JOINT COMMITTEE ON ECONOMIC REGULATORY AFFAIRS debate -
Tuesday, 11 May 2010

Cost of Regulation to SME Sector: Discussion with Institute of Certified Public Accountants in Ireland

Chairman

We are joined by representatives of the Institute of Certified Public Accountants in Ireland to discuss the cost of regulation to business and, in particular, small and medium enterprises, and proposals for a reduction of costs. We would also like to hear the witnesses' views on the performance of the relevant regulators and the efficiency of the consultancy process.

On behalf of the committee, I would like to welcome Mr. Eamonn Siggins, chief executive officer, Mr. Niall Byrne, vice president, and Ms Suzanne Shaw, director of business development.

Before calling on Mr. Byrne to speak, I wish to draw witnesses' attention to the fact that members of the committee have absolute privilege, but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.

I will now ask Mr. Byrne to proceed with the presentation.

Mr. Niall Byrne

I am vice president of the Institute of Certified Public Accountants in Ireland. On behalf of the institute, I thank the Chairman, Vice Chairman and members of the joint committee for the opportunity for Mr. Siggins, Ms Shaw and myself to meet with them today.

The institute welcomes the opportunity to present our views on the regulatory environment in Ireland and how it can be improved for business. Over the course of the next few minutes we will discuss our rationale for change and highlight key areas where smarter regulation can positively impact the SME community.

The Institute of Certified Public Accountants in Ireland, or CPA, is one of the country's leading professional accountancy bodies. It was established in 1943, and has over 5,000 members and students. Some 60% of our members work in business-finance, services, manufacturing and the public sector. The other 40% are engaged in public practice. Our members work across five continents but the majority are here in Ireland.

Because of CPA's day-to-day involvement in business — particularly medium and smaller businesses — we have a valuable and relevant perspective on the effects, both good and bad, of regulation on business. Our submission is based on the first-hand experience of our members, who work both in financial positions in businesses and in public practice advising businesses.

Proportionate regulation is necessary in Ireland to protect our reputation as a safe environment in which to conduct business. In the accountancy profession we accept the need for, and implement, very stringent regulations. A good regulatory framework is in the interests of our members, their clients, employers and, critically, the public.

The high-level group on business regulation has already identified more than €20 million worth of administrative cost savings for business in its first report, through cutting out paperwork, revising the rules for small businesses and making better use of on-line services. We acknowledge this excellent progress, but there is more to do. Our principal theme is to take account of the impact of regulation on the SME sector and in our submission we have detailed specific examples of where we can do things better and smarter.

The objective for us all should be to agree a system of regulation that resonates widely and deeply with all parts of the economic spectrum, as all these issues are interdependent. There are areas in which more regulation is in the public interest, and these are detailed in our submission. Similarly, there are areas where we would question the need for regulation or the proportionality of existing regulation.

Action is clearly needed to reduce the cost burden on Irish business. We also recognise that transparency is an imperative and yet we cannot get subsumed by regulation. We must seek to achieve our objectives in a smarter, cost-effective and sustainable way that creates jobs.

The Government's recovery strategy, Building Ireland's Smart Economy — a Framework for Sustainable Economic Renewal, was produced in December 2008 and outlined the programme for medium-term economic recovery based around the concept of the smart economy.

In March 2010, the Government published Building Ireland's Smart Economy — Progress Report, which highlighted key headline progress from the wide range of policy actions and developments undertaken as part of the overall recovery strategy. We are in the midst of the deepest economic downturn this country has ever experienced. There is an accepted wisdom that this strategy lies at the heart of securing the economy and achieving competitiveness. We have a plan in place and we need to keep going and implement that plan. Smarter regulation is one of the pillars on which this report is based. In the context of this submission, CPA is not calling for anything radical or new, we are working on the assumption that we are pushing a door that is already open.

