Host
Philippa Lamb
Guests
- Romesh Jeyaseelanayagam, Founder, The FD Consultant
- Rhodri Whitlock, Director, HPL Associates
Producer
Natalie Chisholm
Transcript
Philippa Lamb: Hello, welcome to Accountancy Insights, I’m Philippa Lamb with your monthly roundup of accountancy news. Today I’ll be discussing how SMEs can pursue growth in today’s environment of economic uncertainty with consultant Romesh Jeyaseelanayagam. After that, I’ll be joined by Rhodri Whitlock, Director of Audit and Governance Consultancy, HPL Associates. He’ll be explaining how auditors should be fulfilling their responsibilities to exercise professional judgement and scepticism. Romesh, can I start with you? Thanks for coming in. You work with SMEs in targeting growth. Do you want to run me through the main challenges?
Romesh Jeyaseelanayagam: We’re living through a time of economic uncertainty. Now there’s quite a lot of volatility generally, and I think that is a difficult scenario for SMEs. I think financial strain is something that we’re seeing across the different clients that we have in various sectors, and that manifests in terms of increased costs, which I think everyone can identify with. There are challenges in growing revenue and potential supply chain issues as well. So, there’s quite a lot going on.
PL: I’m wondering, it’s at least five years of real uncertainty. And obviously, uncertainty is a constant, but I think the last five years particularly. So, it’s been a long time, hasn’t it? People waiting for better times, and they haven’t come yet.
RJ: And I think that manifests in other ways. Also, I feel there’s lower investor appetite than there was in prior times, it’s harder to fundraise. And also, from a practical perspective, it’s harder to find and recruit and retain good staff.
PL: Thinking about what sort of assistance is out there for SMEs, where do you point them?
RJ: Aside from providing advice in the way that we do as finance directors, one thing I like to do is actually introduce SME founders, entrepreneurs and business leaders to other entrepreneurs and business leaders in similar sectors, because actually, it’s good for them to learn and share experiences with their peer group. So, I think that’s a really good thing to do. Obviously, you can make introductions to advisers in other disciplines where we’re not specialists, for example HR, sales and marketing, other areas of non-exec directing. There are formal accelerator programmes that you can point clients to if there’s a general need for that kind of support. But I think there’s a lot to be said for just going out there and encouraging them to just put themselves out there, network and build connections.
PL: When the government talks a lot about driving innovation and investment, what more would you like to see from them on this?
RJ: I think SMEs could do with support both in a financial sense, but also in an advisory capacity.
PL: What’s not there that should be there for them?
RJ: Funding for training and programmes such as accelerators, as I mentioned, I think that will really help, because at the end of the day, lots of SME owners or entrepreneurs are doing this for the first time. Why reinvent the wheel? Lots of people have gone through the journey. That’s where people like myself help other advisers, of course, but programmes and training can really help support that.
PL: Thinking about how SMEs can change things internally themselves, what sort of efficiencies, repositioning possibilities should they be thinking about, if growth is their aspiration?
RJ: SMEs have a real opportunity to be on the front foot. SMEs have an advantage of being smaller and more agile, more flexible, so leaning into technological advances, making quicker decisions, perhaps being closer to the customer, and I think that’s critical.
PL: Being small can be an outright advantage, can’t it, in terms of offering a niche or a bespoke service?
RJ: Yeah, there’s pros and cons. I think a lot of people can envisage what the cons are. You don’t have the funding, you don’t have the structure, the resources in the same way that a larger organisation does. But I think the ability to move quicker, to adapt, to change can be a significant advantage.
PL: Tech, it’s what everyone talks about, isn’t it? Are you seeing as much take up of that as you would like to see?
RJ: I think with start-ups, and particularly tech-based start-ups, they tend to be very welcoming and embrace the technology revolution as we see it.
PL: Home turf for them.
RJ: Yes, but perhaps maybe some of the larger SMEs are using older systems, not necessarily understanding or having an awareness of products and services out there that can actually automate, make things more efficient, enable their staff to do more interesting things.
PL: And what are they saying to you about AI? We read about it all the time, there’s always some suggestion about how you can fold it into your business. Is the nervousness still very much there, though, for people who aren’t accustomed to using AI-powered tools?
RJ: You have a broad range of appetite for change. In my experience, humans aren’t very good at change and don’t particularly like it, and we are in a period of ever-increasing change. So that’s challenging, that’s natural. However, I think you’re going to have to embrace AI in some way, shape or form if you’re going to thrive as a business because everyone else is doing it to some degree, and that’s only going to accelerate.
