Accountants need to be the people businesses turn to first and trust most. Here’s how they can achieve it.

If practices don’t work closely with their SME clients to plan and manage their needs, then they may start to look elsewhere for commercially switched-on advice. This is important both in the short term to take advantage in the pending upswing in the economy and the long term to plan for a secure and prosperous future.

What SMEs need

If the 80s saw a boom in SME’s, expect to see a similar boom in exits over the next decade, posing succession and retirement issues.

Here’s where practitioners can step up to become trusted advisers.

Many business owners give little or no consideration to retirement or succession planning. Wealth protection and tax mitigation are of utmost importance for directors looking at a sale of the business to fund retirement. They will also need help in getting the business into the best possible shape to maximise its market value and make it more attractive to a buyer.

Even businesses that have a succession plan should be encouraged to review it regularly, given that the ideal exit strategy five years ago might not be today.

As the economy recovers, belt-tightened SMEs might now need to consider investing to take full advantage of the economic upswing. This could include raising finance, capital investment or a merger or acquisition. Alternatively a client might benefit from having its current management systems evaluated and updated to take anticipated growth into consideration.

A practice doesn’t need to provide every service, but they should know what is required and be able to recommend trusted third parties with whom they can form ongoing mutually beneficial strategic alliances.

It starts with culture and attitude

Becoming a trusted adviser offers additional fee generation opportunities by providing added-value services. It can also make the clients more secure, which can only be a good thing for a service provider.

However, for this to be realised, it’s all about becoming the most trusted adviser, not just an adviser, says Phil Shohet FCA, a senior consultant with Foulger Underwood. “I think practices ought to be developing strategic plans, with staff buying into a culture of helping clients, first-year trainees up to managing partner, a culture focused on improving and expanding client services.”

“When you consider most accountancy firms — compliance work, regularly recurring income — it’s absolutely fantastic,” said Shohet. But this is a great foundation from which to add value to clients, build deeper relationships and be an indispensable business partner.

In some ambitious practices, the recurring work can be 60% of revenue and 40% from advisory, because they are leveraging off the bedrock of the recurring work and consider the other services their clients might need, which can be a varied list at the end of the day.

“It could be acquiring businesses, HR, technology advisory,” said Shohet. “The problem is that practices sometimes lack the entrepreneurial mentality of their clients. For example, an audit partner will talk to their clients about audit, but most clients don’t want that conversation, they want to talk about the future of their business.”

Getting the internals right

Establishing the right culture inside a practice should take a hands on, open and honest approach. Such actions can include:

Key performance indicators (KPIs): A regular (eg quarterly) process involving KPIs to benchmark a firm’s progress in areas such as business development, technology, training, client relations, diversity & inclusion, sustainability, remuneration – whatever a practice has deemed measurably important from its strategic vision.

Client and staff advocacy: An extension of the KPIs. Asking staff and clients what they think about the service the firm is delivering. “You need a bit of courage to do this,” said Shohet. “A lot of people are using third parties to do it in a tactful way, so as not to make the client feel unnatural.” Likewise for staff, do it sensitively and anonymously and you’ll get some truly honest and insightful opinions, while at the same time promoting the desired culture of people — staff and clients — mattering.

Inward investing: Shohet mentioned a firm that has successfully taken its ratio of compliance to advisory work to 50/50 from 80/20 and they’re enjoying healthy growth (see case study below). One of their actions has been to invest a whopping 12% of revenue into staff training (technical and non-technical), healthcare (general and mental) and working from home. This is improving their reputation, especially when it comes to recruitment, with the firm being viewed by quality candidates and recruiters as strong career move and not just a stepping stone.

Showcasing the “new you”

Practices solve problems and face challenges, so being able to provide services from the full spectrum is achievable. But to get to the absolute bottom line with clients requires trust. “They need help with their future, but you need them to tell you what’s keeping them awake at night. If you look at building your clients’ business success, it’s about asking, not telling, it’s about listening, not talking. As a practice, don’t go in there and tell them what they should be doing, talk to them, get their opinion. And that will open a floodgate of services you can help them with,” said Shohet.

Case study

Shohet’s example is a mid-tier firm that was very traditional, doing around 80% compliance work. Now this is down to 50% and the balance, which he said is enormous for a practice, is advisory. “That’s a huge tipping of the scales. Often you get 80/20 or 90/10 in favour of compliance, but when you can get 50% simply compliance and the rest advisory, that is absolutely enormous. They just got it right and they’ve grown on the back of that, because most of the gross has been in the advisory work and more people coming to them because of their extending reputation for compliance work.”