CPA has chosen the following eight areas where we believe change will positively impact on the administrative and regulatory burden on Irish SMEs; first, proportionate sanctions for non-compliance; second, availability of audit exemption to small groups. Currently in Ireland all companies in a group, regardless of their size or the size of the group must have an audit. This is at odds with the UK, for example, where the individual companies in a group can avail of the audit exemption where the group has a turnover of less than £5.6 million and a combined balance sheet total of less than £2.5 million. This sensible approach frees up the time of the business owner, and allows accountants to concentrate on strategic advice for businesses within that group. The third area relates to change in VAT registration limits to positively impact small business. We request an increase in VAT registration threshold for all goods and services to €120,000. Fourth, we request the removal of administration burden from the filing process. We encourage the fast tracking of the introduction of extensible business report language, XBRL, which would allow the electronic filing of all financial data with Government bodies such as the Companies Registration Office and Revenue. The fifth area relates to reform of bankruptcy legislation to encourage an entrepreneurial culture. We request a review of current legislation in this area and to introduce similar legislation to the UKs Enterprise Act 2002. The sixth area relates to company law for the 21st century — think small first approach. Draft consolidated companies legislation has been in existence for some time which will reform and modernise Irish company law in many areas. We urgently need to progress this legislation as a clear benefit exists for business which outweighs any cost involved. The seventh area relates to protecting the public interest by legally recognising the term "accountant". The eighth area relates to freeing up working capital — a request for an increase in the turnover limit for accounting for VAT on a cash receipts basis to be increased to €3 million.

Time prevents us going into greater depth on each issue; however I remind the committee that further background is available on all these issues in the CPA's detailed submission. The past 12 months have been challenging for the country and for business. Our members have first-hand experience of businesses in difficulty. It is important to realise that even small changes can make a meaningful difference.

Our submission sets out specific areas which must be addressed to ease the current environment in which SMEs operate. All of the issues raised can be addressed in the short term. The main goal in the immediate future must be to foster an atmosphere in which SMEs can flourish. They have been the cornerstone of economic success in Ireland. If this is to happen again, CPA urges the joint committee to adopt these suggestions as a means of supporting their endeavours.

I thank members of the committee for its attention. I will be happy to answer any questions members may have.

Chairman

I thank Mr. Byrne.

Deputy Kieran O’Donnell

I welcome Mr. Byrne and his colleagues who are appearing before the committee. The submission deals with practical measures. Of the eight priorities can some be ranked as being of more critical importance than others in terms of implementation? Perhaps the delegates would address the issue of freeing up working capital. Would it take an enormous burden off businesses if the turnover limit for VAT on a cash receipts basis was increased to €3 million? Is that on the basis of dealing with clients and, if so, what would be its impact? I would welcome a change in VAT registration limits. It would be a positive measure and would encourage an entrepreneurial culture. Those who register for VAT have an enormous burden placed on them in the initial stages of trying to grow the business and they become more preoccupied with filing VAT returns than in growing their business. In regard to the audit exemption for small companies and companies in a group, I presume that would not be widespread but would have an impact on particular individual companies. Many companies would not be in groups but would be stand-alone companies and the audit exemption would apply. The delegates are talking about companies in a group.

Mr. Niall Byrne

Yes.

Deputy Kieran O’Donnell

There is also the whole issue of regulations. Other bodies have appeared before the committee. Do the delegates find that a regulation review would be expedited on the part of the Government? Has that issue arisen with CPA members in practice, and obviously with its members in industry? Does the regulatory burden have a negative impact on their businesses? Over the next two years, what are the critical areas for the SME sector to survive, maintain employment and grow jobs from their dealings with members in practice and in industry? That issue has not been addressed here. What is the feedback on the critical areas that would make a major difference in enabling businesses to survive?

Mr. Eamonn Siggins

I will start with the last question. The feedback from our members points to two areas consistently, one of which is the easing of working capital particularly for the SME sector. I realise that is not news to the committee but that is what is coming back time and again. We are not talking about large sums in the context of each individual business but sums in the order of €20,000 to €25,000 to €30,000 as opposed to hundreds of thousands of euro. The money is not circulating. The client companies do not have the credit available to purchase stock so they cannot sell and they cannot get paid. We are aware the entire House is working on this matter with the banking sector. That is the number one comment that is coming back time and again.

