offer services to individuals but not to sole traders, whose needs are identical to yours or mine 90 percent of the time. So in the coming months we will make it possible for sole traders to use our current account for their business purposes. And what about other banks and their product offers? Some traditional banks would like to consolidate their portfolios but it’s not that easy. How do you turn those 40 packages into just one or two? And to find a reason why to do so just now is hard. I wouldn’t really bet on a significant one-off reduction about to take place. However, all banks are going down the road of making gradual simplifications. How is big data being used in today’s banking? I would say it’s barely used at all at the moment. The current use of large unstructured data is very limited. What will it be like in the future? Huge. As soon as the banks learn how to structure and use
it. The most obvious ways include assessing the client’s credit risk. But that can be done using basic data for now. Here’s a hypothetical example: a person who bets on sports matches every day may be riskier than a person who doesn’t bet. If that’s true, then, through the better use of data, you can find out if a loan applicant bets on a daily basis. Such data will be analysed in similar – only much more sophisticated – cases. Banks will also try to use it to better target their offers. That’s what interests us too, but in a slightly different way. We, for one, don’t want to bother people with something they’re not interested in. So we, too, will be looking at working with big data… How do you see the future of Air Bank? By 2020 we want to have a million active clients. That means clients that like us. In how many countries will Air Bank operate in 2020? There is an ambition to enter international markets. It all depends on future developments and on whether or not local regulators will let us into their country. We have identified possible locations where the bank could open, and they’re all to the east of us. In any case, it’s up to our shareholder and my predecessor, Erich Čomor, who is in charge of these matters. I’m responsible for Air Bank’s Czech operations and my task is to have a successful bank that people will love here. .
Your friendly banking butcher around the corner
WELL-HUNG SIRLOANS HAM SAVINGS PORK BELLY FUTURES 24
Fifteen years ago, people would happily go to a hypermarket to do their weekend shopping worth several thousand Czech crowns that would last them for over a week. Nowadays, the trend is going into the opposite direction as many people feel that they just can’t find the quality they desire in hypermarkets. Small retailers try to use this to their advantage and focus only on a narrow range of products – we buy meat at the butcher’s, bread at a bakery, while in supermarkets, we buy things like flour or canned peas. If we look at the versatility on offer, the majority of Czech banks remain similar to the hypermarkets of the 1990s. A sufficient number of people still like this and banks in their existing form may therefore survive another several years without having to make any necessary changes. Smaller but more rapacious players on the market are already looking for their pray, however. Such banks focus on specific areas and offer services to their clients under more favourable terms, often also at a higher quality, which lies not in the versatility of the offer but rather in its specialisation. I expect that shopping for financial products and services will soon be akin to grocery shopping. Everyone will have a credit card with one bank, accounts with two other banks and a mortgage wherever it will be the most convenient. Some supermarkets are already furiously promoting their bakeries and butchers. I wonder what course versatile banks will take. Michal Pobuda
Director, KPMG Česká republika
Interest– Komplexní vzdělávací program pro finanční instituce
KPMG Business Institute představuje INTEREST – Komplexní vzdělávací program pro finanční instituce. Během čtyř měsíců se dozvíte řadu užitečných informací z oblasti daní, účetnictví, auditu a problematiky podvodného jednání, které následně využijete ve své praxi. V podzimní nabídce najdete mimo jiné tato školení: 15. září
Jak identifikovat manipulaci s účetními výkazy podle českých i mezinárodních účetních standardů
Regulatorní dopady související s regulací Basel III/CRD IV, výkaznictví COREP a FINREP dle metodiky roku 2015
IFRS 9 – Finanční instrumenty z pohledu CFO agendy
Manipulace historických finančních informací a plánů pro finanční instituce
Legislativní úprava a aktuální výklady DPH u finančních činností
Daňová specifika leasingových společností
Školení jsou určena všem, kteří chtějí zvýšit své odborné vzdělání, najít nové cesty k řešení problémů, rozšířit si obzory a získat nové profesní kontakty. Registrujte se na dvě a více školení pro finanční instituce a získejte slevu. • Dvě školení: 5% sleva z ceny obou školení • Tři školení: 10% sleva z ceny všech školení • Čtyři a více školení: 15% sleva z ceny všech školení Registrujte se na www.kpmgbusinessinstitute.cz.