This firms also spends around 12% of its revenue on technical and non-technical training and healthcare for its staff. “That is massive. But of course they get value for money because suddenly they have a different product in their staff, who are technically trained in areas other than regulatory work, and the firm itself recognises that staff need help.”

Meanwhile, the firm’s growing reputation means the recruitment market and agencies know candidates are going to a “really, really special practice, that works very, very differently. It’s a strong career move, not just a step of a couple of years to get a name of a firm of accountants on your CV,  it’s also a place to train. And you might stay on if you’re any good and make Senior Manager or Partner. It’s only a small firm, but it’s worked for them really well”.

The AAT Members’ Assembly works to provide a voice for all areas of membership and an outlet for their opinions and concerns.

As an accountant, if you experience a problem, there are many ways to express your displeasure: a carefully worded thought piece on LinkedIn, maybe, or even an angry tweet. But what happens when the subject of your ire is a behemoth governmental department such as HMRC? How can you make your voice heard when the organisation is already grappling with unprecedented matters as furloughing, Brexit and extending the self-assessment deadline?

This is where the AAT Members’ Assembly can help.

Over the past year, accountants have noticed changes to the HMRC’s Agent Dedicated Line (a helpline service for accountants and tax advisers), which they feel isn’t offering the same level of expertise as it once did. By sharing their concerns at the last Members’ Assembly, it’s hoped the might of the AAT can have some clout. 

“My staff and I feel as if we don’t have the power to [complain] to HMRC,” says Heather Darnell, founder/finance director at London accountancy firm Ask the Boss. “But when somebody like the AAT acts on our behalf, HMRC is likely to listen a million times more than it would if a few accountants ring up.”

The AAT Members’ Assembly was established in 2019 as part of changes to AAT’s wider governance framework. The members involved in the AAT Members’ Assembly represent the diversity of AAT members across all business sectors, with a wide array of different backgrounds, expertise and experience.

The assembly provides a chance for representatives of the membership to:

• consider, debate and provide feedback to the AAT Council on public policy issues and wider sector and membership concerns;
• provide feedback on AAT’s progress against business plan objectives; and
• provide a voice for the wider membership.

One member, Diana Cornford, was invited to join the AAT Members’ Assembly after receiving the AAT Advocate of the Year award in 2017. Cornford has been a member of AAT for 21 years and became a Fellow Member in 2008. She currently runs her own practice, DSC Accountancy Services, along with two part-time employees.

“Being a member of the assembly gives a sense of belonging and inclusion of the AAT family network,” says Cornford. “The format and size of the assembly gives the ideal opportunity to voice your ideas, concerns and requests to our professional body and is a great way to boost your own self-confidence. We discuss and make contributions to the topics on the agenda of each meeting. This allows the grassroots membership to pass on their points of view to the Council.”

How the assembly works

The Members’ Assembly meets twice a year and hosted by an AAT Council member. AAT’s aim is to expand the Members’ Assembly to ensure that all AAT members continue to have a representative voice.

Any member can apply to join the assembly just by completing the online form.

At a Members’ Assembly meeting in late 2019, members were asked if they considered Net Zero Carbon to be an important issue, and whether AAT should be looking to do more to promote sustainability issues. Responses were fed back to the Council and resulted in the decision to include Climate Action as one of the material UN Sustainable Development Goals that AAT is signed up to delivering on.

Another assembly member, Wil Ames, is a semi-senior accountant at Dashwoods Limited in Buckinghamshire. He also runs his own bookkeeping business, Ledger & Scribe.

He says there are many benefits to joining the Members’ Assembly, including: “Meeting AAT members, meeting AAT staff, learning about AAT changes in advance, learning about forthcoming rules and regulations changes, and being given a voice within AAT.”

Ames wanted to become part of the AAT Members’ Assembly to find out how AAT was being run, plus have the opportunity to throw in his two pennies worth.

“I give my views on how AAT is being run and what may (or may not) happen in the future, and I listen to and discuss matters with AAT staff and other Assembly Members. This has been remote since the onset of Covid-19, but was face-to-face previously.”

Suzanne Andrea, Director at Hertfordshire-based accountancy practice The Book Monitor, explains her reasons for joining the Members’ Assembly.

“I volunteered because I think it’s important to hear what your licensing body is doing, plus you can have some input into how things are done.”

She adds: “My career is an important part of my life, and it’s nice to meet other AAT members who come from different parts of the industry.”

Holding HMRC to account

One example of how the assembly can make a difference is challenging the perceived slippage in HMRC’s support for agents.

Andrea explains the problem:

“Until recently, HMRC had a dedicated agent helpline that accountants could ring to get specialised and experienced advice.