In terms of preserving employment, the constant feedback is about the cost of employment in Ireland and, particularly, the cost of the minimum wage for younger workers and taking on younger workers. Whereas Government saw fit to grade some allowances, perhaps on the back-to-work scheme on an age criteria, a difficulty being reported back to us concerns employers in certain sectors where they typically take on younger workers particularly in the leisure and hospitality sectors. Once a person kicks in at a certain age, 18 in this case, he or she goes from one level of wage to another and it is a pinch point for an employer to say he cannot extract the value from that particular wage at that level. It is not popular to report that to a committee of the Oireachtas but Deputy O'Donnell asked about the feedback. Small businesses and entrepreneurs in certain sectors are reporting back that this is becoming an issue for them in terms of offering new employment opportunities.

Deputy Kieran O’Donnell

What are the consequences? Are people being taken on for a short period and let go before the age of 18 so that they do not reach a higher wage? Is that the reality?

Mr. Eamonn Siggins

That is certainly one reality. Another is that entrepreneurs are not taking the chance. They do not see the cost benefit in expanding the business because the employment cost is too high to yield a return on investment. When they want to diversify and do something else, the labour costs prevent them from moving on it in certain cases.

Deputy Kieran O’Donnell

Is the cost of employers' PRSI payments being mentioned?

Mr. Eamonn Siggins

Yes. It always has been raised, yet there is acceptance that realistically little can be done about it. The State needs money. When looking at issues, accountants tend to look at them in a measured sense and know the circumstances in which the State finds itself. Employers' PRSI will always come up. The issues of the moment are working capital and credit.

Deputy Kieran O’Donnell

What mechanism should be put in place to ensure that employers are able to retain young people in jobs in the long-term?

Mr. Eamonn Siggins

If an age profile is appropriate for certain allowances, perhaps this is an area where it might be appropriate. If a back to work allowance can be graded, probably on the assumption that people are at home, perhaps it could be looked at in the context of younger workers to keep them in employment after reaching the 18 years threshold or to offer those in the age range of 18 to 21 employment.

Deputy Arthur Morgan

I thank the delegation for its interesting submission. In regard to on-line submissions, does it not beggar belief that it has not been streamlined by now and that the various agencies, the Central Statistics Office, CSO, the Companies Registration Office, CRO, and so on, cannot tap into the simple source? For example, I have personal experience of working until the early hours of the morning trying to get my figures correct for the Intrastat. This is done on hard copy and then one has to get the form in.

Mr. Niall Byrne

This is my 26th year in practice. The number of forms that entrepreneurs have to fill out is unbelievable. The forms that cause most unhappiness are the CSO forms. Most, if not all of the information it requires is already there in VIES, VAT information exchange system. What used to intrigue and amaze me — but this is not the case anymore — is that when Revenue came out to conduct a revenue audit, it would ask us for a copy of the accounts, which would have been in the Revenue domain for a year. We talk about streamlining information across the various bodies, CRO, CSO and the Revenue, but the information supplied does not get passed around among divisions of the various bodies themselves.

Deputy Arthur Morgan

The committee has an opportunity, if the Chair will pardon the term, to 'kick ass' to get progress in this area. We have been discussing this for five or six years and still it has not been progressed. This is the IT age, the era of the smart economy and here we are still using the old peann luaidhe. We are all on the same page on that issue. It is just a question of what the joint committee can do to make it happen.

I am not completely taken by the proposals for dealing with bankruptcy. I would look for practical solutions for those who fail in business, for example, that they qualify for social welfare. I know significant numbers who in recent times have failed in business through no fault of their own. These were good solid businesses at one time but because of the economic crash the business has been lost and they cannot qualify for a few bob on the dole. Their backs are to the wall. They have to beg from family and the devil knows who to try to get by. We need a regulatory change in the social welfare code. It is crucially important that we try to bring this change about for the entrepreneurs who have failed. We need to make a cushion for them. That is more important than barring people from becoming a director for a period of years.