The new Chinese five-year plan is right outside the door. It aims at fighting corruption and increasing the standard of living. Although the final version of the new Chinese five-year plan (2016–2020) will be officially published only at the beginning of 2016, Beijing’s ambitious plan is already showing its concrete shape. Based on declarations of the members of the National Development and Reform Commission of the People’s Republic of China (NDRC) we can expect keeping the progressive growth of the economy at 6.5 –7% per year to be one of the major goals of the new plan. However, this goal represents a significant drop in the level of Chinese GDP growth dynamics as regards the significantly more progressive development of the country in the past years. A lower level of economic growth was observable in China already in 2014 where the GDP’s pace was at its slowest for the past 24 years, i.e. it grew by 7.4%. Where is the Chinese economy headed?? Text: Pavel Balada
26 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The development of China‘s economy
GDP (billions USD) yoY growth
1 942 10,1 %
2 269 11,3 %
2 730 12,7 %
3 525 14,2 %
4 561 9,6 %
5 060 9,2 %
6 040 10,6 %
7 496 9,5 %
8 461 7,7 %
9 495 7,7 %
10 361 7,4 %
A consumer society
Emphasis on renewable resources
In the past 10–15 years, the growth of the Chinese economy was mainly driven by exports (20–30% of the total GDP) and by infrastructure investments. However, the Eurozone’s financial crisis had a significant negative impact on Chinese exports. With regard to the impact of this financial crisis, together with the expected deficiencies in the workforce and its rising costs, the Chinese leaders already in the previous five-year plan committed to transform the existing economic model based on exports and government investments into a consumer society model. In 2011–2014, the first positive effects were seen as e.g. the share of the service sector in total GDP rose by 5% to 48% compared to 2010.
Another topic which has been emphasised by Chinese leaders is the reduction of CO2 emissions and the overall improvement of the environment through higher investments in renewable resources. As said by Xu Lin, the supreme representative of the National Development and Reform Commission, the Chinese population has been placing higher demands and is paying much more attention to quality of life. The new fiveyear plan will definitely not ignore these issues. In 2014, China was by far the largest investor in renewable resources in the world. Its investments grew year-on-year by 39% to the hardly believable amount of USD 83.3 billion. As a comparison – the U.S. was the second largest investor in renewable resources in 2014 with its overall investments of USD 38.3 billion.
In 2012, former Chinese president Hu Jintao presented another ambitious plan. He determined that the Chinese population’s disposable income should double by 2020 (compared to the year 2010). The income growth should be equal both in towns and in rural areas, leading to a more balanced and sustainable economic development of the country. In 2010, the average income per capita in urban areas was USD 3 060 while in rural areas it was not even a third of that amount (USD 948).
Hinting at the recently launched anti-corruption campaign, Prime Minister Li Kegiang announced that it will be necessary to also solve the ”deep-rooted“ problems of the country. We can thus expect significant effort to be invested in fighting corruption in the next five years as well. According to statistics of the non-governmental organisation Transparency International, in 2013–2014 China fell from the 80th to the 100th rung among 175 countries on the corruption ladder.
In terms of the demographic development, Beijing will very soon have to deal with problems related to its rapidly ageing population. As a result, more emphasis will probably be laid on a further loosening of the one-child policy. The current fertility rate in China is 1.4, significantly below the global average (2.36). Such a rate cannot sustain a functioning social and pension system in the long run.