“Over the past year, whenever you ring this line, it appears as if you’re being put through to anybody who’s available, usually somebody clueless who is seemingly Googling the answer. Sadly, it means we can’t rely upon the info we’re being given to use on behalf of our clients. When accountants are supposedly allowed to use HMRC advice as evidence if there’s an investigation, it’s really detrimental…”

Darnel reinforces the point:

“Previously, whenever you rang up the HMRC’s Agent Dedicated Line on behalf of your clients, you knew you wouldn’t be getting any Joe Shmoe on the other end of the line: it’d be a knowledgeable person.

“Since Covid hit, you now end up being transferred to the main number whenever you ring. Sometimes, I’ve ended up waiting for an hour only to be transferred to some doofus who can’t help you.” 

Raising the issue within the assembly

Darnell explains how members compared notes and took action.

“At the Members’ Assembly, AAT members talked about how they were affected by the drop in quality of HMRC’s Agent Dedicated Line. Because the wait-times and poor advice are so horribly time-consuming – time that we can’t charge back to our clients – it was having a financial impact for many agents.”

Get involved

AAT will give HMRC feedback on its performance during the Covid-19 crisis, including the question of its support for agents. If you would like to contribute to this, please take this quick survey, which will form part of our representations.

AAT would love to hear from members who want to join the assembly. You can read more about it here, or you can jump straight to the expression of interest form on our website.

The London Inter Bank Offered Rate, more commonly referred to as LIBOR, is being wound up, which is likely to affect over $400 trillion of financial arrangements globally.

Having gained widespread use in the mid-1980s, the globally recognised benchmark interest rate has been subject to manipulation scandals following the global financial crisis, and questions as to its validity, on account of low underlying real transaction volumes.

What is LIBOR?

Every morning just before 11am GMT the ICE Benchmark Administration (IBA) determines a set of rates, having asked a panel of large international banks the following question: “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11am London time?”

A total of 35 LIBOR rates are published with seven different maturities for each of five major currencies: the Swiss franc, the euro, pound sterling, the Japanese yen and the US dollar.

How is LIBOR used?

LIBOR is used in financial products worldwide:

• Standard interbank products: forward rate agreements, interest rate swaps, interest rate futures, options and swaptions.
• Commercial products: floating rate certificate of deposits and notes, variable rate mortgages, bilateral and syndicated loans.
• Hybrid products: collateralised debt obligations, collateralised mortgage obligations and a variety of accrual notes, callable notes and perpetual notes.
• Consumer loan-related products: mortgages and student loans.

LIBOR has been used by financial markets as a standard gauge of market expectation for interest rates. Reflecting banks’ credit risk premium it has acted as an indicator of the overall health of the banking system. It’s used as a reference rate in the investment industry for derivatives products, as well as for processes such as interest calculation in debt products, clearing, price discovery and product valuation.

When is LIBOR ending?

LIBOR will be largely phased out immediately after 31 December 2021, and this year is the most critical in executing the transition and to launch alternative products. The FCA announced on March 5th the long-awaited schedule for cessation of the rates, with the majority ceasing to be published on a representative basis from January 1 2022, and only some longer-dated US dollar settings being maintained until mid-2023 to facilitate transition of USD legacy portfolios.

Why is this important?

While the end of LIBOR may not be a headline grabber, particularly given strong competition from a pandemic and Brexit, at least from a business perspective, the transition is one of the biggest market reforms ever, and a particularly important step in ensuring post-global financial crisis stability.

For businesses with exposure to debt or credit exposure rated against LIBOR, this is the year to get on board with the transition. Large or small, uncertainty is an unwanted commodity for any business.

Meanwhile, for banks, LIBOR transition has been a huge operational endeavour, from systems upgrades, product development and enterprise readiness to large-scale portfolio analysis and client outreach.

Be prepared!

For businesses that have borrowed from banks, it’s important to review all loan documentation for references to LIBOR, said Fiona Cameron, partner, Banking and Finance at law firm Shoosmiths. “Have early conversations with lenders or other counterparties to agree what changes will be required. It’s essential that businesses have an understanding of the changes so that they are adequately prepared for these discussions and so that they will be able to prepare adequate accounting and management information going forward.”

Given the regulatory requirements, most businesses with LIBOR borrowings from a mainstream bank should already have heard or expect to hear from them very soon. However, it would be prudent, suggested Cameron, for businesses to make contact as soon as possible if they have not heard anything.

Check the small print

“LIBOR will essentially cease from 31 December 2021. Many loans priced off LIBOR will contain ‘fallback’ wording that may allow the lender to price the loan at its ‘cost of funds’ (essentially the amount the lender states it costs it to fund the loan). This may kick in if the loan agreement is not amended to refer to an alternative benchmark rate. This is far from ideal for borrowers as it is an amount set at the discretion of the lender, rather than an official rate, which may result in disagreements or uncertainty,” she said.

