‘Big brother’ … ‘overbearing’ … ‘hostile’ … ‘autho-ritarian’: small practitioners are a silent majority no longer. The long-heard rumblings of their discontent with the English ICA gain legitimacy this week as we exclusively unveil the first ever exhaustive survey of opinion carried out at the sharp end of the profession.
In March, Accountancy Age collaborated with the then newly-formed Small Practitioners Association by inviting its potential members to air their views on those issues considered to be of gravest concern – the institute, the JMU and the audit and reporting process in particular. The SPA then sent out the same questions to every firm with up to three partners on the ICAEW address list which elicited a combined total of 818 responses.
What follows are edited highlights of the resultant report – the full text is available from the SPA. The depth of feeling among small practitioners about the damage being inflicted on their businesses today and its potential escalation in the future is clear. It now forms the basis of a package of considerations the SPA is to put to the institute.
The institute’s role
The role of the institute as regulator has created a belief among small practitioners that, in some fashion or other, their ‘card is being marked’.
As a result, many of them make strenuous efforts to appear as invisible as possible, lying low in an attempt to avoid unwanted attention.
There is a strong feeling too that the institute lacks sympathy for and understanding of the small practitioner’s way of life, particularly the close and regular working relationships built up with small business clients.
Audit and accounting standards don’t feature high on the list of priorities for this size of company during an economic decline. The real need is for hands-on help and commercial guidance, often on a day-to-day basis.
Poor management by the institute has contributed to the deterioration in its relationship with small practitioners who, as recent voting on special resolutions has shown, have taken the opportunity to show general disapproval – of the system as much as the substance.
Unfortunately, it appears at such times that the institute mimics poor government – let’s not ask the people as we might get an answer that we don’t want to hear.
The report highlights two problem areas in particular. First, the high-profile reporting of disciplinary hearings, costly in every respect to the defendant but whose subject matter sometimes seems quite trivial.
The small number of SPA members involved in disciplinary hearings belies the underlying trend towards the holding of many more in the last five years. Only 5% of respondents had been called before a hearing in the last ten years. This has moved from a rate of 0.2% per year five to ten years ago to almost 1%, probably largely the impact of JMU reports and compliance.
Almost a third (30%) chose to have legal repre-sentation, although it seems that the cost of this may outweigh the probable benefits. Twenty five per cent said both the process and the findings were unacceptable. There were no positive comments.
The council has issued a paper recommending all disciplinary hearings be held in public. Unless great sensitivity and care is taken – qualities hitherto seemingly absent – to undertake such an activity against an existing background of poor relations threatens to heap trouble upon trouble and further disenfranchise the membership.
It would also parade more members in a potentially sensational fashion, as evidenced in cases over recent months and the merciless exposure of private lives over matters where there has been no public loss. The institute must take great care only to expose the villains and cowboys, not the occasional frailties of long-standing servants with otherwise unblemished records.
Small practitioners are obliged to carry minimum professional indemnity cover of # 50,000, then two and a half times fees to a ceiling of # 1m, negotiable thereafter, on an any one claim basis. More than half of respondents (51%) fell into the lowest cover limit of under # 250,000. Just over a quarter (27%) carried # 500,000 and 22% were between the two figures.
The reality of members’ claims history suggests that, even if desirable, such cover is grossly excessive. The annual rate of notifications has almost doubled from 2.5% for five to ten years ago to 4.2% over the last five years. Nevertheless, almost 70% have never needed to notify a potential claim. Of the very few number of paid claims (0.8% per annum for the last five years), all fell below the minimum cover of # 50,000.
The second major area of concern is the development of general policy statements without a working method of consulting small practitioners to get a balanced view. This assumes that representatives from the Big Six accounting firms understand what works for clients of small practices.
And they don’t.
In fact, many respondents feel the large firms have a good deal too much influence overall. As you’d expect, this is resented all the more since it was their behaviour and the resultant adverse publicity that smashed public confidence in the accounting profession.
Improving communication with small practitioners is known to be high on the institute agenda. Less than 4% of all respondents have been invited to take part in independent research on any of five principal subjects in the last five years.
With a total income of over # 41m, it must be possible to find the budget for properly conducted market research, non-attributable to the respondent, to enable the population of small practitioners and others to participate in the development of their future. The institute is neglecting a vastly experienced source of information.
There are even those small practitioners who go so far as to suggest splitting the institute into two separate divisions, one for the large and one for the small firms, as the single body clearly fails the latter.
This sentiment is most clearly portrayed in the common opinion of compliance requirements which, it is disheartening to see, is stated as the reason why some SPA members have given up doing audit work, although most of them are registered auditors.
Compliance should not be so onerous that it dissuades good accountants from giving service to clients. Similarly, investment advice has frequently been ‘given away’ to less suitable and unqualified individuals.
