SMALL AND MEDIUM PRACTICES (SMPs)

1. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF BANGLADESH CPD Seminar on SMALL AND MEDIUM PRACTICES (SMPs) Presented by M. Farhad Hussain FCA Member Council & Past President ICAB and Partner Hussain Farhad & Co., Chartered Accountants Dhaka, 15 June 2011

2. INTRODUCTION • Small and medium-sized practices (SMPs) have always had - and will continue to have significant share of the professional market of Bangladesh and all over the world. • Small & Medium Enterprises (SMEs) play a predominant role in most developed and developing economies • In most countries, SMEs account for the highest proportion of employment and value addition. • SMPs can play a very vital role in meeting the real need of SMEs.

3. DEFINING SMPs AND SMEs There is no uniform definition of SMPs. IFAC has defined SMPs as accounting practices whose clients are mostly SMEs, external sources are used to supplement in-house technical resources and contain a limited number of staff. SMEs also does not have any uniform definition but by nature the SMEs have very few staff, the accounts are simple and not meant for public at large and have less complex and less voluminous business transactions.

4. RELATIONSHIP BETWEEN SMPs AND SMEs An SMP’s client portfolio typically comprises mainly, if not entirely, of SMEs.Many SMEs depend heavily on their SMP for a range of accounting and relationship between the SME and the SMP goes beyond assurance and compliance work. SMP tends to have a more personal and long-standing relationship that extends beyond the assurance services. Clients of SMPs tend to put greater reliance and a high level of trust and confidence in the SMP accountant and use them as a total solution provider. Expectations of SMEs from SMPs The expectations of today’s users are that of ‘Expertise, Experience & Efficiency’. However, Small and Medium Practitices (SMPs) may not have adequate manpower, may lack finances and need wide range of skills required to provide diverse needs of business clients. Further, SMEs now expect delivery of professional services at multi-locational areas. The SMPs are usually small in size may not have required expertise in diverse areas. Further, in the presence of big CA firms, SMPs face difficulty in getting big clients business in today’s competitive business environment.

5. INHERENT LIMIATIONS OF SMPs Majority of SMPs are sole practitioners or small partnerships. Majority of clientele are SMEs. Very few pure and large Company audits. Audit programme/ Methodologies are often lacking. Limited qualified, senior or experienced staff. Excessive dependence on articled students and mid level staff. Capacity limitations preclude quality assurance. Resource constraint precludes specialization in practice areas (IAS/IFRS & ISA, IT or Tax work). Inadequacy of capital base and limited accessibility to finance. Non affordability of technological innovations. Limited data base or information availability (particularly compared to large firms).

6. COMPARATIVE STUDY OF SMPs IN SAARC REGION

7. GENERAL SERVICES PROVIDED BY SMPs IN BANGLADESH • External Audit. • Taxation. • Accounting. • Secretarial.

8. OTHER POTENTIAL SERVICE AREAS FOR SMPs Financial management planning and financial policy determination. Capital structure planning and advice regarding raising finance. Working capital management. Preparing project reports and feasibility studies. Budgeting including capital budgets and revenue budgets. Inventory management, material handling and storage. Price-fixation and other management decision making. Management accounting systems, cost control and value analysis. Internal Audit and reporting to Management / Board. Personnel recruitment and selection. Setting up wage / salary structures, wage incentive plans etc. Management and operational audits. Valuation of shares and business and advice regarding amalgamation, merger and acquisition. Business Policy, corporate planning, organization development. Organization structure and behavior, development of human resources including design and conduct of training programmers, job-description and job evaluation.

9. (p) Acting as advisor or consultant to an issue, including such matters as: - • Drafting of prospectus and memorandum containing salient features of prospectus. • Advise regarding selection of various agencies connected with issue. • (q) Investment counseling in respect of securities. • (r) Environment Audit. • (s) Acting as Recovery Consultant in the Banking Sector.

10. POSSIBLE INNOVATIVE AREAS Perhaps the most challenging and exciting opportunities for SMPs lie in the search for new services that build on the public's reliance on professional's experience, methodology and ethics. SMP members can look to many new Innovative and/ or cutting-edge service areas to provide the potential of growing their practices and expanding range of services they offer. Other services simply reflect a change in attitude. In the United States, for example, consulting services viewed as non-traditional for practitioners, yet the CPA Vision Process identified them as one of the core services that CPAs can offer. Typical consulting services include strategic planning, strategic plan review, business valuation and human resources consulting.

11. NEED OF CAPACITY BUILDING MEASURES AT INSTITUTIONAL LEVEL With the advent of globalization and the challenges posed by the liberalization process taking place worldwide, a need is felt for strengthening competence of Small and Medium practitices (SMPs) through various capacity building measures i.e. consolidation of Firms through Networking, Mergers and De mergers. Most of the clients demand a “Single Window Point” or one firm to handle their all business issues relating to the various assignments. The clients now expect a quicker and globally accepted solution.

