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BAB-35 July 2005 Analysis
The July edition of the Business Adviser Barometer offered a set of questions chosen by The Professional Oversight Board for Accountancy (POBA), part of the Financial Reporting Council. POBA is looking at the effects of recent changes such as higher audit thresholds and new reporting and auditing standards on companies, the accountancy profession and business advisers in general. The mix of respondents to questions changed from past months as well - many new respondents were members of professional accounting bodies, thus broadening the included range of types of advisers used by businesses.
Altogether 441 Advisers responded to this Survey.
Survey Findings
42% of respondents to this month's Survey work for an accountancy firm that is registered to carry out audits, while 21% are employed by accountants and/or tax advisers who are not registered for auditing. A few, 4%, are bookkeepers while 1/3 of respondents are engaged in other aspects of business advice.
One third of respondents' firms employ 1- 2 accounting technicians or bookkeepers and a similar proportion employ 1 - 2 accountants.
There is a strong correlation between the numbers of accounting technicians or bookkeepers employed and the number of accountants employed - of those working for firms employing 1 - 2 accounting technicians or bookkeepers, most also employ 1 - 2 accountants, and this holds for all five size ranges.
There is also a correlation, although weaker, between the numbers of accountants employed and the number of 'other' people (i.e. not qualified or trainee accountants, technicians or bookkeepers) employed.
The association between the numbers of 'other' people (i.e. not qualified or trainee accountants, technicians or bookkeepers) and the numbers of accounting technicians or bookkeepers employed is weaker still, but more evident in the larger firms.
Panellists were asked: As an estimate, how many people in your firm:
The Survey shows that the clear majority of respondents frequently work with small limited companies: 15% of them are in firms with between 25% and 49% of clients that are small limited companies, and 42% estimate that smaller businesses make up over 50% of their clients.
When asked what proportion of audit-exempt small company clients currently have their accounts audited, 32% of respondents said that none did, but 34% said that up to 25% of them opted for audits. 27% said that more than one quarter of audit-exempt small business clients have audits carried out.
After taking out the not applicable and don't know responses, 4% of respondents said that the numbers of small companies their firm has as clients has increased by over 20% as a direct result of increases in the audit threshold, and a further 13% said numbers increased by up to 20%. 7% said that their firms had experienced decreases in this category of client, either somewhat or to a significant extent.
69% of respondents were able to provide opinions as to why some audit-exempt small companies decide to have their accounts audited. Panellists were invited to select up to 3 responses, and the average number of responses selected, after eliminating 'not applicable', was 1.8. Excluding 'n/a', 38% of responses were for 'required by banker or other lender'; 25% for 'gives management confidence in controls and 22% were for 'required by non-management shareholders'.
44% of respondents do not have any medium-sized companies as clients, but 26% have between one and four medium-sized clients.18% have between 4 and 50 , while 9% have over 50 medium-sized clients.
Panellists were asked to identify the problem areas in accounts and audits for small- and medium - sized companies. They were asked to select all that applied.
In the case of small companies, the average number of selections was 3, after eliminating the 4% of respondents who selected 'don't know'. Understanding and interpreting the statutory financial accounts was reckoned by most to cause problems, followed by management accounting including budgeting and planning.
For medium-sized companies, the average number of selections was 2.2, after eliminating the 37% of respondents who selected 'don't know'. Preparation of statutory financial accounts was thought to be the main problem by respondents, followed by understanding and interpreting the statutory financial accounts.
These views contrast with the results from the UK Business Barometer (UKBB), the parallel monthly survey of smaller businesses (which includes both small and some medium sized businesses). Business were given the same list of response options and asked which areas caused them problems. Excluding the ''none of the above' response, which was the highest at 48%, businesses chose Preparing statutory financial accounts and Understanding and interpreting the statutory financial accounts as problematic.
Consultation of external experts is not prevalent among the respondents to the UKBB. 39% either found this question not applicable or responded with none. The remainder, those who have used experts, have consulted between one and two types of expert on average. The most frequent types of expert consulted were Marketing experts and Graphic designers, with 11% of responses.
Panellists were also asked to consider small and medium sized companies separately, in two separate questions on the subject of what financial, taxation and/or IT services their firms provide on a routine basis.
In the case of small companies, the average number of selections was 4.3, eliminating the 2% of respondents who selected 'none of these'. General business advice was selected most, just as for medium-sized companies, but the four finance and tax related options are also provided frequently.
For medium-sized companies, the average number of selections was 3, after eliminating the 42% of respondents who selected 'none of these'. After general business advice, assistance in preparing statutory financial accounts and assistance with tax were the most frequently provided services.
