The change in South Africa’s Companies Act, which allows many small and medium firms to forgo an annual audit for a less costly review, offers a potential saving on overheads to small and medium enterprises (SMEs). SMEs in the mining sector who have seen their profit margins squeezed by falling commodities prices, restrictive labour laws and a militant work-force, may be tempted to opt for a review and even to have it conducted by an independent financial services professional, rather than retaining a CA(SA). Research undertaken by SAICA with specialist funders to the SME sector indicates that whilst most SMEs still opt for the Audit, there are good reasons for SMEs to stick with or even enhance their relationships with CA(SA) led practices even if they have chosen the review option.

Lenders trust CA(SA)-prepared financials more

SAICA commissioned an independent survey of five major banks and three specialist SME lenders, and all indicated that they found financials prepared by CAs(SA) more trustworthy, when assessing creditworthiness, than those produced by companies themselves, or by other independent accountants. “The letters behind the name make a big difference to us,” says Scott Brown, Group Credit Risk of Investec.

Specialist SME funders, in particular, want an audit. “As it stands today, we prefer audited financials,” says Darryl Adriaanzen, Chief Commercial Officer of the Bank of Athens. “Even when the new criteria get embedded, it will still 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.”
CAs(SA) offer additional benefits

“Apart from the finding that financials prepared by a CA(SA) carry more weight with lenders, there is a lot more value a chartered accounting practice can add to a small business, through advice on financial planning and management,” says Brigitte Kriel, SAICA’s Project Director: Small and Medium Practices. Major banks find CA(SA) input in a small company invaluable. “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 Small 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 they consider predictors of a company’s ability to repay debt – and this is another area in which 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, etc. “Their input can make a major difference on the bank scoring system, when and if credit is required,” says Kriel.

The respondents also indicated that a CA(SA)’s involvement in an advisory capacity made the business more attractive as a credit risk. Chartered accountants 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.

Chance to re-invest windfall savings in sustainability

In conclusion, Kriel says that it’s easy to understand why some SMEs have used the new reporting rules as a way to cut costs – especially small companies in the hard-pressed mining sector. In challenging times, reducing overheads 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 and more sustainable.” Kriel says. “In truth, the potential cost reduction of the review should be looked at as a source of funds to improve the sustainability, financial health and cash flow of the SME. It’s an investment in ‘borrowing fitness’, and in today’s uncertain world, that’s something worth thinking about.”

Written by Bridgitte Kriel, Project Director for the Small and Medium Practice sector of SAICA