In fairness, serial defaulters are rarely directors of companies, but in the main, are sole traders. People who rent a premises for a relatively short period, run up a bill with all their suppliers and simply walk away and leave the suppliers standing. We need to ensure that serial defaulters are caught. We need some sort of protection for other entrepreneurs. I would appreciate it very much if this topic was addressed more extensively again.

I am concerned about the proposal in the submission on group companies. Could somebody, who had a desire to be other than compliant shunt stuff into one of the groups, which would not be subject to a strenuous audit and therefore allow people to escape outside the net? I would like to tease out this proposed change as well.

The significant point for entrepreneurs during the start up phase is that for the first couple of years there is no such thing as a wage. The challenge is usually to pay the mortgage, and keep the wife and children fed. I have sympathy for those trying to pay VAT at that stage. We should be easy on people because when one does not have the economy of scale, one is swimming against the tide. It is easier to deal with the practicality of business and enterprise and growing the business when a business is up and running.

The minimum wage is an issue that comes up fairly regularly. It is critically important that we remember to convey to staff their value from the very beginning and that we want them to grow in their skills and be recognised as part of a company where there is a future for them and a pathway to senior management eventually. We will not achieve that by paying them less than €8.65 an hour. While I am acutely conscious of the pressures on business, we need to be careful not to shoot ourselves in the foot by losing the value of people we need. Many employees are highly educated. The delegation is correct in saying that one will not earn the value of their input in the first six months or even a year, and that is a difficulty for business, but if we can keep those people in the business they will come through and they will be innovative, visionary and considerably more valuable. It is critically important to stay with the minimum wage and recognise the importance of it.

Mr. Eamonn Siggins

I will clarify our position on the minimum wage. We were not making a point in principle, but in responding to the question, we were reporting on the feedback coming from members and practising members in industry. I respect the Deputy's opinion and have regard for the value of individuals. We are certainly not at odds there. It is something outside our submission and we commented on the feedback from the ground as accurately as possible for the benefit of the committee.

On the concern about groups, if we could allay the concern somewhat, we are talking about small companies that are already available in their own unique right for audit exemption. It seems somewhat illogical where this applies to a group of small companies. Cumulatively, these smaller companies may fall within the audit exemption threshold. The idea that someone will form a group to avoid this measure is not an issue. It is difficult to explain to a client with one company with €5 million turnover that five companies in the group with €1 million turnover each requires five audits. Five times the amount of business time is taken up and there is also the cost of audit. It is difficult for us to explain this.

Regarding bankruptcy, serial offenders should be treated as such. If there is to be a review of bankruptcy legislation, discretion could be given to decision-makers on how to sanction serial offenders in contrast to those who set out in business life and fail. Not all business failures become bankrupt. Some can rely on family and friends — which is an unfortunate circumstance — but it avoids them becoming bankrupt. Others have no alternative but to be bankrupt and the stigma attached to them remains for a long time. They are removed from the opportunity to conduct business again. Entrepreneurs seldom succeed the first time. They pick themselves up, dust themselves down and go again and again. If they are declared bankrupt they do not have that opportunity. This could provide for discretion rather than a blanket cover for any serial defaulter, which we do not condone.

Deputy Arthur Morgan

We are on the same side on that.

Deputy Damien English

I thank the delegation for its presentation and I like the way it sets out exactly what is to be done. Some groups come in and tell us there is a major problem but do not provide details. Here we can work on specific ideas. The CPA can feel free to send in another eight points because it is useful to have specific ideas we can agree on and try to change rather than being told there are 50 items of legislation that do not help businesses.

In this country we do not reward failure but one is a better businessperson and has learned a lot if one has had a business fail. That is recognised in the US but not here, where people look down on those who have failed. There is a major difference where people purposely fail or trade fraudulently. There is a crossover with company law and bankruptcy. This needs to be changed because it is unfair that one cannot go into business because of bankruptcy. Someone could be very useful as a director of a company. I would welcome changes in this respect and perhaps the UK is the best example to look at, including the Enterprise Act.