Reduction of the gap between rich and poor Last but not least, Beijing plans to concentrate on reducing the difference between the rich and the poor. NDRC is hence allegedly planning, similarly as in the past five-year period, to construct another tens of millions of urban accommodation units intended primarily for underprivileged families. According to estimates of the Chinese government, by 2020, 850 million inhabitants could already be living in urban areas, up by 200 million from 2010. 27
Dilapidated stadiums and closed-down gyms or the Czech way of supporting sports Nagano, Sáblíková, Železný, Vrzáňová, Panenka and many other names and sporting events. If there is something that can really make Czechs come together, it would have to be sports. One would expect that such a traditional and significant sector is the subject of intense political interest and general public support, but this is not the case. Text: Jiří Táborský If you wanted to learn more about support for the Czech sports sector or a long-term sports concept, you probably would not be very successful. Statistics are also not readily available, either. Want to have a look at a transparent register of public funds eligible for this sector? There is none. A register of sports venues or facilities? No. The absence of interest from the country’s highest instances is really striking as next to sports’ positive impact on the general public’s health there are also financial benefits in form of higher numbers of jobs and business opportunities.
CZK 52 billion for the treasury Sports fall under the Ministry of Education, Youth and Sports but they only made waves in the media during the controversy surrounding the regulation of gambling, closely linked with sports. Other than that, state support for sports has more or less remained a non-issue. To get at any sports support data, we thus had to approach the private sector. “We have been dealing with the entire sports sector for about ten years now and for the past five years have been intensively cooperating with the Czech Olympic Committee,” says Ondřej Špaček, manager at KPMG Czech Republic. This firm’s analyses have revealed a number of issues which should serve to open the eyes of politicians on both local and national levels and demonstrate to all that sports are a sector worthy of concern.
The information that sports’ annual contribution to the public budget in the Czech Republic is about CZK 52 billion should make an impact especially at a time when countries all over the world are pondering new sources of revenue. “It is necessary to realise that the sports sector employs a huge number of people; according to our analyses, it generates up to 200,000 jobs. Adding up the levies for these people and corporate and other taxes, we arrive at the conclusion that sports’ contribution to the public budgets is indeed significant,” explains Ondřej Špaček. In addition, lots of money is being invested in sports every year. The overall consumption of sports in the Czech Republic is ca. CZK 120 billion, of which ca. CZK 15 billion comes from the public sector, comprising state, municipal and regional budgets. Ca. CZK 100 billion come from Czech households.
Sports is not a private but a public affair Economists often voice the opinion that as a leisure activity sports should be exclusively privately financed and that the state should not get involved. However, this opinion ignores the fact that the sports sector is not an isolated island disconnected from its surroundings. “Physical activity (exercise) helps prevent diseases such as diabetes. As follows from our analyses, each CZK 1 invested in sports generates CZK 2.5 in health care cost savings,”
28 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Ondřej Špaček states to explain the relationship between sports and the condition of the public budget. Hence, the bottom line is that the Czech government should make sure that Czechs do sports. What remains is how to go about it in the right way. History is full of examples of the state doing more harm than good in its effort to support something. In addition, developments in the sports sector have been rather convoluted in the past years.
Ninety percent of the sports infrastructure is older than 20 years To have people do sports, it is of course first necessary to have a suitable sports infrastructure in place, i.e. stadiums, gymnasiums, swimming pools and other facilities. And we do have really a lot of sports facilities in the Czech Republic – according to KPMG’s analysis, the Czech Republic has a larger sports infrastructure than most of its neighbouring countries. Unfortunately, care of these facilities is usually neglected and money is rather scarce. “According to our findings, more than 90% of the sports facilities are more than 20 years old and their owners usually do not have sufficient funds for their operation,” says Ondřej Špaček.
Back to Zeman The roots of the current issues lie in the period when now-president Miloš Zeman was prime minister. At that time, it was decided that any sports infrastructure not properly being taken care of should be transferred to sports organisations. As a result, approximately 60% of the sports facilities now belong to various sports clubs and associations operating in more than 6,000 towns and municipalities. The remaining infrastructure is held by schools, towns and municipalities, while some are privately owned. Similarly as in any other area, the sports sector’s key question is: who pays for all of this? Alas, in this respect the Czech Republic lamentably lacks any sort of concept. Until 2011, the situation was far from ideal but definitely better than now. Through the Český svaz tělesné výchovy a sportu (ČSTV), the Czech association for physical education and sports, Sazka a.s. distributed a significant amount of its betting income among sports clubs and associations. A second funding source were the so-called levies on beneficiary purposes. In practice, gambling and lottery companies did not pay traditional taxes but sent a part of their revenue for so-called beneficiary purposes. Many recipients of these funds were non-profit charity and cultural organisations but most of the funds were given to sports clubs and associations. Critics of this system rightfully pointed at its huge corruption but some money really did reach sports. A third significant source of sports funding came from “pork barrel”.
