BUSINESS BLOG - Ian Welch

SMEs are key to global recovery - let's help them

SMEs are, by their nature, resilient creatures. A major global survey commissioned by ACCA, and published today, shows just how important that tenacity has been over the past two years – and continues to be – as their ability to access finance has been squeezed.

ACCA, in conjunction with two other international accountancy bodies, CPA Australia and CGA-Canada, commissioned the respected Economist Intelligence Unit (EIU) to carry out a global report on the issues faced by SMEs. The three bodies then worked together to produce policy recommendations based on the EIU's findings.

The EIU study reveals a picture of SMEs battening down the hatches. Banks have not passed on interest rate cuts and executives at SMEs expect lack of funding to be the main constraining factor on their businesses over the next two years. Many are, to preserve cash, postponing investment and focusing on cost reduction.

This lack of investment, which includes staff recruitment, means it will be difficult for them to capitalise on the increase in demand, when it comes. Most of them predict slow improvement in economic conditions in 2010, with a return to some sort of normality in financing by 2011.

But it is also clear that there is a sizeable rump of SMEs facing particular difficulties. 26% said their debt had increased over the past three years and a similar number had refinanced in 2006, just before the slump. These businesses face a tricky time refinancing again in the near future. And 29% are not sure when, if ever, they will be able to access finance in pre-slump levels. So what are their business models looking like now?  

It is clear that governments, banks and small business advisers – notably accountants – must all act to help the SME sector through these tough times. Governments can help by putting SMEs to the top of their agenda and produce suitable fiscal incentives, proportionate regulation, and action to boost asset and equity finance – including business angel investment – to provide alternative sources of finance. Banks need to empower their staff to handle SMEs better – and accountants can mediate and, where necessary, advise of other options.

This is the first recession that a new generation of entrepreneurs have faced – and it is a bad one. Yet the resilience of the sector shines through, in all markets of the world. More than half of the SMEs surveyed still expected revenue growth over the next two years. Governments should remember – the SME sector will drive the recovery. Just give it a chance to do so.  

---

Existing subscribers to this blog feed
Due to the changes in our format, please re-register to continue receiving your blog feeds.

Should cross-selling of non-audit services be banned? FRC consults on MPs' recommendation

Like early '80s electro-pop revivals, some issues in accountancy seem to come up once every few years, fade away and then a new generation discovers them. The supposed threat to the independence of audits carried out by firms who provide non-audit services to the same clients is one of them.

In the recession of the early 1990s, firms allegedly 'low-balled' – ie cut their audit fees in order to get a foot in the door for more lucrative non-audit work. Then in 2001, following Enron and the demise of Andersen, the argument came up again. How can firms possibly perform properly independent audits when their eyes are fixed on the bigger consultancy prize?

And now, in the credit-crunched late noughties, the issue is back. In May, the UK Treasury Select Committee, after its open hearings into the banking crisis, declared: 'We strongly believe that investor confidence and trust in audit would be enhanced by a prohibition on audit firms conducting non-audit work for the same company, and recommend that the Financing Reporting Council consult on this proposal at the earliest opportunity.' A similar conclusion was reached by an earlier Committee hearing into the Northern Rock debacle.

The FRC has, via its Auditing Practices Board, duly just issued a consultation paper and fascinating reading it makes. The APB observes that the Select Committee's recommendation was based on the views of 'certain representatives of the investor community' and 'particular commentators', all of whom strongly believed that auditors do not stay independent in the face of non-audit riches. These individuals are not named but at least some, it would be reasonable to say, merit the title 'frequent critics of the audit profession'. 

The APB goes on to give a balanced analysis of the issue, but the reality is that the critics have a much easier job arguing their case than the firms do in asserting that their audit independence is not tarnished. This is why politicians tend to seize on this argument every few years.

The APB rightly laments the lack of evidence used in the arguments – 'these views are based predominantly on the perceptions and opinions that different stakeholders hold, and not a proven track record linking audit failures with a lack of objectivity'. ACCA has noted that there is a need for more evidence and research into the value of audit in promoting business confidence – but also believes that the skills of auditors bring value to business.

But in fact, the APB does come up with some key facts and figures, courtesy of Financial Director magazine, which shows a dramatic decline, since Enron, of the ratio of non-audit to audit fees in listed company accounts. From a peak of 191% in 2002, the figure plunged to 71% in 2008. In a debate where more heat than light tends to be generated, these are telling figures. A combination of extra regulation and market development seems to have come up with an answer.

ACCA does not believe a complete separation of audit and non-audit services is either possible or desirable. Some services are closely related to audit, while the extra insight of the incumbent audit firm into the business brings quality and efficiency benefits that businesses would not wish to lose. For SMPs, their ability to offer wide-ranging services as business advisers is of proven value to SMEs, a view supported by research.

But there is also a wider debate. We believe audit training is a crucial part of being an accountant and a blanket ban on the provision of non-audit services to audit clients would start to position audit as a specialist activity, rather than a central part of business governance, adding wider value to business leaders.

This would not help bring talented people into the profession. It would be a brave person to bet against the independence issue being revived again, circa 2018, but let us hope that, by then, there are still large numbers of firms providing a wide range of services.

---

Existing subscribers to this blog feed
Due to the changes in our format, please re-register to continue receiving your blog feeds.

Going concern - a problem for credit ratings agencies?

Martin Williams, MD of Graydon UK, one of the leading credit referencing agencies, has been speaking with ACCA recently on the topical and thorny issue of going concern statements in audited accounts.

On his blog, he acknowledged what accountants are increasingly complaining about, on behalf of their clients. The problem (allegedly) is that somewhere in the complex process of information gathering, people in the credit industry are misinterpreting the statements and are panicking when they read references to 'material uncertainties' about future trading. They are then marking down companies' credit ratings – which, of course, makes them less able to access finance or to obtain credit from other suppliers.

The issue here, once again, is that going concern statements should not be treated as if they are qualified audit opinions. They are intended to be helpful to users – the auditor is effectively saying: 'Here is an issue we have come across which is worth bringing to your attention but we can see the company is doing something about.' It might simply refer to the difficult times facing companies and, hence, that it is impossible to be certain about the future.

But in these anxious times, if they are going to have the same practical effect on the company as the auditor saying 'we are not willing to expressing an opinion on these financial statements', then we need to work with the credit industry to make sure the going concern statement is better understood. The Financial Reporting Council has put out guidance on the issue, but maybe further steps are needed.

While it is tempting for accountants to put all the blame on the credit agencies for misunderstanding and over-reacting, a more positive response would be more helpful. Is the guidance clear and accessible? Has the profession done enough to explain to other parties the going concern issue? After all, this only rears its head when credit is difficult to get. Access to finance is still fragile for many and anything that endangers it should be scrutinised carefully. We would like to hear your views on this subject.  

Lastly, it must be remembered that this is the first recession a whole new generation of business people (including bankers and credit agencies) have faced. We are all in this together. It should not be forgotten that while the credit ratings agencies have taken a lot of stick for their role in the financial crisis over the past two years, they have in some ways deflected the wrath that would otherwise have been aimed elsewhere – possibly at auditors.

---

Existing subscribers to this blog feed
Due to the changes in our format, please re-register to continue receiving your blog feeds.