EFAA

On 21 November in Vienna, EFAA organised a conference on "SME finance and relations to banks: the role of the accountancy profession", with special consideration of the consequences of the new requirements set up by the Basel II rules, and considering the current financial crisis. EFAA President Federico Diomeda opened the event stressing that this conference is part of an ongoing project within the EFAA SME expert group on SME relations to banks and Basel II rules, and that it is to be considered as a first step towards the development of concrete results and tools to help small entrepreneurs get a better access to finance.

Keynote speakers from the International Federation of Accountants, the World Bank and the European Commission took the floor during the opening session. Mr Budavari from DG Enterprise's SME access to finance unit presented the tools and policies set up by the European Commission, such as the Innovation and Competitiveness Framework Programme, which aims to insure that SMEs have access to venture capital and mezzanine finance, the recently reviewed European Investment Bank earmarked funds for SMEs and the development of micro-credits. He also spoke about the Small Business Act for Europe and the related legislative initiatives on VAT or the European Private Company Statute.

Paul Thompson from the IFAC SMP Committee pointed out four main issues SMPs and SMEs have to face, from the relevance and proportionality of international standards to SME/SMP, their capacity to efficiently implement these standards, to the ability of SMPs proficiently operate and manage their practices and, very important those days the ability to remain competitive and client-focused.

John Cachrae from the World Bank's Centre for Finance Reporting Reform responsible for the region's corporate sector financial reporting activities presented the activities and projects of the Centre and stressed that auditing and accounting are fundamental pillars for the private sector growth, financial sector development, the development of capital markets and by and large economic growth and financial stability.

The implementation of Basel II rules by European financial institutions and the impact on SMEs: The new crisis scenario approach

Three speakers from the banking sector, Mr Konesny from the German Saving Banks Association and Mr McKee from Barclays Bank, and Mr Medizza from a risk consulting agency took the floor in the first panel on the implementation of Basel II rules, its impact on SMEs and the possible new crisis scenario approach. Although internal ratings are still mainly based on quantitative criteria, qualitative criteria are becoming more and more important within Basel II rules. The dialogue between banks and their clients is therefore very important to ensure trust, which is the key of the relationship, and a good knowledge of the business's situation. Indeed, if the bank or the rating agency does not know its clients, as soon as the business gets bad its rating score decreases.

Mr Konesny presented the three pillars of Basel II - minimum capital requirements, supervisory review process and market discipline, of which the first one is the most relevant for business clients. He stressed that an "open" rating raises transparency for the customer regarding the impacts on his credit terms. Such transparency is applied in Germany and provides good results.

Mr Medizza insisted on the pro-cycling character of Basel II rules and its undesired effects in a period of economic crisis such as the one we are facing now. Indeed, when it comes to analysing the business' growth expectations and to report it into rating, the financial crisis over-impacts on real economy and the business situation.

Mr McKee presented the different steps of a business assessment from the opening of the account to the tracking of the operation and financial accounts to the understanding of the business external and internal environments. He also emphasised on the necessity to adopt a pro-active behaviour in the relationship between banks and SMEs.

SMEs banking relations - Can it be a win-win relationship?

The second panel presented the views of the accountancy profession and SMEs. Mr Benassi from UEAPME said that SMEs cannot afford that the relation with banks is not a win-win relationship but that there is still a lack of communication between the two parties. He also mentioned the revision of the 4^th company law directive and UEAPME's position against the exemption of small enterprises as they will still have to prepare accounts. What is needed is not exemption but an SME-friendly harmonised accounting framework. Accounting is a tool for small enterprises, not a burden, he added.

Mr Thompson evoked the current financial crisis and said that it is an opportunity for external accountants to position themselves as financial advisers. Accountants are the ones who can convince the banks that their clients are worth a loan or credit. He also said that it is the role of accountancy federations such as IFAC and EFAA to push for that.

Mr Britton shared his view as a small practitioner. He stated that accountants, banks and the clients are part of a triangle relationship in which the accountant acts as an information bridge by assisting both the banks and the clients and helping them speak the same language. He concluded with the assertive remark that if banks support SMEs, the contrary is as true: SMEs also support the banks.

The last speaker of the panel Pr Avallone from the University of Trento, Italy, pointed out that one of the main problems is that there is no harmonisation of the segmentation of enterprises with regard to the rating assessment. He also showed the importance of external communication for small businesses in terms of management control and business strategy and raised the idea of a possible survey by EFAA in partnership with universities on how to understand the internal rating systems of banks with the aim to reach better rating scores and to suggest a right use of that information to drive business and support strategic decision.

SMEs banking relations - How to manage a practical approach?

The third panel gathered speakers from rating agencies and business consultancies to discuss a practical approach of how to manage the relations with banks. Mr Lah, from CAPP&CAPP, explained how a rating agency proceeds to the rating assessment. Several methods can be used ranging from pure factual figures to a heuristic approach taking into consideration qualitative information and therefore allowing a more accurate rating of the business. He advocated that a rating should be seen as an opportunity for the business, not a threat.

Pr Korth from DStV stressed that in Basel II, the first pillar on evaluation of risk is the most important for SMEs to comply with, with the consequence that SMEs must now provide more information to the banks and/or rating agencies, including both hard and soft facts for a comprehensive understanding of their business. Accountants here play a crucial role.

With regard to the financial crisis, a possible scenario for SMEs would be that credit institutions will scale up their rating requirements and the earning position of SMEs will deteriorate which could lead to a credit crunch that would jeopardize the existence of SMEs.

Mr Veneri from Interprofessional Network consultancy testified of the difficulties faced in the approach with banks due to the fact that more than often small entrepreneurs do not have a financial mindset and hence need an interface to speak with the banks. That is where consultancy agencies and accountants intervene with the aim to improve SMEs' performance. He presented the technical rating/scoring criteria used by Interprofessional Network to assist the banks and their clients. Considering the high speed of the current economic cycle, he advocated for the use of qualitative information reflecting the development of the business rather than purely historical information.

Conclusions

Mr Diomeda called for the profession to adopt a more pragmatic approach in the approach with the banks, for instance by filling the gap of the lack of financial analysts that is strongly missed by small entrepreneurs. He added that only mutual and transparent relationship between banks and SMEs will allow a general win-win situation in a market where all stakeholders are in the end interdependent.

Mr Diomeda concluded the event by saying that EFAA will continue working on the SME access to finance and relations to banks issues - communication with financial institutions, lack of transparency, etc. and it will convene a follow-up conference in 2009 aiming to present more structured and concrete solutions and tools.

Programme

Presentations

Opening session

Vilmos Budavari, DG Enterprise, European Commission

Paul Thompson, IFAC SMPC

John Carchrae, World Bank

First panel: "The implementation of Basel II rules by the European financial institutions and the impact on SMEs: the new crisis scenarion approach"

Peter Konesny, German Saving Banks Association

Luca Medizza, Protiviti

Kevin McKee, Barclays Bank

Second panel: SME banking relations: can it be a win-win relationship?

Paul Thompson, IFAC SMPC

Geoffrey Britton, GBAC

Pr. Francesco Avallone, University of Trento

Third panel: SME banking relation: how to manage a practical approach?

Matej Lah, CAPP&CAPP

Pr. Hans-Micahel Korth, DStV

Giulio Veneri, Interprofessional Network