George M. Mangion | Wednesday, 11 March 2009

Small but resourceful

GRTU has been lobbying with parliamentarians to promulgate laws that can nurture higher growth amongst their members. Recently, it commissioned an analytical report on the electricity tariff structure to help galvanise the attention of the government for the review of the existing electricity tariffs. The report evaluates the tariffs from the point of view of small and medium enterprises and the impact caused on SMEs as a result of the alleged discriminatory element they included. It is a bone of contention raised in various discussions by the GRTU with the authorities that the new tariffs have an in-built bias against the smaller enterprises in favour of larger ones in certain sectors. Certainly, running a small business has never been more challenging. Last month, the Economic Sentiment Indicator for the EU and the eurozone continued to decline, according to a survey conducted by the European Commission’s Directorate General for Economic and Financial Affairs. Naturally, this hit SMEs a bigger blow when considering that the indicator fell by 2.2 points in the EU, and by 1.8 points in the eurozone. The ESIs now stand at 65.4 - the lowest level since the current series of the indicator was launched in January 1985. Over the past year, SMEs endured more volatility than larger firms – making it exceedingly difficult to achieve a reasonable return on capital and deliver sustained performance. Some may criticise SMEs in that they are too fragile in their stature resulting in an under-utilisation of resources. But because they are smaller, this should not mean they are inherently riskier and be side-tracked particularly by risk –averse bankers and wary suppliers. But here one may ask who are these SMEs in Malta and how important are they for the national economy? There are a number of definitions. A traditional one is to consider entities employing under ten people as micro enterprises. Higher up in the pecking order we meet those firms employing from 10 to 50 and these cover about 90 per cent of the local economy. Referring to a study prepared by Professor Debono under the auspices of MCST, he discovered a rich innovative trend by SMEs in Malta. The good news is that last year, government promised the setting up of a State administered venture fund. To date this fund has not been sourced but commentators agree that this is an encouraging start and that it is never too little to finance R & D in innovation and supply necessary seed capital. Fortunately, the EU regards Small and Medium Sized Enterprises as a great source of employment generation with currently 63 per cent of the community workforce employed by SMEs. Some years ago the Commission adopted a package of documents outlining policy towards small and medium-sized enterprises across Europe, the so-called SME package. The package analyses how the Member States, the candidate countries and the European Commission are implementing the principles embodied in the European Charter for Small Enterprises. EU funding comprise financial support for capital investment, aid for research & development, and additionally schemes with long term aims to improve local infrastructure, training, and employment opportunities. These comprise financial support for capital investment, aid for research & development. As a member state Malta will be able to share additional resources provided by the EU, which complement those government initiatives already in place such as funding programmes from Malta Enterprise. With so much bureaucracy in Brussels how can small firms ever try to access the gravy train? One hopes that the recent initiative by Finance Minister Tonio Fenech will lead to a better awareness by firms on how to apply for EU programmes. Teaming up with other similar industries across the EU is one of the exciting features which is being actively encouraged by Malta Enterprise. So why are SMEs so dear to us? The answer is that as a common rule, small businesses play a vital role in replacing jobs lost through bad start-ups, recession, natural wastage or through long-term structural changes in the economy. It is a fact that due to volatility, 10 per cent of SMEs disappear after the first year of operation. Their main weakness is that they tend to finance their growth from internal sources which invariably is limited. In particular these companies or unincorporated bodies tend to be more risk averse due to their resource limitations. Notwithstanding their size they are more entrepreneurial in their approach. Studies have shown that SMEs are proud of their product, act on their own and do not copy others. Their risks tend to be calculated risks and moderate by comparison. It goes without saying that GRTU and others are trying their level best to inculcate a culture that small and medium-sized companies should face less red tape.
Red tape is an unwelcome eradicator for SMEs as it drains valuable energy which otherwise could have been better directed in managing their businesses. Typically, we find that in the UK smaller companies are exempted from filing audited financial statements if their turnover falls below £5.5 million. On average, audit costs around €2500 to €9000 each company and this is a saving which smaller companies are reaping right away apart from reduced compliance cost of meeting the full IFRS code which runs into thousand of pages of ever changing regulationws. The good news came in last month when the Ministry of Finance announced the implementation of GAPSE a reduced version of new accounting principles. These came into force retroactively from January 1, and significantly reduce the requirements which smaller companies need to adhere to when presenting their accounts. It was thanks to the unrelenting efforts of the Institute of Accountants and the co-operation received from Finance Minister Tonio Fenech, an accountant by profession that made this enormous project a reality. Obviously prior to the introduction of GAPSE Malta was among the first EU members to impose the IFRS code which every company no matter whether small or large had to comply. Traditionally these rules are applied more appropriately to larger multinational companies .
Of course, more regulation was heaved on the new IFRS following the Enron scandal which saw their auditor; a big five international auditing firm Arthur Andersen closing down. Thus disclosure became more complex and needed the expertise of experienced accountants to apply them. In passing, one notes how subsidiaries of American listed companies had also to comply with rigid audit requirements pursuant to the Sarbanes Oxley Act. These additional requirements go beyond the scope of smaller companies making their financial reporting needs too costly and cumbersome for their modest budgets. Therefore it is commendable that the introduction of the new revised GAPSE accounting rules go some way to alleviate the rising costs of administration for smaller companies.
The new rules apply to limited liability companies whose revenues do not go over €35 million and whose balance sheet is less than €17.5 million. It has been reported that there are some 20,000 such companies who will be benefiting from this scheme and they will be reaping lower audit and accounting costs in the coming year. As an example under the IFRS rule all companies are expected to translate the values of certain assets by marking them down to market.
This means that independent valuations have to be requested for various types of assets on their balance sheets. This is not cheap and needs to be updated every year. Notes to the audited accounts will also be simplified and this should lead to savings on the preparation of annual declarations which have to be submitted to the Registrar of Companies. To conclude we must do our utmost to fight against prejudices reigning from past colonial days that SMEs should be seen and not heard. Without constructing a monolith, the Ministry of Finance is encouraging firms to create synergy between national and European aid programmes. It aims to enable managers to travel more easily to join the other European firms where their products can be exported .
And finally, it aims to help SMEs, those engines of innovation are best suited to benefit from funds intended to solve their problems during these days of financial mayhem.

George Mangion
Partner at PKF – an audit and business advisory firm

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