The following are extracts from responses to the 'Free text' question 14:
"In your view, what could the accountancy profession do to help small and medium sized companies to meet more effectively their accounting and auditing needs? "
Views expressed are those of individual panellists and may not represent those
of the University.
Advise their clients to seek additional business advice from an enterprise agency or similar training provider.
Be more specific about alleged tax benefits of incorporation, rather than what appears to be a general view that Ltd is a default choice...
Speed up delivery of interim management accounts info for clients' succession planning/business transfer.
Make the accounts more realistic in relation to the Inland Revenue requirements.
Information leaflets about how to keep accurate records in business 3.
Advance personal and corporate tax advice - not wait until Year End 4.
(Better) Employment guidelines-when to employ on PAYE, when to pay 'Casual' (if ever)!
Explain the need to ensure contractors/consultants are bona fide self employed etc.
Advise on, and ensure client companies have adequate systems of record keeping, from which either they or their advisers such as ourselves can produce accurate, reliable financial reports for internal and external users.
Accountancy bodies must try and get equal status to solicitors so that unqualified firms do not call themselves accountants.
Allow them to prepare accounts in the same manner as a sole trader.
As a routine offer a software package (ie sage) which it expects its clients to use.
Communicate regularly and determine the needs of the client instead of just turning up at year end to carry out an audit.
Either allow statutory accounts to mirror better a company's management accounts (or develop software packages for management accounts which more readily enable conversion of accounting information into statutory accounts format).
Encourage the government to enforce regulation of unqualified accountants in practice.
Ensure that sme's are aware of the full range of services and expertise that they can access.
Have a completely different set of rules and regulations that apply to this segment, FRSs, Companies Act, rather than having the current mish mash of stuff that mainly applies to large entities.
Have more flexibility in tailoring assurance services to meet client needs rather than be driven by compliance with a set of rules devised by standard setters.
One problem area is that of Computerised accounting, required more and more and accountants often advise without real regard for and understanding of what is best suited to their clients' needs.
However, I feel that the profession should make their clients aware that the audited accounts are history and the way forward is to look at constantly changing budgets and prepare rolling cash flow forecasts etc.
My own view is that accounting standards are taking the annual accounts further from the needs of the main users of financial information and making the understanding of these more and more complex.
In my view there is a need for a refocus back to the basics of what information is required by the user of accounts to understand its performance in relation to risks and, in particular, its ability to generate cash.
Need to better identify and market the application of professional accountancy expertise to businesses that fall below the audit threshold and help them become more effective and profitable, not just maintaining accurate historical records that have limited value.
Offer a "one-stop shop" for all business needs so that the client comes to you with a business problem and you can give them the contact details of a professional that can help them, if you can't!
Promote the various accountancy qualifications to help the stop the proliferation of unqualified individuals setting themselves up as accountants and tax advisors.
Provide a more proactive role in strategic planning, budgeting and general business control/management.
Provide a simple interpretation of the accounts in laymen's language, especially for the small owner manager who is a craft rather than professional person.
Realise that we are a service industry to small companies and to stop being high handed and expecting clients to treat us like God.
Reduced fees, newsletter for new clients advising pitfalls, free advice for, say, up to two hours per year to avoid firms being too frightened to ask for simple advice because of cost.
Remove the mystery and the technical terms.
Charge more realistically - these days much of the donkey work can be automated - so grasp the IT nettle more firmly and offer on line real time services.
Remove the need for full statutory accounts for shareholders when these are also the directors/managers of small companies.
Produce only the abbreviated accounts for filing, and then only the information that the directors/shareholders/managers want and understand, ie not 14 pages of Stat.
Listed below are extracts from feedback into the July 2005 Survey BAB35
Views expressed are those of individual panellists and may not represent those
of the University.
A similar questionnaire on tax compliance would be interesting.
A START POINT ON THE PATH TO REDUCING REGULATORY RED TAPE FOR SME'S.
A useful starting point. Suggest you change the word "require" in why firms have audits. My experience shows that outside bodies do not require audited accounts but it is deemed helpful and confirmatory.
A VERY relevant topic .I only HOPE the Oversight Board take proper note of the real role played by accounting/audit advisers to SMEs!!
ACCOUNTANCY FIRMS GENERALLY ARE NOT PRO ACTIVE IN THEIR ADVICE AND ARE NOT INTERESTED IN BEING INVOLVED WITH THEIR CLIENTS. THOSE THAT ARE TEND TO BE VERY EXPENSIVE AND OUT OF REACH OF SME'S
All embracing and the questions appear to be relevant to small businesses
Amazingly simple for a complex area!
