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Proceed with caution

31 Dec 08

The planes are still flying but the crisis calls for great care – from accountants, non-executive directors, company management, regulators…

by Frank Blin

I’ve been immersed in financial services issues over the past few months, and flying back from London or overseas, I sometimes wondered: “Why are the planes still flying? Why are the trains still running?”

From newspapers and television, you can get a sense of the world coming to an end. There have been some particularly frightening periods in the banking crisis, and I don’t think we are by any means at the end of it.

We have not yet solved the challenge of ensuring that the capital injected into banks by the government and others is translated into greater liquidity to support businesses and provide a much-needed stimulus for the wider markets, such as housing. Furthermore, we have not yet solved the challenge of making available sufficient credit to corporates, from small businesses to large-scale corporates.

The financial system is not completely broken, but it is clearly very vulnerable. It is incredibly important that we get the credit markets moving again and in the right direction.

I hate the phrase “the real economy” but it cannot be denied that, starting as a financial crisis, the credit crunch has reached businesses in all sectors. Many solid enterprises that have been trading well, and are profitable, will face massive challenges. It would be unthinkable to see such businesses go to the wall because they cannot find the finance for their day-to-day activities.

So, what is or should be the role of the accountancy profession?

Every board must be looking at risk management and risk assessment. They will need to “stress test” assumptions and look at how the business can deal with scenarios that a few months ago meemed unimaginably pessimistic or even completely unrealistic.

The independent perspective of the accountancy profession has an important part to play. We offer enormous collective experience from working with a very wide range of companies and sectors which will challenge, enrich and broaden the viewpoint.

Companies are facing massive challenges as a result of the liquidity crisis. For example, in the recent past, banking syndicates were the norm for larger businesses, and the company dealt with them through one lead bank or through a lead member of its “banking club”; companies may now find themselves managing a series of bilateral arrangements, with more relationships to handle and more information to provide to more people, again putting a premium on the CA’s professional advisory skills.

This is where providing a view on the business debt capacity, credit ratings, knowledge of who is still “open for business”, how debt finance is priced and the most appropriate forms of debt (and related covenants) will be invaluable.

Clearly the issues of valuation, impairment and going concern are coming to the fore.

Auditors and advisers should not negate the role of the board, but they have the ability and the breadth of experience to help the board fulfil its responsibilities.

What lessons have we learned from the past 18 months? One, for me, has been the speed and scale at which problems can escalate and spread. Businesses must understand their risks and stress test them continuously.

Second is the need to ensure reward strategies align the interests of management with those of the business. Arguably, in some cases, management and senior staff have been incentivised to follow too aggressive a strategy and ultimately too much risk.

Third, the crisis brought home the global nature of business. People talked about globalisation, but who would have predicted the impact that problems with mortgage lending in the US would have on, say, a small business in Scotland?

A further surprise has been the role of government and the scale of its intervention. This has a direct impact on whether businesses succeed, or even survive.

I believe that we will see more rigorous challenges to executive directors and non-executive directors assuming much greater influence in the boardroom.

Further regulation can now be viewed as a given, particularly in sectors closely linked to capital markets. I hope, however, that the result will not be “one size fits all” – we need the right approach for each sector. Business must not be stifled by excessive regulation! n

FRANK BLIN CA is senior partner, Scotland, with PricewaterhouseCoopers and a former head of UK regions..

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