How can we define national sport When it came to approving next year’s state budget, every year, members of the Chamber of Deputies submitted thousands of motions to amend the state budget bill so that they could send small budget subsidies usually to their home town or municipality. Very often the subsidies went to a sports facility. In response to the financial crisis, then Minister of Finance Miroslav Kalousek put a stop to this procedure several years ago. The present situation is significantly different. Gambling’s tax treatment has undergone significant changes in recent years and at present, money is not being sent from the gambling companies to sports clubs or associations directly but through the state budget or municipal or regional budgets. Sports clubs and associations can also apply for subsidies from the state and regional budgets through the relevant municipality, stating the specific purpose. Other sources of money are also European Union funds but they usually provide financial support to sports only as part of other projects, e.g. to a golf course within the scope of support to the tourism industry.
Sports in the Czech Republic create 200,000 jobs As a result, many sports facility owners lack sufficient operational funds and prefer to gift the dilapidated facilities to local municipalities. However, municipalities are usually not in a much better financial condition and can only hope for subsidies from the relevant regional authority. The question is which road to take now. “First and foremost we should agree on which sports have priority. For example, Austria provides extensive support to skiing. Of course, they have very good natural conditions for this sport and, by promoting Austrian skiing abroad, they advertise their country as such. In the Czech Republic, we do not prioritise any specific sport. What needs to be established is a transparent and in the long-term predictable way of funding sports activities from public sources. It is true that most sports funding comes from households but this money usually only covers operating expenses. Public funds play a unique role as they usually represent investments which in turn stimulate some further sports activity,” says Ondřej Špaček. Other than a system of funding, there should also exist a transparent overview of the Czech sports infrastructure and the condition it is in. This cannot be done without a detailed sports infrastructure register and the “passportisation” of sports facilities. At present, information regarding the condition of these facilities is at a very insufficient level.
29 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Lukáš Maixner, co-founder of Socialbakers
“Facebook gained its leading position in the CR with a Czech version”
He quitted school so that he could fully devote his time to his company focusing on work with Facebook. He spends every day of his life on Facebook – something every teenager dreams of doing but he himself is no longer in his teens. Lukáš Maixner of Socialbakers speaks with us not only about the creation of a Czech Facebook but also about the start-up of his company and a new investor.
Text: Richard Valoušek
What would Lukáš Maixner’s life look like if Facebook did not exist? More free time and less information shared with friends (laughs) but more or less the same. I would find myself somewhere near technological improvements and updates or would help other companies make further progress in this area. You did establish a company which is doing just that and that is fully dedicated to social media. How difficult was it at the beginning to persuade others that Facebook in particular was the right choice to which to devote your career? It’s always hard to persuade anybody about anything they don’t know anything about. Honestly, nobody knew much about Facebook at first. We were just lucky that Facebook in the US was quite popular so we had no problem searching for and getting information. You were more than successful in this respect. It didn’t take long for you to begin negotiations with Facebook… I’ve got to say it was great from the start. We were quite sure what we wanted and that’s may be why we persuaded them. It’s unusual for them to agree with anybody so quickly and without any hesitation. I’m sure that we’ve been on the right track all these years and that they’re happy with us, too.
Photo: Martina Votrubová
Has it ever happened that some client rejected you and later came back saying that he was wrong to underestimate Facebook? Yet, it has and we were quite understanding. We were never reproachful as it was clear that Facebook was something new for them that was yet to be explored. We knew that companies would not want to immediately pay for something that seemed so uncertain. Gradually, however, as Facebook spread, our position grew increasingly better. Why do you think Facebook in the Czech Republic has had such a head start compared to other social networks? There’re certainly more reasons but I’ll pick one for all. Facebook very soon offered a Czech version to its users, finding its way to them. Its competitors offered great products but people could not like them as much because of the language barrier. In addition to the early existence of a Czech version, are there other reasons why Czechs like Facebook best? Transparency. Facebook beat back all its then competitors such as chats, Libimseti.cz or Lide.cz by creating real profiles with people’s real names and photos. Facebook was trustworthy, open and very interesting. You didn’t communicate with Tonda321 but with Antonín Nový whom you knew from school. And you even recognised him from his profile photo.
