In the first part of this two-part blog series, we looked at the impact a Brexit could have on the accounting industry. However, it is important that firms are aware of the effects the referendum itself is having on the sector. What is happening to the industry now while businesses are uncertain about Britain’s future in the EU?
A recent study by Deloitte showed that a Brexit is at the top of CFOs’ worry lists. This fear is driving ‘defensive balance sheet strategies’ and plans for hiring and capital spending are being put on hold until after the referendum vote in June. Interestingly though, despite adopting such strategies in the meantime, the majority of companies have not yet developed a contingency plan for Brexit. However, this is very likely to change over the next few months as a Brexit becomes a real possibility.
When you consider that 75% of CFOs believe that it would be in the best interests of UK business for it to remain in the EU, it is unsurprising that Brexit is at the top of the risk list. In fact, the study reveals that over half of CFOs rated the upcoming referendum as the greatest risk facing their business. This has ultimately led to a significant increase in perceptions of financial and economic uncertainty. 83% of CFOs rate the level of external economic and financial uncertainty facing their business as above normal, high or very high – the highest it has been since the euro crisis.
It is clear that the looming referendum has cast uncertainty across the business sector and has resulted in the adoption of risk-averse, defensive strategies. Corporate risk appetite has hit a three-year low and as a result, reducing costs and increasing cash flow are among the top priorities for CFOs. This could have serious consequences for the industry. We are only just beginning to see signs of growth following the recession, but this will be hindered if businesses return to similar austere measures to mitigate the risks posed by Brexit.
The uncertainty is also leading firms to put hiring plans on hold which is another big concern for the industry. According to the study, for the first time in more than three years, CFOs expect hiring and capital expenditure by UK corporates to decrease over the next 12 months. Why? The study claims one of the factors driving this is the possible UK exit from the EU. Recruitment is already a serious problem among accounting firms, so hiring freezes will only serve to exacerbate the issue. In the last few years, the impact of the hiring and training freezes imposed during the recession has hit the finance sector. It has led to a severe skills shortage which will only continue if hiring is put on hold once again.
Finally, it is not just the direct impact to firms that are causing problems. Accountancy software providers themselves are facing issues as they attempt to plan future development work on their products without knowing what legislative changes are around the corner. Providers need to look forward and make clear forecasts for their development, so they are delaying software development projects until they know what is happening legislatively, but legislation won’t be put into place until after the referendum. Taking templates for sole traders and partnerships as an example, in a few years’ time they may not need to file accounts in the same way if we move over to a digital tax account system – so do software vendors make the update just in case? Or do they hold out for confirmation? Essentially, for as long as there is uncertainty, development projects are on hold and this could seriously impact the accountancy professionals and organisations who rely on this software.
While it is sensible and understandable that firms take a cautious attitude while the UK is still uncertain about its future in the EU, it is important that this approach isn’t taken too far. If measures are imposed that are too restrictive on growth and recruitment, there are likely to be ramifications for the industry later down the line.