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Opinion: what a difference a year makes

Stephen Nicholas,  Monday, 14 December 2009 10:06

What a difference 365 days make. A year ago, the economic air was thick with predictions of a looming Great Depression; today, the New Zealand economy, along with those of most of our trading partners, appears to be comfortably out of recession.

That makes this a particularly good moment for accountants to be doing what we're accused of doing too much of anyway - taking a look in the rear-view mirror - in order to find a few salient lessons.

To be sure, the past 12 or so months have not been all sweetness and light. But simply focusing on the various train wrecks to have littered the corporate landscape doesn't necessarily highlight useful lessons for next time.

Certainly, from where I've been sitting as the chief executive of an accounting firm, it has been more interesting to look at some of the different ways various sectors have been affected during the downturn.

The small business sector was hardest hit in terms of available credit. This forced a significant number of operations to devote their attention to cash flow rather than simply extending the overdraft into a limitless future.  Alas, some of those operations left it too late or else discovered that their business model was not viable without the supporting lines of credit to help trade through negative business conditions.

Lesson number one, then, seemed to be about staying very clear about one's business model in order to create sufficient and rapid positive cash flow to deal to any short term debt funding.

For the corporates, the biggest issue had to be employees who were removed to reduce costs, leaving those who were left to improve their skills, either to prove themselves of greater value to a company or to position themselves for better opportunities at such time as the axe may fall.

Banks, of course, have been painted as the bad guys throughout much of the period. That's not surprising as some of their traders appeared to have been handsomely rewarded for gambling on the financial markets.

But the reality is that those traders were, properly, focused on maximising profits and minimising the risks. In some cases, though, that appeared to be achieved through creating structured financial products that shifted a heck of a lot of risk to the other party in the deal.

For investors, a lesson here was the need to understand what one is investing in before one parts with one's money - a lesson that was obviously too late in coming for a number of recent finance company failures.

Working as I do in Wellington, the impact on the government and the public sector has also been palpable. Lower tax collections, along with the tax-funded efforts to revive the economy, have drastically shifted the surpluses of past years to large deficits, turning the public spreadsheets blood-red.

Here, the lesson seems to have been about building and supporting the New Zealand economy to create significant and sustainable value, especially through exports.

Given our country's location - which is to say, our abiding geographical challenge - I would also suggest that the IT sector and other industries that create value through intellectual property development are the areas we should focus on with even more enthusiasm in the months and years ahead.

Which brings us to the accountants. To hear some tell it, we've sometimes been single-handedly responsible for the entire downturn, either as the wretched auditors who did not see what with hindsight was patently clear, or else the manipulators of numbers to hide or confuse the users of the financial statements.

In addition, we have also seen the implementation of the International Financial Reporting Standards, and all that that has entailed.

My personal view is that we are drifting as a profession - towards a more rules-based approach and creating more barriers to the public in understanding was businesses are doing and how they are performing, along with the associated risks of the business.

As an accountant, the key area I believe we can make a difference, and the lesson that we most sorely learned, has been the need for increasing transparency and understanding of the numbers.

Financial literacy is an area that New Zealand is sadly lacking. This coming year, more than anything, we need to engage with clients and society to assist in lifting business performance and de-mystifying our profession. The next 365 days could make all the difference.

 

• Stephen Nicholas, a chartered accountant, is CEO of Openside (www.openside.co.nz, freephone 0800 322 268), one of New Zealand's fastest-growing accounting consulting firms. He has held senior positions with Fairfax Media, AMP Financial Services, AXA Funds Management and Citicorp Private Banking, and has a passion for making an impact on the performance of businesses.