The issue of the minimum wage arises in most debates. I have never seen a set of accounts that prove the minimum wage has a major impact on business. If some of these accounts are available, the delegation should show them to us because no one has proved to us that it is an issue. Those on the minimum wage, after working a 40 hour week, are not going home with a great deal of money by the time they have paid for the car and the cost of going to work. In some cases they are better off on social welfare. IBEC keeps rolling out the minimum wage debate and it is getting in the way of tackling other costs in business. Ireland is the highest in a range of costs for businesses. We can fix other costs quicker and these will have more of an impact than the matter of the minimum wage. If someone can prove that we really should examine the minimum wage and that it would create jobs, we will consider it but no one has come in with proof that the debate is worthwhile. Perhaps some of the people the CPA represents can provide figures on this point.

Many of the points made by the CPA concerned the cost of employment. We are discouraging business, especially small businesses, in the way they must deal with council rates and contribution levies. We give the impression we are encouraging business but we are not. We must get this right to provide jobs. We can affect wage costs through PRSI. We have very high costs for banking yet we seem to be slow to move to e-banking. Is that an issue we can examine?

Mr. Niall Byrne

It is definitely a procedure that is slowly but surely speeding up.

Deputy Damien English

Carrying cash is expensive.

Mr. Niall Byrne

The banks aspire to having no cheques by 2015. We look forward to that day.

Deputy Damien English

Is there a real move towards that date?

Mr. Niall Byrne

There is, although it is almost imperceptible at the moment. I see more and more of it on a day-to-day basis. It will be a natural consequence over time.

Deputy Damien English

Is it common to have small groups of businesses? It gets more common as we move along the supply chain.

Mr. Niall Byrne

Yes, it is common enough to place a severe additional burden on businesses. A related matter concerns the first point we made, where we suggested proportional sanctions for non-compliance. Deputy Kieran O'Donnell referred to this. If an operator of a small business makes a late submission——

Deputy Kieran O’Donnell

Or a big company.

Mr. Niall Byrne

Yes, but the big company must be audited anyway and the SME does not have to be audited. If the accounts are late being lodged to the CRO, the accounts must be audited, as must the following year's accounts. In my experience, it is more effective to apply monetary penalties. The operator of the business may not perceive this and may not make a connection between the additional costs of the audit and not having accounts submitted on time. The monetary sanction addresses this whereas the audit sanction is a stealth cost. We are not sure the penalty is appropriate or that it increases compliance. A monetary penalty would have a greater effect and would be less burdensome.

Mr. Eamonn Siggins

The committee needs to appreciate that we represent a body of auditors willing to surrender audit fees. We feel this is nonsense. Auditors do not believe it is appropriate to audit companies that are clearly audit exempt. The meat is not there to audit and the time of the owner-director is taken up for a two-year period. The audit process is designed for larger companies. It is a disproportionate sanction when audit exempt companies are late in making filings. We agree with the principle that companies should comply or pay. It has greatly improved compliance rates in Ireland but the rider of losing the audit exempt status for two years is an onerous sanction on a business and hugely disproportionate.

Deputy Damien English

People may not realise at the time that it will create such problems and it does not act as a deterrent.

Mr. Niall Byrne

That is why the penalty is like a stealth penalty in nature.

Mr. Eamonn Siggins

We would be delighted to take up the invitation to research further the impact of the real effect of the minimum wage. We will see if we can find facts to support what was a feeling coming from the ground.

Chairman

We will be obliged if the delegation can revert to the committee with this.

Mr. Eamonn Siggins

We would be happy to follow up with a reply.

Deputy Damien English

We appreciate that. I have a suspicion that the minimum wage is used by some employees as a benchmark. They figure that if somebody else is on the minimum wage they can ask for the minimum plus 10% or 20%. However, it is unfair to pick on the minimum wage for that reason.

The UK seems to provide a lot more protection, advice and help to small businesses. Management accountants come at a high price and professionals, such as solicitors and employment law and credit management consultants, have to charge for their services. Many businesses are in a tight corner and if the Government could help make available professional advice or some kind of health check, with a voucher system or by paying some of the costs, many more might survive. I am aware that there are mentors operating in enterprise boards but they are on a small scale. However, hundreds of thousands of companies, while they are good at making things and selling them, are not brilliant at the financial or legislative sides of their operations. They could do with advice but they might not be able to afford it.