30 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Do you have any idea in this respect? WhatsApp has been much discussed in this respect lately. But it’s not a typical social network; it’s more a replacement of SMS chats. The question therefore is what exactly the future development will be and what types of communication people will prefer. Wouldn’t people miss sharing information with a wider range of friends and acquaintances? Of course they would. People have got used to it. They do not always admit it but they like sharing their experiences, collecting likes and being at the centre of events. Whatever the future holds for us, I’m pretty sure that this type of network will remain in application for a long time. Is Facebook trying to find its way to older users? I think so. It does so through the younger generation - children and grandchildren who use Facebook most actively. For example, I created a Facebook account for my mom so that she can see my photos from business and private trips and other up-to-date information from my life. It’s a useful tool for them in this respect. Facebook users will get older the same way as our population. Not drastically, just naturally and logically. You quitted university to start your company and it has been flourishing ever since. Have you ever doubted your decision? We had to live through both good and bad times. If it hadn’t been for the bad times, we wouldn’t be able to enjoy the good
offices around the world
clients (half of them on the Global Fortune 500 list)
1 000 000+ monthly webpage visitors
34 000 000
Will anybody ever catch up with Facebook? Or even get ahead in the foreseeable future? It’s hard to say. Facebook is perfectly able to react to any developments and the behaviour of its users. Technological companies monitor trends very carefully and I sometimes feel like they are able to foresee, and sometimes even create the future on the internet. Facebook is continuously developing, changing and updating and therefore is still in its prime. And whether I think that something will replace it? I am perfectly sure that something eventually will. The question is what.
Lukáš is a co-founder of Socialbakers, a company focusing on social networking advisory services. He himself is in charge of services tailored to the needs of important clients and his primary task is to come up with innovations and new experimental projects. He considers good food, travelling and time spent with his family his hobbies and he also likes modern technologies. It is no surprise that before establishing Socialbakers, he was involved with IT but neither wore glasses nor Prestige shoes.
acquired CZK in the form of investment (CZK 26 000 000 from Index Ventures)
Lukáš Maixner and Socialbakers
ones. Problems are a necessity that push us forward. We knew from the very start where we wanted to go. Yes, we sometimes had to change our plans and adapt ourselves to specific situations but we always had the desire and the knowledge we needed. This helped us achieve what we have now. Is it difficult when a larger number of people manage a company? Don’t your ideas sometimes interfere with one another? It isn’t easy. There are pros and cons to this. But I think that the advantages definitely prevail. And, what’s more, each of us is currently involved in separate spheres of operations so we don’t interfere much with one another. Not long ago, a new investor joined your company. How difficult was it to make this happen? Very difficult indeed. That’s why we did not select the investor by ourselves but utilised the services of an advisory firm. Looking back, I now know that we made a very basic mistake: our price was too high for small and too low for large investors. A number of potential investors were thus discouraged from the very start. But you eventually managed to find the right one. Was it hard to harmonise your ideas? This was the one of the main reasons for our choice. We didn’t want anybody forcing us into anything. We wanted somebody who understands us and is willing to push the company forward. And, luckily, we succeeded. Lukáš, what would you personally recommend to those who would want to experience a start-up as successful as that of your company? They should find good partners they trust one hundred percent and come up with an idea that is attractive for people. Then they should conscientiously research the market and find a gap perfectly suitable for them. This gap will lead them to success. They should also try to be profitable from the start and apply a business model that really works. A good business model is as important as a good idea. 31
European cultural highlights
Cultural highlights for travellers This autumn, are you going on a business trip to the Czech Republic or elsewhere in Europe and would like to spend your evenings differently than sitting all alone at the hotel bar? Maybe the following European cultural highlights will inspire you. Text: Anna Batistová
Dvořák Prague Europe’s Pilsen International Music Festival Pilsen
9–17 September 2015
Prague 7–23 September 2015
The 23rd International Festival Theatre taking place from 9 to 17 September is one of the highlights of the Pilsen – The greatest cellist of present a European Capital of Culture 2015 protimes, Yo-Yo Ma, accompanied by the ject and promises the confrontation of Czech Philharmonic conducted by Jiří Czech with top international theatre art. Bělohlávek, will open the eight annual As a Czech premiere, Krzysztof WarDvořák Prague Festival, celebrating the likowski, one of today’s most respected brilliant Czech composer. The festival stage directors, will stage (A)pollonia runs from 7 to 23 September and offers from the Nowy Teatr in Warsaw. The classical music performances by world famous orchestras (e.g. Philharmonia Or- Festival will also offer the Berlinesque chestra London conducted by Christoph version of Henrik Ibsen’s An Enemy of the People, directed by Thomas Ostervon Dohnányi) as well as star soloists (violinist Lisa Batiaschvili among others) meier, one of the most celebrated drama productions at international theatre and conductors (Jakub Hrůša among festivals in recent years. the Czech talents). The Dvořák Prague Festival takes place in the Rudolfinum, the Convent of St. Agnes and in St. Vitus Cathedral.