Businesses should also cast an eye over ancillary finance documents that may be impacted, such as interest rate hedging products and foreign exchange and trade finance contracts.

“While LIBOR transition has been a hot topic in the loan markets for a few years, it’s probably a lot less prominent in commercial spheres. This means that commercial contracts that reference LIBOR may be the ticking time bomb of the transition. Following the cessation at the end of this year, businesses looking to enforce a commercial contract provision that references LIBOR may find themselves litigating. It is therefore essential that this is addressed and changes are made before the end of this year,” said Cameron.

The impact on hedge accounting

Hedge accounting seeks to reduce income statement volatility by allowing businesses to provide a modified treatment for recognising gains and losses on hedging products and the exposure they are intended to hedge, reported not separately but in the same accounting period.

The LIBOR transition will affect companies that report under IFRS and UK GAAP and have applied hedge accounting for LIBOR-related hedges, such as hedges of loans, bonds and borrowings with instruments such as interest rate swaps, interest rate options, forward rate agreements and cross-currency swaps.

Amendments to IFRS 9, IAS 39 and IFRS 7 issued by the International Accounting Standards Board (IASB), as well as to the Financial Reporting Council’s (FRC) FRS 102, provide some relief for LIBOR replacement issues that impact hedge accounting. This means that in most cases hedge relationships will not cease directly as a result of anticipated LIBOR cessation or actual contract transition.

What comes after LIBOR?

Finance and treasury functions, whether big or small, like certainty. However, for SMEs, it’s unusual to have this kind of uncertainty. LIBOR has been notably volatile during the Covid-19 crisis, with rates at times going very high, to the detriment of borrowers. But whether it’s cessation is a good or a bad thing is not yet clearly known.

The end of LIBOR may help mitigate uncertainty, as borrowers shop around for rate options, but ultimately when LIBOR disappears there will be a bit of a cliff edge moment, which means preparation and understanding of the alternatives are key.

The replacement rate for sterling is SONIA, the Sterling Over Night Interest Average. “SONIA is quite a different animal to LIBOR so this has been no mean feat. We are not quite at the stage yet where we can say that there is a ‘market standard’, but we are not too far away from that,” said Cameron.

However, a SONIA calculation is not straightforward, which may put off some borrowers, she pointed out. “There will also be some lenders who, at least in the short term, do not have the systems capacity to calculate and administer SONIA. We have seen some contracts simply move back to Bank of England Base Rate or an agreed fixed rate,” continued Cameron.

Ulrike Koeppl, director, Capital Markets Advisory, Financial Services Group at Grant Thornton, also notes challenges to incorporating SONIA pertaining to moving from LIBOR, going from a term floating rate to an overnight rate. “A term rate is forward-looking, where you know months before a payment is made how much it’s going to be, while an overnight rate is backward-looking compounded, so the actual rate is determined only close to the payment date.”

While this will help mitigate the risk of manipulation, with overnight rates based on actual historical transactions, effectively, a borrower or lender will not know the amount of a payment until a few days before it needs to be made, which may pose challenges to planning and cash flow management.

Synthetic LIBOR

For tough legacy contracts, where businesses struggle to transition, there has been talk of a “synthetic” LIBOR. “There is potential that there might be a LIBOR rate in some shape or form beyond the cessation date, but this isn’t something anyone should rely on because you might not get the result you want. And the regulators are actively pushing to transition away from LIBOR. I think people will get used to the new rates as time passes,” said Koeppl.

Watch out for mis-selling and misconduct

Any transition and upheaval to a system or process comes with misconduct risk, and the end of LIBOR is no different, applying to all products and entities, with particular emphasis on regulated financial services firms.

“Banks don’t want the LIBOR transition to be the next conduct risk and mis-selling crisis, because customers were sold products with conditions they didn’t fully understand,” said Koeppl.

Furthermore, debt issuance is a potential challenge for large non-financial corporates, not just for banks said Koeppl. “So for example, if a corporate issued a floating rate note, they need to identify and reach out to their bond holders to solicit their consent to undertake the transition, to communicate a new rate and spread, and there shouldn’t be a value transfer in doing so, said Koeppl.

Alternatives to LIBOR

• SONIA for contracts denominated in sterling.
• SOFR is the new rate for US dollar-denominated contracts.
• Euribor for euro contracts, though is also under review for reform.
• HIBOR (Hong Kong) and SIBOR (Singapore) are also facing review.
• SARON is being pushed as the new rate in Switzerland
• TONAR is the alternative reference rate for the Japanese yen.