living on the edge John Palermo on how to survive the unique business challenges of Western Australia Exceptional business thinking JULY 2013

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1 Exceptional business thinking JULY 2013 Vol 84 Issue 6 degrees of change The reinvention of higher education a smarter carbon solution? More transparency, certainty and sense trans-tasman debate Proposed New Institute: pros and cons living on the edge John Palermo on how to survive the unique business challenges of Western Australia REGULATING RISK: APRA S JOHN LAKER SOLVING THE FAIR VALUE RIDDLE ELECTION: SMALL BUSINESS HIT LIST

2 The Big Interview shadow Out of the ofgiants The Western Australian business ecosystem is unlike any other in Australia, and to take on the big boys you need integrity, foresight, flexibility Photographs: Jason Reload and guts. As John Palermo explains to Leon Gettler 8 Charter July 2013

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4 The Big Interview While Western Australia is the growth engine of Australia, it has its own peculiarities that have created a challenging environment to do business in. John Palermo FCA knows this better than anyone. He runs a small public practice in Perth, where accounting businesses are struggling to pick up talent because the mining companies are recruiting many of the best accountants with unbeatable salaries. And with Western Australia having the highest number of small cap companies, WA auditors face particular challenges. Palermo has strong views about these issues, and more. And as the chair of the Institute s national public practice advisory committee, he strongly believes that public practice, as we know it today, will cease to exist within the next decade. Palermo admits that his views don t go down that well with everyone, but he s resolute in his beliefs. My thoughts are, the way compliance is headed, what we re seeing coming out of the Big 4, and the way clients are now, compliance will be less and less our role because people are becoming better at it, Palermo says. The reliance will be more on the client and we will become more like advisors than compliance processors. The smaller one- or two-partner practices, with 20 staff, are very heavy on compliance, and most of their revenue would come from compliance work, but that will start to become extinct over the next five to 10 years. He s not saying public practice will cease to exist, but its business model will have to be replaced. You will see a dynamic shift in public practice, for sure, he says. The Big 4 are already on top of it. The people who have their heads in the sand and think they re going to be doing tax returns for the next 20 years will have to open their eyes to see what s going on around them. My personal view is you work harder for the compliance dollar. It s more labour intensive because it s about debits and credits and more making sure there are checks and balances. The rise of the advisor So how should smaller firms respond? He says they will need to develop a business model around advisory work, not compliance. They will have to upskill and pick the staff that can work in an advisory capacity, he says. What we did 10 years ago was pick up a bunch of bank statements and code them into the system, and produce a set of financial statements. With our clients now, we prepare the tax return and then sit down and plan their business over the next five years. From a work perspective, that s much more interesting. We would rather do that work 10 times over than do the compliance work. And you can charge more for it. You are valuing your time better instead of doing debits and credits and bank reconciliations which a client can do in their own MYOB system. He says firms in WA have to work a lot harder to recruit talent. Accounting employers struggle against the mining giants. The problems exist in the west for public practice because, by the nature of our industry, we can t compete with the salaries that some of the commercial organisations pay, he says. We are not in a position to offer our staff a nine-day fortnight either. Once you start grossing that up, we can t compete on a salary level, pure and simple. A common theme and a common problem for all public practices is trying to retain good staff. It means that accounting firms in the west have to offer more than dollars to recruit talent. In the first instance, if you re looking purely at numbers, then there will be natural loss of staff to commercial miners so you have to appeal to them on a different level, he says. I have seen friends and clients employ people that they have lost because they haven t given them the right work conditions. If you talk to people in the market looking for work, certainly the flexible time, the working arrangements, the people they work with are just as important as the money. More companies in the west are offering those nine-day fortnights, where staff get every second Friday off. Some people are more willing to go for the flexitime arrangements than the money, he says. Certainly it s become more commonplace here, more organisations are doing that nine day fortnight not to compete on a salary level, but just to compete for staff on more a practical and lifestyle level. He says that while his firm does not offer nine-day fortnights, he makes sure all staff have left the office by 5pm. At one minute to five, there s a gust of wind that runs out our office. No one is there ipad exclusive CONTENT In this month s ipad Charter, John Palermo shares his top 10 tips for small business leaders who want to take on the big boys. Download Charter free from the App Store or Apple Newsstand. past five, he says. If there are people hanging around I just tell them to go home and they love that. Not surprisingly, his small firm has now picked up recruits from larger firms which have a reputation for working long hours, well into the night and over weekends. Palermo s firm appeals to recruits by paying them on productivity. They can actually make more than their counterparts at other firms. We will look at productivity and what you are doing for our business and we ll pay accordingly, he says. If you re working for a large firm and you have three years experience and you have half-finished your Chartered Accountants Program, you will generally be in this five to ten grand bracket, whereas for us we pay on productivity. So if you come to us and you re halfway through the Program and you are producing more than a Chartered Accountant with three-years experience, there s a good chance you will earn more. On the occasion that a staff member has to work on a Saturday we will pay them for their time. It s dissimilar to most accounting practices where they say this is your salary; you re getting grand a year and you work to whatever hours you need to get the job done. If that s an 80 hour week, you work an 80 hour week. We don t do that. As a result, his firm has a very low rate of attrition. We have lost four staff in the past three years and they ve all become pregnant and all of them have come back to work for us on a part-time basis. As long as the work gets done we re happy. Certainly that has an effect on your bottom line because, if you re paying extra for your staff and you re not letting them work past 5pm, you are, generally speaking, not squeezing that extra profit out of them. But if we know the clients are happy and they re getting serviced, we are happy to take that hit. Audit pressure According to Palermo, a big issue in Western Australia is the future of audit. Some auditors there, under extreme pressure, have left the profession, he says. There simply aren t enough auditors to meet the demand. WA has the highest number of small cap listed companies. Many of those companies have to be audited by about 10 Charter July 2013

