Issue 4 | Fall 2009

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accounting issues

The Economic Crisis: How are SMPs Helping their SME Clients during this Economic Downturn?

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During financial crises and economic downturns, it is the large employers and publicly listed firms that make the headlines. But the impact on small businesses can be just as severe. When the board of directors of the Confederation of Asian and Pacific Accountants (CAPA) met in Vancouver in May 2009, CGA-Canada, the host organization of the meeting, presented a panel discussion on the impacts of the recession on small and medium-sized enterprises (SMEs) and the small and medium-sized practices (SMPs) that service them. Panelists were: John Nagy, FCGA, partner at Reid Hurst Nagy Certified General Accountants in Richmond, B.C.; Ken Richardson, CGA, managing partner at EPR in Coquitlam, B.C.; and Tina Peters, CGA, Director of Public Practice Services at CGA-BC.

With a robust construction sector, large infrastructure projects underway and pre-Olympic games spending, British Columbia felt the effects of the economic downturn later than most other jurisdictions. John Nagy, whose clients include many in the construction sector, says many businesses continued to do well into the third quarter of 2008. But when the downturn hit in the fourth quarter, it impacted B.C.’s SMEs sharply.

“We found that in coming into the first quarter (of 2009) to start working on their year-ends, they actually had very good years last year because the first nine months, they were still finishing off projects that were ongoing and they actually made a lot of money,” said Nagy of his construction sector clients. “The big hope we had was that they actually retained some of that money to pay the taxes because the last quarter of last year and the first quarter of this year have not been so good to them.”

Ken Richardson concurred, noting that: “A lot of business owners in British Columbia right now are getting a harsh reality check, not only mentally, but in the pocketbook as well. No different than probably anywhere else in the world at the current time.”

Tina Peters saw the impact on her association’s members and noted that the recession arrived in stages. The first to be impacted were CGAs working for the B.C. subsidiaries of U.S. or other foreign-owned companies. Next to be affected were a large number of accountants working for the provincial government who were let go in a major round of cutbacks. The third wave resulted from downsizing in the Big Four accounting firms as work from public companies dried up. However, those layoffs are helping to rectify a talent shortfall that had plagued small practices in recent years.

“We had a real issue with finding good key staff and firms were turning away a lot of work,” said Peters. “We had one firm that decided to keep track and they turned away, in one year, $100,000 worth of work just because they could not have the staff levels to serve the client base.”

Succession Plans Derailed

One of the most significant and unique ways the economy has hit the SME sector is in the area of succession planning. Both Nagy and Richardson are finding succession planning and estate planning to be growth areas as the Baby Boomer generation prepares for retirement and, in the case of private business owners, plans to either hand the business over to the next generation or sell the business to fund their retirement.

“The impact on clients is that a lot of these individuals have put their succession plans on hold,” said Richardson. “They’ve had the business valued over the last three or four years, they had maybe a succession plan in place, and things are starting to come off the rails right now as their turnover, their revenue is declining, their bottom line is shrinking.”

“We see some purchasers walking away from enormous deposits,” he added. “It’s not uncommon to have somebody put down $500,000 towards an acquisition and just basically walk. They see the risk of taking over that business and jumping into the marketplace, or the risk of obtaining financing and obtaining working capital on an ongoing basis as just too risky.”

Nagy noted that the economic downturn has impacted most peoples’ retirement savings and that has forced some small business owners to rethink their retirement plans, or at least the timing of their retirement.

“I think some of us boomers are considering hanging onto our businesses a little longer than we might have, but the planning component of that is still critical,” said Nagy. “From an individual perspective…they have had a very rough go and we are seeing a lot of losses, or we did see a lot of losses during our tax season.”

Economy Prompts SMEs to Restructure

Both Nagy and Richardson noticed their clients have been restructuring their businesses as a result of the economic uncertainty. Some businesses were consolidating or buying up smaller competitors. Others have been dividing different operating units into separate corporations to help them withstand competitive threats. “They’re creditor-proofing themselves and sheltering their assets,” said Richardson.

Among larger firms, Peters has noted that designated accountants are increasingly being sought for senior positions, ahead of candidates with MBAs, because those firms recognize and value the fact that accountants adhere to a professional code of ethical conduct.

There is still plenty of work for public practitioners, but since many of their clients are facing hardships, it is impacting how the practitioners bill for their services. “Firms are starting to get some collection issues,” says Peters. “Part of it is the psychological process of actually billing, so we might have realization issues. The time you put into the file was worth $5,000 but you know you can only bill three.”

A question from one delegate about the root causes of the financial crisis sparked discussion about whether regulation can effectively change behaviour and particularly whether it can curb greed. Richardson noted that greed, to a certain extent, drives the system. The challenge is to keep it in check.

“When financial institutions, particularly in the United States, take a look at allowing people to borrow money at such a low rate, and the entire system is betting on inflation in the marketplace driving house prices or commodity prices up and up and up forever, it baffles me how so few people were forward looking enough to see that this was actually going to happen,” said Richardson. Having just returned from Las Vegas, he spoke of new houses that were originally priced at $795,000, then selling for $200,000. Increased regulation may be needed to prevent real estate bubbles and irresponsible lending, he suggested.

Richardson also noted that the speed of information these days may have an impact on peoples’ behaviour and their perception of financial and economic news. From an individual standpoint, a longer memory would help people to foresee and avoid future crises by recognizing the signs of previous crises.

Peters talked about the changing relationship between individuals and their financial institutions and the role that played in the crisis. New regulations have changed the way risk is assessed and, as a result, the way money flows through the financial system.

“I really think it’s the banking industry, or the financial institutions, that have had an impact on what’s going on,” said Peters. “And we saw it coming. We knew it was coming, we just didn’t know how deep. It’s been a while since we had a recession and the longer we wait, the deeper it is.”

Demographics Create Opportunities for SMPs

Despite the difficulties being faced by many SMEs, all three speakers were optimistic about the future for SMPs. The main reason for that optimism is demographics. According to Peters, over the next 15 years, 600 accounting practices will transition to new owners in B.C.

Nagy said that roughly 50 per cent of the professionals in B.C. will retire in the next 10 years, yet the next generation of accountants does not appear willing to work as hard as the current generation of partners. There is a question of whether the next generation is willing to take on the risk and the responsibility of running accounting practices. Regardless, B.C. and other western jurisdictions will have to rely heavily on immigration to make up the difference.

While the next generation places a higher priority on work-life balance, they also have less tolerance for client pressure, fee disputes or ethical compromises, a sign which Peters views positively. She also notes that they are very confident, although in some cases they may not be aware of how much they still have to learn if they are to truly replace their more experienced colleagues.

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