PL: That takes us to culture, doesn’t it? That comment you’ve just made about appetite, attitude, positive culture, it’s absolutely crucial and fundamental to scaling up right at the start of the process, isn’t it? But what does it look like on the ground? What does a growth-positive culture look like in an organisation?
RJ: I think it’s very important for SMEs, firstly because you expect a lot of your staff in an SME environment to work harder, be more effective and at pace compared to a more established business because resources are limited. So ultimately you have to ensure that your staff are motivated, energised and aligned. That’s why culture is so important. The key aspects of having a positive culture mean building a more cohesive team. So having a team that understands where the business is going, they’re fully aligned with it.
PL: Do you think, particularly in times like these, there’s a temptation to push that cultural piece down the agenda. It looks like a nice-to-have rather than a have-to-have.
RJ: I think there’s a tendency to do that, but it’s a mistake. It’s really important, because for me the team is one of the most important aspects of building a great business, particularly at start-up, scale-up stage. You’re relying on everyone in the team to pull their weight in the way I mentioned before, and actually make your business something special, and you have support them in that way.
PL: Now, I know you’re taking part in ICAEW’s Scale-up Live event on July 1. What is that going to look like for people who are going along or attending?
RJ: I was in one of the webinars recently. It was a series of webinars where we looked at scale-up businesses and different aspects, and really tried to impart insights and experiences and various views. And this evening is the culmination of that. There’s going to be a series of panel discussions, talks, fireside chats. There’s going to be a great opportunity to network. I think there’ll be lots of good things that we’ll be talking about, and we’ll be fielding questions from the audience as well. So hopefully it’ll be quite insightful.
PL: Sounds great, good luck with it on the day. Remember ICAEW’s small and micro business community is the place to go for more support across these issues. We will have the link to that in the show notes for this episode.
Now over to Rhodri Whitlock. Accountants’ responsibilities to exercise professional judgement and scepticism; it’s a big subject, so today we’re going to concentrate on audit. Shall we start, Rhodri, with your definition of professional judgement and scepticism?
Rhodri Whitlock: I’m a firm believer in process with purpose, and I think if you just focus on the technical definition, you may not get it right. So, I’m really passionate about judgement and scepticism, and I really encourage my clients to think about what we are trying to achieve here because it’s the Holy Grail. They’ve sort of got a symbiotic relationship with each other, and if you get it right, it can really improve the quality of your engagement with a client, it can improve exceptional client service. And the spin-off benefit from that is you get more robust assurance and you get much better job satisfaction. I know they’re bold statements from me, but they’re ones I believe in.
PL: It’s a very positive approach. The reason I asked for a definition, really, was that I think a lot of people find it quite a frightening prospect, the sense that they don’t quite know what it is, they don’t know how to get their arms around it, they’re frightened about getting it wrong.
RW: I find that a conundrum. I see the problem on a regular basis and I think there’s an element of a lack of confidence that people have, because we use judgement in our daily lives and to some extent it’s professional judgement. When we open up our app on our phone to check our bank account we have an expectation of what it should look like, and if it’s wrong we have some processes that we go through to cross check it. I think a lot of firms and teams have difficulty moving that into the professional sense, and some of the reasons for that are about culture, the confidence point I made. But I also think some teams actually do a lot of good work and they undersell it, they don’t document it. So, there’s a range of factors there. I don’t think there’s any one silver bullet around this, but there’s a range of factors.
PL: It’s interesting, you talk about scepticism, the culture of scepticism, as something that can build client relationships, because I think the reverse of that would be the fear that if you did too much of that you might lose a client or you might hold up a project or that the outcomes might be negative. But you don’t see it that way?
RW: I think if you get to the right answer, it’s always positive, because if you’re not professionally sceptical and you allow a client to make the wrong decision or to present certain financial statements that are incorrect, nobody actually wins. You as an auditor may get sued; the management may suffer legal consequences; and of course, we’re hearing from the FRC the importance of looking after stakeholders, and stakeholders lose out as well. So, I think that fear is misplaced. I think that goes back to that culture of confidence of doing the right thing. If you do the right thing everybody wins, whereas if you aren’t confident enough and you do the wrong thing, there are significant consequences.
