E-business and accountants: Coming full circle

Everyone remembers the dotcom boom, that period when traditional business values were booted out of the way to make space for the age of the internet. Strategic plans and profit reports were of no importance to the first flush of e-businesses, but having a fat marketing budget and fancy-looking website was vital, to the horror of most accountants.

At the height of the hype, when venture capital firms like 3i gave millions of dollars hand over fist to start up e-businesses, accountancy firms became the frenzied funding-hunters’ rubber stamp to the VC money pot.

Now, e-business has come full circle and merged back into the world of sane accountancy laws, allowing accountants to take stock of those hectic years.

Of the e-business influx beginning in late 1998, Henry Fairpo, corporate finance partner at mid-tier firm PKF says: ‘E-businesses were going into business in a place where there wasn’t any proven way to operate. They used a marketing-led approach and were more concerned about winning customers and the cost of their acquisition, than some of the basics about creating a lasting business; we were dealing with companies that had no strategy to create a long-term business. We saw people who had no intention of making a profit.’

PKF was concerned about the lack of regard demonstrated by the new wave of companies for business basics.

Fairpo says: ‘From an auditing perspective, our concerns focused around their cash reserves, which they were burning at a vast rate, and what controls they had in place to cope, when it ran out. Also, they didn’t seem to worry about collecting financial information for VAT returns and the like. Our client rejection rate shot up.’

But Fairpo adds that once accepted as clients, e-businesses were handled in much the same way as bricks and mortar clients: ‘Strategically, our dealings with e-businesses weren’t that different other than we had to spend a lot of time with people, trying to teach them basic accounting skills including proper projections so they knew what was coming into the business, getting a proper accounting system hooked into the front-end of the business and trying to convince them that there was more to life than marketing spend.’

Jeff Woodhouse, general business partner at Moore Stephens, says the main strategic difficulty that the firm ran into with e-businesses was the uncharted territory of their technological perspective.

‘In 1999, many companies were beginning to operate in entirely new areas of technology, giving rise to the issue of revenue recognition; accounting for things entrenched in the electronic medium, like maintenance contracts embedded in ten-year software licences, was new territory.’

He adds Moore Stephens found itself in a parental role, teaching and coaching na’ve directors of e-businesses: ‘They looked to us for start up advice, which was basically hand-holding, tax advice for things like employee share schemes and company share evaluations.’

PKF’s success rate at helping budding directors of e-businesses understand the importance of keeping good books depended on each individual. Fairpo says: ‘Whether they listened or not depended on their mindsets. With those that were fighting against us – as e-businesses often believed all the old realities, like accountancy, didn’t apply any more – we made much more use of our IT specialists to get e-business clients to listen.’

PKF used its IT consultants as interpreters between the technological world of e-business and the accountants. Fairpo says: ‘We would use our IT consultants to talk to clients and even to tell them their idea wouldn’t work. They were able to tell us what was new and working, what wasn’t particularly new and innovative, plus integrate accounting packages and develop an accounting strategy that linked into what the e-business was doing.’

For such firms out of the dotcom growth new divisions were spawned.

The growth led PKF and Moore Stephens to expand and create new partner groups to manage the influx of e-business clients. PKF created a cross-departmental group called ‘technology and e-commerce’ that made use of everyone the business could lay its hands on who had been involved in e-commerce transactions. Stephen Moore created the ‘telecoms, media and technology group’ that consisted of a corporate finance partner, corporate tax partner and Woodhouse as the general business partner. The trio held lectures at Oxford University, client seminars and struck up relationships with solicitors and venture capitalists.

Since the dust has settled since the crash, PKF’s e-commerce group, now with a silent e-commerce, advises its clients to see technology as a tool.

Fairpo comments: ‘Now we talk to businesses about how they can make the best of the technologies available to them, such as the internet and mobile, as part of their overall business strategy.’

Both firms see the dotcom boom as a positive experience. Woodhouse says Moore Stephens has retained e-business clients in its Media and technology group (now minus the Telecoms). But he adds: ‘Although many of the pure dotcoms have fallen away, we still have a large platform of clients in the area who are principally developers of software for long-term growth businesses.’

Woodhouse sums up the accountancy dotcom boom experience with a statement that seems remarkably obvious in 2002: ‘This sustained downturn in the equity markets has demonstrated to people that businesses need business plans and do need to make a profit.’

  • Heather McLean is a freelance business and IT journalist.

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