12. CAPACITY BULDING MEASURES TAKEN AT INSTITUTIONAL LEVEL TO SUPPORT SMPs – An example of ICAI Considering competition, prospective clients’ need, demographics and market trends ICAI has taken initiatives in the form of capacity building measures to develop Indian Chartered Accountant firms. The concept of capacity building measures basically includes: - (a) Networking (b) Merger & Demerger

13. Networking • The Institute of Chartered Accountants of India has announced the rules for networking amongst the chartered accountants. In Network, one does not need to be partner but one can have affiliation with a CA firm bearing advantages of partnership alike and benefits of building capacity to serve the clients at different locations or in different areas of the services. • Formal network means a network amongst two or more firms registered with ICAI, where the object of network is to use the collective resources of the affiliates for execution of professional services of one or more types at one and/or at multi-locational points. • The Network itself will not carry on any business for acquisition of gain for itself and only act as a facilitator for its member firms to pursue their professional jobs. Only one Firm/Member can apply on behalf of the Network showing the collective strength of all the constituent firms of the Network, when responding to any enquiry.

14. Name for network & registration for the network • The Network may have distinct name, which should be approved by the Institute. • Merger & Demerger • Merger is the fusion of two or more existing firms. On the other hand, de merger signifies a movement in the firm just opposite to merger. • Merger • In order to have an orderly and sustainable growth of the CA firms, it is desirable that the coming together of the firms begins with networking and then matures to mergers. • Demerger • The merger agreement itself shall contain the terms and conditions for de merger. The merger agreement shall stipulate that in case 75% or more of the continuing partners of one of the erstwhile firm(s) are willing to de merge then they can do so after giving due notice

15. Committee for Capacity Building of CA Firms & Small and Medium Practitices •  In the line of above objective, a Committee for Capacity Building of CA Firms & Small and Medium Practitices has been formed which will work in this direction by addressing the concept and implementation issues at the firm level, popularizing the concept of merger in order to enhance the capacity of the firms, reviewing the progress of networking in the context of current rules and procedures and also to suggest ways and means for carrying forward consolidation and networking by way of encouraging collaboration with the professionals / experts in the relevant fields. The Committee also proposes to create brand image and visibility of small and medium practitioners in the business community as well as explores new avenues and opportunities for the profession.

16. IFAC LAUNCHES NEW INTERNATIONAL CENTER FOR SMPs The International Federation of Accountants (IFIC) has launched a new International Center for Small and Medium Practices (SMPs) on its website to provide SMPs with access to news, informational and resources relevant to them. The International Center for SMPs can be accessed at htt://www.ifac.org/SMP.

17. WAY FORWARD PLAN There have been clear signs in the last couple of years that IFAC is recognizing the importance of this sector. The creation of the SMP Permanent Task Force is a concrete example of this recognition. Way forward plan should cover: • Development of an International Database. • Establishment of contacts Among Firms. • Playing a strong Advocacy Role.

18. The structure of the Accountancy Profession in the Bangladesh is significantly dominated by SMPs. They provide professional services in diverse areas particularly to the professional services requirements of SMEs. SMPs’ market share of professional services is very significant. It is essential for the ICAB to strengthen the SMPs, so as to enable them to address the wide variety of professional services requirements, and ensure requisite quality assurance for effective management of professional risks. The ICAB should formulate policies for SMPs to work together coherently, by pooling their resources, sharing each other’s experiences, in responding to the emerging challenges and opportunities of financial markets. • ICAB during the year 2011 has already formed a new sub-committee for SMP which is a very positive more for strengthening the present and future of SMPs in Bangladesh. • The other area where ICAB may focus in future are as follows: • Capacity building measures through education • The ICAB should conduct more Workshops/Seminars/Interactive Sessions so at to create awareness amongst the SMP sector on the various capacity building measures. The apprehensions in the minds of the SMPs on Networking & Merger should be addressed and the benefits of the capacity building measures should be highlighted to SMPs. In such programmes, Open Networking Sessions can be conducted wherein the CA firms can be encouraged to form Networks.

19. The ICAB through interactive sessions/meetings with SMPs should try to understand the needs and expectations of the SMPs from the Institute in regard to various Capacity Building Measures. • To publish research based publications /Checklists/other need based publications for SMPs. • Further research based publications/checklists should also be provided to them. • To arrange the hand holding exercise for development of SMPS i.e. requesting Big firms to delegate the work to SMPs. • The ICAB may organize meetings with big firms and encourage them to delegate some work to the SMPs. This type of handholding exercise by big firms would be very beneficial for the development of the SMPs. • Intention in to upgrade the SMPs not Just Provide them with jobs which the large firm cannot handle.

20. CONCLUSION Needless to say that this is high time we should accept a change in our mindset and move forward for developing size of the firm through Networking & Merger. This option is always better than to have proprietary and small firms. The objective of this Seminar should not be taken just as one of seminar but beginning of a series of structured interactive Programme.