But you raise an interesting point about the fear factor as well, of delaying projects or getting the wrong answer. Nobody’s got a monopoly on what is right. We live in a really complex world. There are so many different right answers, and there’s a lot of wrong answers. And why did we all go into this profession? We go in there because we like problem solving, we like helping people, we like making a difference, but we end up ticking and clicking boxes. That’s not really what you paid up for. When we send out tenders to clients, we talk about our value add. They don’t want us to click boxes, they actually want that informed discussion. So, I think going back to your question, provided your challenge is appropriate and informed and constructive, everybody’s a winner, whereas if you just ask generic, ill-informed questions, then you’re probably going to frustrate people and your fear will be founded.
PL: It’s interesting, so it’s a reputational win if you get it right, if you’re bold enough to do it, and a longer-term play in terms of client relations?
RW: Absolutely, in my own experience and the firms I work with, those who really constructively engage with their clients, those clients become their ambassadors, and it helps them win work because they become seen as peers that they can have a really sensible conversation with rather than just this bean-counter image that unfortunately is haunting the profession.
PL: We talked about positives, tell me where people tend to go wrong.
RW: As I mentioned earlier, it’s probably not a single thing, there’s probably a collection and sometimes it’s a combination of those. I touched on documentation, so let’s be positive again for a moment. It does feel like it can be difficult, but there’s lots of good practice, there’s lots of firms who actually do this well. When I was at the FRC there was a project I was involved with on scepticism and the FRC published a list of really good examples of what good looks like. I would urge people to look at that. I know that’s not your question, but I think it’s important to understand what good looks like, to then see what the not so good can be.
I think as we transition from the good to the not so good, I come across situations where firms do a lot of good stuff but they just don’t document it, and therefore they’re underselling themselves. So, I think that there’s a lot that could be done just to improve documentation and the confidence in writing. Also, in terms of where it goes wrong is that culture piece again. We keep coming back to culture. Fear works in a number of different directions, and as a partner leading an audit, if you feel you haven’t got the support of your fellow partners and your managing partner you might be worried about losing a client, and that might be the right thing. Nobody likes that to happen. But those firms that do well have a really good culture of scepticism and they have the support, and I’ve always been lucky to have really supportive managing partners. Also, I think time and fee pressures can get it wrong, if you don’t get the budget right, if you’re boxing yourself into a corner. With things like that, it’s confirmation bias, and you’re mixing that up with who’s the real client here? You don’t want to upset management, so you’re looking for things to prove that it’s what they’ve told you rather than having that open mind that, actually, there could be other scenarios here, but actually you’re not helping management.
PL: So how does this all play into standards?
RW: I may be in a relatively small group of people who think this, I think the standards are actually quite practical on this. The definition is practical, the application may be a little harder. There is one standard that sets out the scene and the definition, and for those who like references it’s ISA 220, but it’s actually pervasive to all standards. And really what the standards talk about is having that state of mind, that open-mindedness to other plausible outcomes. It’s actually applying all of your technical training and your experience and pulling it together. But I think for me, the secret sauce here is that open-mindedness and being alert to other information. And we live in a data-rich society now where it’s relatively easy to capture those other sources of data.
PL: Would it be fair to say there’s anxiety about conflict, that it can look like conflict? And we’re a very conflict-averse society now, particularly in the workplace and particularly with clients.
RW: I think that’s a big myth that’s built up in the profession. Sometimes – sorry to my former employer the FRC – when we use the language “a culture of challenge”, sometimes people mix up the word challenge with an adversarial relationship. Challenge doesn’t have to be adversarial. Challenge is about testing each other. I love sport. When you play sport, do you play with somebody who’s the same as you? That’s not challenging you, that’s not developing you. You normally try to play with somebody who’s better than you so you can stretch yourself. And I think the FDs I’ve worked with, they want to work with peers and sometimes people who have got more knowledge than them, so they stress test what they’re doing. So, I think it can become adversarial if you tackle it the wrong way, if you don’t have informed and constructive challenge. But also, I think the trick to this is to engage early, because if you leave it too late to challenge people, people feel boxed into a corner and then they react badly. If you allow people time to think and internalise what you’re saying the confrontational piece goes away.
PL: Training must be the answer here, surely?
RW: Training is absolutely important. We’re all different. Everybody’s got different traits and experience. Some people enjoy things more than others, and auditing – and this is a phrase used by the FRC – is a team sport. We can’t all be strikers and things like that. We need a team that’s got a cross section of skills who can analyse the data, and some people are more articulate and politic in presenting those issues. You’ve got to play to the strengths of the team. I think one of the challenges is sometimes people try to be audit heroes or audit superheroes. Look at the dynamics in your team and see who’s best placed to actually tackle and drive these issues through.