Chalupecký’s Brno Brno from 25 September 2015
From 25 September till early January 2016, the Moravian Gallery in Brno will host the Finále 2015 exhibition, presenting the works of the five finalists of the Jindřich Chalupecký Award 2015, the most prestigious Czech fine art award. This year’s finalists are Vojtěch Fröhlich, Lukáš Karbus, Barbora Kleinhamplová, Pavla Sceranková and Pavel Sterec. The name of the winner of the 26th annual award will be announced on 20 November in Brno. Moreover, at the occasion of the 25th anniversary of the Jindřich Chalupecký Award and the death of the significant theorist whose name the award bears, the Trade Fair Palace of the National Gallery in Prague will feature an extensive exhibition open until 30 September elaborating on the “anatomy” of the award itself, its past and present.
32 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
European cultural highlights
Opera in Vienna
The Vienna State Opera has prepared six new performances for the coming concert season. Czech conductor Jakub Hrůša is premiering in the famous Viennese opera house with Janáček’s The Makropulos Affair. This season’s other news include Verdi’s Macbeth, Humperdinck’s Hansel and Gretel, Puccini’s Turandot, Three Sisters by Hungarian composer Peter Eötvös and the newly commissioned children’s opera Fatima by Johanna Doderer. The performances will also be broadcast live online.
From 19 September to 13 December, Chinese dissident, activist and artist Ai Weiwei will be exhibiting his works at the Royal Academy of Arts in London, which awarded him honorary membership several years ago. Using his art to fight the Chinese Communist party and call for the freedom of speech, Ai Weiwei is one of the most followed artists of today.
Visitors have only until 31 October to stop by the world Expo 2015 in Milan, Italy. A total of 145 countries are present at the exhibition, whose main topic is the search for quality sources of food and water for all the people in the world. The Czech pavilion, which was designed by architects Ondřej Chybík and Michal Krištof, was ranked by the Italian media among the top five pavilions of this year’s Expo.
Vienna throughout the entire season
Gaspar Noé’s controversial 3D film Love is coming to Czech theatres on 17 September. The film had its premiere at the Cannes Festival. Czech spectators had the chance to see the ArgentinianFrench provocateur’s new film at the Karlovy Vary Film Festival. The main character is Murphy (Karl Glusman), a young American, who falls in love with Electra (Aomi Muyock), a French actress. Blond Omi (Klara Kristin) completes the triangle.
London 19 September – 13 December 2015
Lost in Munich
After a seven-year break, film director Petr Zelenka, winner of three Czech Lion awards in the Best Director category (Buttoners, Year of the Devil, Karamazovi), is introducing his new film to Czech movie goers. The 22 October will see the premiere of his new film Ztraceni v Mnichově, based upon his own idea and screenplay. The film retells the controversial story of Munich in 1938. As expected of Zelenka’s films, the plot is a blend of reality and fiction. The cast includes Martin Myšička, Václav Kopta, Marek Taclík and Jana Plodková.