5 If you talk to people in the market looking for work, certainly the flexible time, the working arrangements, the people they work with are just as important as the money. July 2013 Charter 11

6 The Big Interview mid-september. So there is an intense amount of pressure on auditors to complete the ticking and checking of accounts, and those guys are burning the midnight oil and working until 3am to try and get this work done. He says firms will have to work out how to manage audit staff to ensure they stay on board. Many firms he speaks to are worried about it. It s a real concern for them. If you talk to any audit partner, it s a concern with the sheer volume of work, he says. Once you factor in public company audits, then you ve got the large private audits, then you ve got clubs and societies and not-for-profits; they all get audited, so it all adds to the pressure, and what you re seeing is an exodus of good quality staff. Not younger people going to work for mining companies. We re talking about senior guys leaving the practice, and the industry. Apart from making work conditions more appealing, Palermo says regulators could stagger the reporting dates to ease the pressure, although he concedes that needs to be okay with investors and stakeholders. The proposed New Institute Palermo is also on the working group focusing on the proposed creation of 12 Charter July 2013 The people who have their heads in the sand and think they re going to be doing tax returns for the next 20 years will have to open their eyes to see what s going on around them. a single new trans-tasman institute for Chartered Accountants. He is an enthusiastic supporter of the proposals, which would create a body of about 100,000 members. He says it would create greater efficiencies, and give the Institute real global scale. The two bodies already share an education program and it is important to build on that, he says. I think it s good to have critical mass, Palermo says. There are already too many accounting bodies in Australia as it is and, with our population, we should have one force rather than spending our money on the same thing in different industries. With New Zealand coming in, certainly there s scale and thinking about the future of the industry is important. In order to remain relevant we need mass. I don t think 60,000 members will cut it in the future. Financial integrity For Palermo, Chartered Accountants have a wider role and responsibility as the trusted business advisor upholding financial integrity in society. I think our role has always been the most important because accountants are at the base level of the financial system, Palermo says. Our role will continue to grow, especially as the compliance side starts to decrease, and people rely on us to give good, sound advice. We are heavily regulated and, at the end of the day, the fact that we are heavily regulated means we are bound by our code of ethics to do the right thing, and clients can rely on that information. He says the role of the Chartered Accountant stands out from the rest of the financial services industry. I look at a lot of the other players in the financial industry and that includes everyone from financial planners to mortgage brokers to investment bankers, he says. The advice that we give is probably a lot more rounded, because we have a greater appreciation of most of the issues at a general level. Chartered Accountants don t want to tell you to buy BHP. They want to tell you that it is more tax effective to have a super fund, and we re good at that. As far as stating the pros and cons of a certain structure and how to make it tax effective, and what works best for your business, that s what we re good at. We don t want to tell you what to buy. We want to tell you how to buy it. We have to give the general population something to rely on without them feeling they are being led astray.