Could "Enronitis" spread to SMEs, infecting their reputation with the bank manager?
Sure, we are more accountable and we're more tidy with our accounts, but is our book cooking becoming more red hot? And while our books might look better, is our cashflow looking decidedly worse? Enronitis has spooked Wall Street and poses a threat to the improving US and global economic outlooks. Terrorism aside, Enronitis - the new term for the propensity of big corporations to have unreliable accounting and financial reports - is undermining investor confidence. But this is all big end of town stuff and beggars the question: Could the advent of the GST created a kind of Enronitis at the smaller end of town? The introduction of the GST on July 1 really put the cat among the SME pigeons, with more than a million small businesses coping with the triple whammy of learning about the GST, coping with the BAS and managing cashflow. Looking back on the period, HLB Mann Judd accountant, Neil Wickenden recalled what he told his SME clients.
"In our seminars, we warned our clients that cashflow would be the number one issue and number two would be the cost of compliance," he said. Twenty months on, the bookkeeping brigade knows that cashflow remains the only enduring and tormenting aspect of the GST that smaller operators can't do much about. Compliance, it is thought, has increased accounting bills substantially but in the age of MYOB, Quicken, and other bookkeeping software solutions, and the army of consultants who have spontaneously been spawned, most SMEs must be getting it right. Surely? One thing we do know is that no-one really knows for sure. Could it be that a sizeable chunk of small businesses are cooking the books - either intentionally or unintentionally? One man paid to monitor or at least be aware of the incomings and outgoings of about a quarter of a million businesses is Paul Lilley, CEO of Business Banking at Westpac. The bank has around a quarter of the nation's one million small businesses and, while small time borrowers aren't on a close watch, those businesses with reasonable debt levels have their books looked over at least once a year.
His view is enlightening: "In the first six months post-GST we found deposits were going up, with many businesses banking their GST, and we started to see many businesses drawing on their increased limits on their overdrafts." Most of these customers had prepared for the GST's drag on cash by bumping up their overdrafts, but by the end of the last financial year, there were no worrying signs. Asked how many businesses were cooking the books, he felt numbers would be low, but "the ones who are doing it are going to get a nasty surprise when the tax office starts auditing." The Tax Office insists it is still in the education phase of the GST but experience shows that when this "nice guy" stage is over, many small businesses will be way short of mistake-free when it comes to GST bookkeeping. Lilley says believes 70 per cent of small businesses are getting it right, while 25 per cent are getting it wrong with minor mistakes, and only 5 per cent are cooking it up big time. Is he worried about Enronitis with SMEs? "We know more about some of our customers cashflows than they do," Mr Lilley said. In terms of risk management issues, this is not a high priority issue for the bank.
Similarly, he is not worried that too many of his customers could wind up with a horrendous, back-dated tax bill. One group worried about cashflows for SMEs and the legitimacy of their books is the receivers fraternity. When businesses have cash problems their books' credibility often suffers. "Those businesses whose Christmas trading has not been real flash are the most vulnerable," said Max Prentice of Prentice Parberry Barilla. "Historically, many businesses kick off the New Year with negative cashflow." Businesses in this kind of trouble often lose internal control, Prentice says, such that the accounts are no longer telling the true picture. He believes the tax office is starting to get serious about GST and other taxes and this means there could be a number of firms found out for not keeping accurate records and paying the right tax. The jury is still out on whether Enronitis has infected SMEs, at least until the tax office brings in some new tax-dodging culprits. But if there are some book-cooking business owners out there, a bite size chunk could be doing it unwittingly.
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