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French Market Report 2010 - Market Overview

It is perhaps surprising how quickly the global economy has recovered from the worldwide recession. However given how much was spent on stimulus packages a rebound was perhaps inevitable. The global financial system had been threatened by a systemic collapse and the stimulus packages, which included unconventional measures such as quantitative easing, was unprecedented.

Globally, the last decade was about cheap money compounded by flawed regulatory and risk management practices. Banks were able to provide cheap credit that allowed increases in asset prices to be transformed into income and then into consumption. It allowed excessive consumption in some countries and excessive production in others. These imbalances remain. Unfortunately governments have not only assumed debts from their otherwise bankrupt banking systems, their finances have also been badly hit by falling tax revenues and the huge stimulus packages they have undertaken to promote growth. The threat of private sector debt default has been replaced by the threat of sovereign debt default.

The world is currently walking an economic tightrope between the need to deleverage and correct the manifest imbalances in the world economy and maintain sufficient growth to allow these things to happen. Success is by no means assured.

Against this global backdrop France weathered the global economic crisis better than most countries. Losses incurred by the banks were below those in other developed countries. French banks were more diversified, engaged in more cautious lending practices and were subject to closer supervision. Domestic demand in France proved to be more resilient and the economy less reliant on global trade. As a consequence the economy contracted by only 2.1% and the budget deficit expanded less dramatically than in other countries. The French economy was one of the first out of recession. France has promised the European Commission, given a perhaps optimistic growth rate of 2.5%, that it will reduce the budget deficit from 8% to 3% by 2013. This will be achieved by cancelling some Euro 70 billion spent on tax breaks and limiting public sector spending growth to 1% a year from 2011.

However, unemployment in France is now over 10% and has reached 3 million. At nearly 50%, the tax burden remains one of the highest in Europe and relative to Germany labour costs have risen 17% during the last decade. There is a danger that prolonged labour market weakness may depress economic recovery. Economic growth declined from 0.6%, the highest in the Eurozone in the last quarter of 2009, to 0.4% in the first quarter of 2010. This was slightly less than the 0.5% forecast by the Bank of France.

Corporate Governance

Before the economic crisis there was little doubt that regulators worldwide believed they had corporate governance about right. The corporate failures that occurred in the early years of the century resulted in Sarbanes Oxley and in France the LSF. These were designed to provide more transparency and reassure stakeholders. LSF is more wide ranging than SOX and is not confined simply to financial controls. These codes and their equivalents in other countries had seemingly produced a benign corporate governance environment.

Outside of the banking sector such a belief was perhaps justified and the current debate over the future of corporate governance is now focused almost exclusively on the banks. A banking system whose social utility was at least partly to manage, distribute and control risk, became a source of risk and instability and has forced governments to distort their economic priorities. It is perhaps depressing that for all the resources that were spent globally on internal auditing, risk management and wider corporate governance frameworks, management clearly allowed their businesses to become insolvent. Regulation in the banking sector is in the process of being tightened. There will be stronger insolvency regimes and capital adequacy and leverage controls. However, international co-ordination is required for regulation to be truly effective which is notoriously difficult to achieve.

Whatever its failures in the banking sector, corporate governance has had a good recession. In France, not surprisingly in an economy with many multinational companies, corporate governance standards are high. Given the scale of the economic collapse the number of corporate failures has been low. The financial scandals that plagued developed economies during the last period of economic weakness ten years ago have been substantially absent.

Market Profile

France is the second largest economy in Europe and is one of Europe’s largest importers and exporters. It has a large and diverse industrial base with many indigenous world class companies. Many foreign multinational companies have a significant presence in the country.

The French internal audit recruitment market is less international than, for example those in the UK, Benelux and Switzerland. Many multinational groups base their international audit departments in these countries. The UK, for example, has been popular because English is the language predominantly used by multinational and particularly US groups who have historically dominated the international internal audit recruitment market.

The French internal audit recruitment market, like the German, Italian and Spanish markets, is dominated by indigenous companies. Foreign companies, particularly in the financial services industry, employ locally based internal auditors to provide audit coverage to their operations in France. There are only a limited number of foreign multinational groups that have their European or international audit departments based in France.

The total number of internal auditors employed in the French economy is growing and is a continuation of a trend that has been established for the last decade. This is not unique to France and is part of the wider investment in internal auditing and corporate governance that public companies worldwide are making.

As higher standards of regulation and reporting are required, the number and quality of internal auditors employed in the economy has continued to rise.

In France the typical entry level recruit into internal auditing has graduated from a top business school and is most likely to have external audit experience gained from a Big 4. There is an established flow from the Big 4 into the internal audit departments of client companies. Companies operating in the engineering, aerospace, energy and utility sectors have a preference for engineering graduates ideally with MBAs.

French multinational groups tend to base their main internal audit departments in France rather than employ satellite departments in other regions of the world. As a consequence a trend amongst the internal audit departments of French multinational groups is their propensity to recruit foreign nationals. Notably internal auditors are being recruited from growth economies such as Brazil, China, India and Russia. Companies in France are willing to sponsor such individuals as they provide the linguistic skills and cultural background that enable their internal audit departments to build strong relationships with auditees globally.

Commercially France is dominated by Ile de France and not surprisingly it is where the majority of the largest internal audit departments are based. It also contains the highest concentration of foreign company internal audit departments and is an area where the big 4 employ large numbers of internal audit specialists. The financial services sector, as a highly regulated industry, is as in all countries the largest employer of internal auditors. The banking sector dominates the industry followed by the insurance sector. Other major employers include the retail, manufacturing and energy sectors where France has globally recognised companies.

Outside of the Ile de France there are significant internal audit departments based in cities such as Marseille, Lyon and Bordeaux. However, the internal audit recruitment markets in these cities are small in comparison.

Candidates

Modern corporate governance requires the necessary structures and capability in internal audit, risk management, compliance, legal and information security. The requirements for internal auditors in France share many of the universally desired skills and competencies.

Internal Audit Managers

Within internal audit, a first requirement is to recruit managers who have substantial experience of corporate governance, who understand risk and control and managing risk based audit activity. They must also be capable of implementing change and gaining credibility with business and management and where relevant within a multinational environment.

Requirements in France are most often industry specific, combining strong technical and excellent communication skills. Fluency in French and particularly English in multinational environments is vital.

At Director and Senior Manager level companies invariably prefer to recruit locally and there is a large pool of available expertise at this level.

Internal Audit Seniors

Below management level, whilst entry level recruits are most commonly taken from the Big 4, wider internal audit skills are increasingly in demand. Recruits with at least a basic understanding of risk based internal auditing and the ability to undertake value adding reviews are required. Specific industry skills are valued and becoming more common. Fluent English is required if the internal audit department has international responsibilities.

Unlike other countries professional accounting or internal audit qualifications are not universally required. Whilst the CIA qualification is becoming more popular only a minority of internal auditors in France are qualified. Academic qualifications and experience are more highly valued.

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