The change in South Africa's Companies Act, which allows many small businesses to forgo an annual audit and opt for a less detailed independent review, has been hailed by many small and medium enterprises (SMEs) as a saving on overheads. Independent reviews present an opportunity for cost reduction, amounting to as much as 20% or 30%. SAICA, however, has another perspective, and this view is backed up by many of the country's major lenders to SMEs.
"Apart from the value a chartered accounting practice can add to a small business through advice on financial planning and management, SAICA research has shown that an annual audit or a review carried out by a CA(SA), carries more weight with lenders," says Brigitte Kriel, SAICA's project director: Small and Medium Practices. She explains that the logical inference is that businesses that need capital for internal growth, capital expansion or acquisitions will find it easier to borrow that capital if they have a CA(SA) preparing their books.
SAICA sought input from five major banks and three specialist SME lenders, and whilst there are differences of approach, on average they indicated that they found financials prepared by CAs(SA) more trustworthy than those produced by the companies themselves, or by other independent accountants, when assessing creditworthiness. "The letters behind the name make a big difference to us," says Scott Brown, Group Credit Risk of Investec.
Specialist SME funders, in particular, prefer an audit. "As it stands today, we prefer audited financials," says Darryl Adriaanzen, chief commercial officer of the Bank of Athens. "When the new criteria gets embedded it will still undoubtedly make a difference whether the review is conducted by a CA(SA) or somebody else. The independence and the quality of that information, whether it is reviewed or audited, is a significant component of the credit decision in terms of data that we look at."
As opposed to specialist SME lenders, the major banks, while finding CA(SA)-generated financials more credible, do not consider annual audits that important when assessing credit risks, but still find CA(SA) input valuable. "As a bank we have a huge interest in the survival of small businesses across the country; they are a key driver on so many things," says Oscar Siziba, head of Enterprise Business at Absa. "We pretty much look for a business that is well-supported financially - and that starts by being mentored and being taught on how to run a business, how to treat customers, how to manage creditors, how to manage payments...".
Some banks have a more detailed scoring system, estimating turnover and costs from the bank account, and measuring other indicators that they have determined are predictors of a company's ability to repay debt - and this is another area that CAs(SA) can improve a company's rating.
According to Kriel, CAs(SA) are familiar with bank criteria, so they can advise small businesses on ways to improve their financial fitness in the eyes of the banks - by providing proof of on-going turnover and the quality of debtors, ensuring salaries are paid on the same date every month, keeping VAT and PAYE payments up to date, maintaining regular credit payments and avoiding bounced stop-orders, ensuring the person behind the business maintains a clean credit record, and so on. "Their input can make a major difference on the bank scoring system, when and if credit is required."
The respondents also indicated that a CA(SA)'s involvement in a business, in an advisory capacity over and above their auditing or review services, also made the business more attractive as a credit risk. They help business owners understand the difference between cash flow and turnover, for example, and their professional relationships with lenders make them invaluable when creating a business plan that will qualify for credit. "Everybody always says funding is the biggest pain point for entrepreneurs," says Kandis Swanepoel, divisional executive - Business Banking, Nedbank. "I think it's more the soft issues - the coaching, the mentoring, the consulting. 'How do I register a company?' 'How do I create a business plan?' I think those are bigger pain points."
In conclusion, Kriel says that it is easy to understand why SMEs may want to use the new reporting rules as a way to cut costs - in challenging times, paring overheads to the essentials makes sound business sense. "However, looked at from a funder's perspective, the advice and expertise of a qualified CA(SA) could now be channelled into activity that will make the business more creditworthy. In truth, the potential cost reduction of the review should be looked at as a source of funds to improve the sustainability, the financial health and cash flow of the SME. It's an investment in its 'borrowing fitness', and in today's world, that is something worth thinking about."
For more information, go to www.saica.co.za.