The apparent U-turn executed recently by the institute to encourage practitioners to offer investment advice suggests a belated response to the poorer service provided to clients in recent years by the insurance industry. The small practitioner is probably the best-placed and informed person to provide such advice, but unfortunately, although current insurance claims do not support this position, it is still deemed high risk in terms of JMU supervision.
Undoubtedly the JMU has a role to play in the quality and effectiveness of the audit process of public entities. How it affects private entities is of great concern to small practitioners who consider it of little benefit or relevance either to them or the majority of their clients. Given the extremely low level of public interest audits they are involved in, the process should be helpful rather than hostile in terms of maintaining quality of work.
Almost half the SPA membership (45%) have received a JMU visit and it is clear that the present regime engenders unreasonable stress. Most who had experienced this said so, indeed 23% said it was very stressful.
And in cases where the JMU identifies a breach of regulation, the subsequent drawn-out reporting process is even more so, sometimes running into many months which is surely unacceptable.
The institute report to the Department of Trade & Industry on audit regulation for 1995 speaks of compliments made to the JMU at the end of visits. What it does not do is register any of the disquiet raised by those monitored.
The negative remarks made by SPA members outnumbered positive by three to one, suggesting there is considerable scope for improvement in the process.
Members point to the disproportionate amount of attention given to ‘trivial matters’. In a number of cases, practitioners found the inspector unhelpful, even hostile. Others complained of an inadequate understanding of their business.
There is strong evidence that the levels of compliance required have added time and real cost to the small practitioner to the point where he or she is unable to pass them on to the client. Such negative economic action is harming the effectiveness of small practitioners’ services – quite the reverse of what is intended.
The disillusionment expressed about the low level of perceived benefit of audits generally – either to clients or to shareholders, and even in the case of large companies and plcs – should be very worrying for the institute. After all, the statutory audit underpins much of the Big Six activity and with it public opinion on the safe handling of their moneys.
It would be reasonable perhaps for the appointed professionally qualified accountant to act in a reporting role for all small limited companies where an audit is not requested. In this way the audit process may be restricted to those companies where it is appropriate and meaningful and the overburden of compliance plus reporting standards may be minimised.
The lack of facility or desire of most small practitioners to participate in institute matters is well-known. In past years such a laissez faire attitude was probably neutral in effect as, until the introduction of institute compliance plus the JMU with its attendant annual return, no direct intervention into a small practitioner’s practice would generally take place.
Highly publicised public interest company failures are cited as the major reason why compliance and monitoring was introduced in 1991. A sea change has taken place in attitude with the need to demonstrate publicly that work is being carried out to a high standard, a process involving almost all small practitioners irrespective of whether their work has any public interest or not. Thus small practitioners must be prepared to be involved to help shape their future.
On occasion, members may feel isolated. The need for a trusted colleague to share your concern is paramount. To do nothing and let matters fester can only damage your practice and even your health.
Peter Mitchell is chairman of the SPA steering committee. Writing to his members this week, he closes the letter with an earnest hope for the future: ‘Being a small practitioner used to be uncomplicated with little institute intervention. Regrettably, increasing bureaucracy has reduced our effectiveness and threatens our future. Let us hope our efforts can put some enjoyment back into our work and focus our masters’ attentions on the qualities that truly matter.’
The Small Practitioners Association was set up both to raise the public profile and image of small practitioners and to represent their interests to the English ICA within which it now represents the largest independent group. The membership now numbers just over 750 and the SPA is looking to develop a local network. The steering committee comprises Peter Mitchell, Raymond Ashton, Michael Hoy, Simon Ripper and Terry Gower. The first general meeting will take place in November.
The SPA can be contacted at PO Box 542, Amersham, Buckinghamshire, HP6 5TS (telephone 01494 434333, fax 01494 431352).
Ten-point challenge: small practitioners call for change from the English ICA
1 The institute must review its role as a trade association and whether this is compatible with its secondary role of regulator
2 There should be formal moves to develop independent market research to encourage wider participation in current issues
3 It is essential to abandon any intention to hold all disciplinary meetings in public and to review the method of determining whether cases are called on substance rather than form – only cases concerning criminal activity or actual public loss should be publicised
4 The institute should review with the DTI whether all small non-public interest limited companies may opt out of the audit process as has already been granted to those turning over under # 350,000
5 The current methods and role of the statutory audit should be overhauled to assure the public that it is impossible to perpetrate a major fraud
6 The role of the General Practitioner Group must be redefined to provide support services for small practices with up to three partners separate to those for larger firms
7 The institute must reconsider with the JMU what constitutes a breach of regulation to concern matters of substance alone not form
8 It should also review the scope of the JMU’s supervision and its methods, and particularly whether its remit should extend to small non-public interest limited companies
9 There should be a review of the Complaints and Disciplinary procedures to establish any underlying causes for the apparent increase in activity (the yearly rate has increased for complaints too up from 1% five to ten years ago to 1% in the period from 1991) and to ensure that such procedures discern between substance and form
10 The institute should also consider providing free legal support to members for disciplinary hearings.