Audit is becoming under regulation less competitive. This is driven by government regulation.
Basically agree with the rationale for the survey but wonder if asking the accountants is not asking the wrong end of the relationship!
easy enough to answer. but not really enough depth to the questions .i am not sure what the survey will tell me.
Fail to understand why audit has anything to do with Turnover and Balance sheet size - surely what is relevant is external ownership and / or management?
Found survey easy to answer & use.
I feel very strongly that the accountancy profession gets itself a bad name by behaving like the legal profession. ie. That money is the overriding factor. Service to the client should come first, money being a secondary consideration.
I think this survey is a good idea as it will help to decrease the gap between what SME's require from the accountancy profession and what WE think they need
I welcome the survey. In my view the annual report of companies large and small is suffering from information overload and a distinct lack of focus on key information.
It is nice to think that the institute of financial accountants has been asked to circulate details of the survey to its members but I am still concerned that the institute gets no recognition from any of the regulatory bodies whatsoever. Perhaps this survey will in some small way help to change that.
it is not clear how the survey applies to the different requirements of charitable companies
It was just the right length to complete and was easy to complete
Length about right. Comment should be available about how government can help small companies improve accounting. Accounts should have to be produced by accountants but not to the silly rules drawn up for multi-nationals. More like sole trader accounts.
Option on why do Clients require audits did not cover my only examples: Charities and Travel Agents (ABTA requirement)
Perhaps enquiry should be addressed to clients about what they want from accounts.
Survey could be extended to cover the ethical requirements of small audit firms in relation to clients who are covered by the survey
The first set of questions on professional qualified/ trainees/ bookkeepers etc were poor.
The massive increase in audit limit I predict will lead directly to more fraud as companies can now get away with all sorts in their accounts. Some intermediate level review is needed.
The survey assumes that all responses come from businesses with more than 1 employee and it did not seem to cover the self employed book-keeper/accountant
The survey does not address issues of complacency or ignorance. Although not a qualified accountant, I have an MBA and a good grasp of accountancy. In my experience, many senior managers who are not accountants have a poor to mediocre knowledge of either financial or management accounts. I am well used to hearing - "Oh, the accountant looks after that side of things." Accountants are often not used to full effect. Their role is commonly to keep the tax authorities at bay or to put together grant/finance applications. It is rare to see things such as evaluations of process improvement proposals or sales/volumes/margins strategies in the charge of accountants.
The survey does not seem to address the issue that many ltd companies which are CHARITIES have an audit threshold of just £250K. We specialise in work with charities, and act as independent examiners to many unincorporated charities up to £250K income. For charities above this, we may assist with accounts preparation but refer them to other firms to provide the audit. However, there is a starting to be big problem with many smaller firms of accountants not continuing their audit registration if their only clients still requiring audit are one or two charities. In some ways this is good, because there were many firms with insufficient charity specialisation in the Charities SORP and charity audit requirements attempting to do charity accounts. But it does now mean that a charity with only £251K income increasingly has to go at least a medium sized firm with a charity-specialist department (and pay fees accordingly). The charity audit threshold is due to go up to £500K - both for charitable companies and other charities - in the Charities Bill before Parliament, but this still leaves them a long way short of the £5.6M threshold. More needs to be done to enable smaller firms with a specific interest in charities to retain an audit registration at lower cost than at present. NB The survey seems to assume all smaller companies have shareholders, but there are many cos ltd by guarantee in the sub £5.6M band. Those which are charities need to account as above. Others still have to prepare Companies Act accounts, and may need audits to satisfy stakeholders regarding their non-profit activities.
The survey was easy to complete; however, a little ambiguity on some questions - did they relate to 'the firm' or me as an individual, or our office (as one of four).
This month's survey is indeed both relevant and well structured - it's time for the accountancy profession to roll up their sleeves and get stuck in to help SME's survive, before they are forced under with an ever increasing burden of legislation.
Very basic level survey. should consider digging to a deeper level.
Very commendable piece of work especially if progress is made in simplifying UK Companies Act requirements for small and medium sized companies. Exemption from audit is no great benefit and will be a disservice to all interested parties
Will be interested to see the results. So far, questions seem pertinent, and lots of space for own comments. Thanks
Your survey does not cover what is probably the most vital function that we provide to small SME's - a listening ear and advice on running their business; advice which extends beyond the simple accounting and taxation function. Often the small SME has nobody to discuss his business with except us and we become "men of business" for these clients.