Mr. Niall Byrne

That might be a very good thing to do, not only for existing businesses but for those considering going into business.

Deputy Damien English

Do our guests support that idea?

Mr. Eamonn Siggins

Yes. The State already pays an enormous sum for training. A reallocation of some of the existing spend towards training SME owners and entrepreneurs in important skills would be useful.

Deputy Arthur Morgan

There is a need for efficiency.

Deputy Damien English

They may be assisted in drawing up a new business plan to take into their bank so that they can get credit. Many small businesspeople are not accountants so it is not their fault. They need help but they are not getting it.

Deputy Kieran O’Donnell

How much extra time are CPA members spending on Revenue matters on behalf of clients? Is there a large increase in the amount of time spent on dealing with the banks? The institute will be a fair barometer of the difficulties businesspeople are finding getting credit or related to the collection of taxes.

Mr. Byrne made reference to sanctions for non-compliance. A €1,200 late filing fee is a pittance for a large multinational company but a killer for a small company. A small company with arrears of three or four years will accrue a debt of €5,000 or €6,000. Has the CPA considered a fee which is proportionate to the size of the company? Mr. Byrne also suggested higher CRO fees in exchange for audit exemption. There is a huge cost for smaller companies which lose their audit exemption.

Chairman

I have a personal engagement at 4.30 p.m. I ask Deputy Damien English to take the Chair.

Deputy Damien English took the Chair.

Mr. Niall Byrne

I would not say that any more time is being spent dealing with Revenue in the current environment. The question depends on the client. If a client is diligent, it takes virtually no time but if the client is less than diligent a proportionate amount of time will have to be spent on Revenue matters.

Deputy O'Donnell asked about CRO costs and penalties. I agree that €1,200 is a large amount for a smaller company. For example, our fee might be €1,200, which doubles the total costs. However, it is the money which brings the company officer back into line, rather than the fact that the company has to submit audited accounts. As Mr. Siggins says, we may be talking ourselves out of audits but the penalty is disproportionate and it does not have the desired effect.

Mr. Eamonn Siggins

We were asked whether we had considered raising the issue of monetary sanctions. This is like a certain airline's approach to extra charges. The sanctions are avoidable by compliance so it is difficult to call for a reduction. We support the principle that the complier pays. The compliance rate has risen from just over 30% ten years ago to 90%, which shows that the majority of companies are able to comply.

It is no secret that our members, particularly those in practice, are spending significantly more time in providing advice to SME clients related to dealing with the banks. This involves negotiating restructuring facilities or reducing assets and stock, all to maintain financial viability. Our advice largely amounts to handholding. It is strategic in nature, requiring that we become immersed in the business for some time. It is largely not rewarded but a product of the relationship we have built up with clients over the years. Our members commonly say that, because clients have been good to them over the previous years, they now have to pay particular attention to them to keep them alive, turn them around and hold onto them as clients.

Deputy Kieran O’Donnell

Could banks do more for the SME sector?

Mr. Eamonn Siggins

We had a meeting with the credit review committee. If that committee can be more of a workdog than a watchdog it might play the necessary role. Parliamentarians need an accurate measure of the levels of lending to the SME sector. At a macro level, significant funds are being "provided" but there is no evidence on the ground that they are hitting the SME sector.

Deputy Kieran O’Donnell

It is capacity rather than provision.

Mr. Eamonn Siggins

We would like to think the credit review committee would be able to provide Parliament with accurate statistics, bank by bank, for levels of lending to the SME sector. An initiative to bring that about would be welcome and we need something to that effect urgently, not in a year's time but within three months as a business is going bust every week.

Acting Chairman (Deputy Damien English)

I thank Mr. Byrne and his colleagues. The joint committee will adjourn until tomorrow, when we will meet with Grant Thornton to discuss its 2010 report on corporate governance.

The joint committee adjourned at 4.30 p.m. until 2.30 p.m. on Wednesday, 12 May 2010.