Milan until 31 October 2015
Light in Paris
In September, MOBA publishers will bring out Jakub Kalina’s Czech translation of Anthony Doerr’s All the Light We Cannot See. The original novel has become a worldwide bestseller and won numerous book awards including this year’s Pulitzer Price, the 2014 New York Times bestseller and the Washington Post’s Book of the Year award. This is 41-year old Doerr’s second novel and depicts the parallel story of a blind French girl and a young German soldier on the background of WWII.
33 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
“We took a risk by seating Czechs at one table” He‘s British and loves Czech meat. For the past five years, while cooking he has only used meat from animals living on pastures. An advocate of whole animal butchery, i.e. the nose-to-tail processing philosophy, the tastiest cut of meat for him is pork neck. You can taste it at his butcher shop called The Real Meat Society, at the Sansho Restaurant or at Maso a kobliha (meat and donut) in downtown Prague
Text: Eva Samšuková, Photo: Eva Šafránková
Since the start of your business, you have only been processing Czech meat. But downtown, everywhere one looks, one sees Argentinian steaks. Do you think that Czechs are not proud enough of Czech meat? It’s not that they aren’t proud of their meat. I just think they find it hard to buy in good quality. Five years ago, when I opened Sansho, I was really shocked not to see any restaurants in downtown Prague offering Czech meat. I wanted to follow in the Czech tradition; that’s why we have our own butcher shop, why we found our own supplier in Jihlava and also why we are closed on Sundays and Mondays, as we cut the meat ourselves. Was it your original intention to target Czech customers? Is there a difference in meat cutting traditions and whole We definitely targeted Czechs from the beginning and animal butchery in the Czech Republic versus in the UK? luckily attracted them. About eighty percent of our current The process is the same. A good relationship between the clients are Czechs. butcher and the farmer is crucial. Recently I’ve witnessed the As a chef, you have experience with the gastronomical entrend here that even small farmers learn how to cut meat vironment in various parts of the world. How is the Czech themselves instead of sticking only to the farming busione different? ness. We only cooperate with experienced animal farmers I feel it the most in the insufficiency of a Czech and and meat cutters. We also use our own butchery skills and Austro-- Hungarian gastronomical tradition. When foreigners knowledge. I am proud that every cut of meat we prepare ask me for a recommendation where to go for some typical comes from animals that spend their entire lives on pastures. Czech food, I often don’t know where to send them. There Compared to the UK, here is it easier to find business partmay just be very few good local ners among farmers because chefs in the Czech Republic as the demand is not that big yet. most of them leave for AustraWasn’t it a bit risky to enter lia, the US or London. It will the Czech market with this The Real Meat Society Butchers - Náplavní 5, Praha 2 definitely take some time fore concept? Sansho - Petrská 25, Praha 1 Maso a kobliha - Petrská 23, Praha 1 them to come back but I am No, it wasn’t. Riskier was looking forward to it. Even to offer to clients a communal I don’t know where to get a good Svíčková (sirloin with dining interior in the centre of Prague, including long tables, cream sauce). benches and no luxury. This risk was definitely worth it, though. People complain that it is really difficult to start one’s own How did Czechs react to informal communal eating on one business, especially in gastronomy. What do you think? hand and quite high prices on the other hand? Not really. Everyone supported us from the very beginWithin the first two months, we were at full capacity, ning and liked what we were doing. But maybe those comso I guess they reacted very well. After six months, Hospoplainers don’t have any gastronomy experience. Then they in dářské noviny daily ranked us one of the best restaurants. fact may find the initial stage extremely demanding. But the Even more people started to come in. Some even asked us beginning is nothing compared to what will follow! if they were in the right restaurant after walking in. We What’s the most difficult in ing the food business? were nervous how people would react to having a private Probably retaining satisfied employees and customers, dinner while sitting at a table next to strangers. Mostly, in that order.T Then again, most beautiful are the positive however, they are content, eventually even toast each vibrations around food, which we have in abundance. other and exchange business cards.
This is Paul’s territory
34 © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Paul Day in his kingdom of meat and donuts. © 2015 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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