PL: I am wondering whether people might be listening to this and thinking actually a lot of this, it’s kind of common sense, isn’t it? It still feels quite hard to quantify.
RW: I would go back to what I said earlier in that I think a lot of it’s common sense, because we use scepticism and judgement in our daily lives, whether it’s driving the car or crossing the road, we analyse, we interpret, we make judgments. It feels familiar. I think the big challenge for a lot of people is, how do we capture this? How do we capture our thought processes and have those so-called difficult conversations? But as I said a moment ago, the difficult conversations don’t need to be difficult. It’s common sense with a sprinkling of informed sense, but also doing it in a timely fashion that really allows people an opportunity to move things forward, but then document, document.
PL: We’ve covered a lot of this in your previous answers, but if we were to run through how auditors can put this into actual practice, what would your list be?
RW: Firstly, it would be make sure that there is a supportive culture within the firm. Consult, make sure that you’ve got the right skills and strengths in the team. Do your research early so that you can actually engage with the client, engage with management with informed knowledge, which they will value. Don’t confuse challenge with an adversarial relationship. It’s a positive if done in the right way. And get in touch with your inner author. As accountants, we focus on the numbers. For some of us we’ve lost the skill to write, and writing that down can be a professional lifesaver. And do it contemporaneously, do it as you go rather than just trying to remember what happened at the end.
PL: Presumably, particularly if things don’t go so well, you absolutely want to have documented. So, what else should auditors be thinking about on professional judgement?
RW: That’s a great question. It’s a very big question. I would go back to my comment about the audit superhero. We are as a profession – and of course, I’m biassed – very talented people. We’ve got lots of training and experience, but we don’t know everything, and the world is more complex. Sometimes you need to phone a friend, ask the audience – maybe not the audience – but you need to reach out to other professionals who may have more expert knowledge than you on a particular area. That isn’t seeding control, it doesn’t make you impotent as an auditor. It’s about harnessing and capturing the best skills. Also remember that auditing is a team sport. I didn’t always get it right as a partner in terms of understanding the strengths within the team. Firms have got some fantastic people: utilise that knowledge. We’ve got young graduates who’ve been through some fantastic degrees, they’ve got skills that maybe some of the more senior people of a certain age like me don’t have. So, let’s capitalise on those strengths.
PL: Would it be fair to say that bit about accepting you don’t necessarily know the answer and that you might have to ask someone else, or indeed that the thing you’ve actually suggested might not be quite right, that’s the thing that comes with age and experience largely? Isn’t it difficult for younger accountants?
RW: It is, and there’s nothing wrong with a good degree professional humility. Obviously, you’ve got to manage that. I mean, if you truly don’t know the big subject area in which your clients operating, you probably shouldn’t be acting, but there’s sometimes nuances. It goes back to one of your earlier comments about the value of proposition here, it can make a big difference. If you are a firm or a team that is sufficiently self-aware, and you’ve got the confidence to say “we understand your business, we could really add value with external help here”, that gives you a competitive advantage over your peer group because clients will recognize, I’m going to get more robust assurance if I’m trying to renew my banking facilities, if I’m trying to raise money, that assurance has a better quality and it resonates better with users.
PL: It’s not just the client, though, is it? It’s admitting ignorance or error in your own team. That’s a tough thing for people to do, isn’t it? Where everyone wants to progress in their careers, they don’t want to undermine themselves professionally with a senior colleague. Isn’t that where we’ve seen issues crop up with this, that reluctance?
RW: It’s a reluctance but I think the more relevant ignorance is the reluctance of the person to accept they don’t have the in-depth knowledge. And that’s a bigger risk.
PL: And is cultural as well, isn’t it?
RW: It is absolutely cultural. I think self-awareness, emotional intelligence, whatever the correct term is, knowing that you can’t be an expert is important, and it is a bigger weakness not to admit that you don’t know something, or you may not know something in sufficient depth that you want to call in an expert.
PL: Thank you very much, Rhodri. That is it for today, the next Accountancy Insights will be with you in early July. Subscribe, turn on notifications, and you will get an alert as soon as it drops. Next time, we’ll be getting into thorny territory. How can businesses best navigate geopolitical instability? I’ll be joined by Peter van Veen, ICAEW Director of Corporate Governance and Stewardship, and Charles Hecker, formerly a partner at the global risk consultancy Control Risks and with deep expertise on doing business in Russia. So, listen up for that one later this month. Thanks for listening.
