The small business sector is a vital part of the UK economy. There are currently around two-and-a-half million small companies in the UK, together employing some six million people. Unfortunately, the failure rate is fairly high, with around 40% failing within the first three years.

In order to survive, let alone flourish, new and small firms need to ensure that the decisions they take on their business affairs are based on sound financial judgement. As far as start-ups are concerned, ideas for new business ventures might sound perfectly plausible to the entrepreneur concerned. But good ideas are not always commercially successful.

They need to be given flesh by comprehensive provisions for the investment that will be required and the outgoings that will ensue and realistic assumptions about the income that the venture will generate. Such calculations and assumptions are no less essential for existing businesses than they are for start-ups.

Accountants are recognised as being the prime source of advice for businesspeople. Traditionally their advice has been valued because of the sense of financial discipline that is acquired through their training. Increasingly, however, accountants are widening their base of skills and becoming all-round business advisers with commercial acumen.

Confusing bodies

Most people in business would agree that they need an accountant, whether or not their businesses are subject to legal requirements to prepare financial statements. But if you are new in business, or if you are considering changing your accountant, appointing a new accountant may not always be a straightforward step to take. There are numerous accountancy bodies, which offer a variety of qualifications, which make it potentially confusing for a business person to decide how to go about the appointment process.

Unlike the case of doctors, solicitors and other professions, there is currently no protection in law for the title “accountant” and any person can, in theory, call him/herself an “accountant”. Below is a series of questions which you as a business person should be prepared to ask when thinking about appointing a new accountant.

Does the accountant have a recognised qualification? It is vital that you enquire of any person who you are considering appointing as your accountant as to the qualification that they claim to hold. You should then check with the body concerned that the person is indeed a member in good standing.

Top of the scale

Most reputable qualifications are issued only after candidates have successfully completed a programme of examinations and obtained a period of supervised practical experience. At the top of the scale are the qualifications issued by the six “chartered” bodies: the Association of Chartered Certified Accountants (ACCA), the Institutes of Chartered Accountants (in England and Wales, Scotland and Ireland), the Chartered Institute of Management Accountants and the Chartered Institute of Public Finance and Accountancy.

Only members of the first four bodies – that is, Chartered Certified Accountants (whose designatory letters are ACCA or FCCA) or Chartered Accountants (ACA or FCA) – are usually involved in providing professional services direct to businesses and members of the public. These bodies have rigorous ethical and technical standards and require their members in practice to carry substantial professional indemnity insurance cover. They are recognised by law for the purpose of authorising their members to act as auditors, investment advisers and insolvency practitioners.

At the other end of the scale, there are some bodies which issue qualifications that do not require candidates for membership to take examinations, which enjoy no form of official recognition and have few resources with which to exercise supervisory control over their practitioners.

If specialist services are required, does the accountant have the necessary skills and qualifications? Certain functions that are often carried out by accountants are reserved by law to those holding particular qualifications.

To be eligible to audit limited companies (and many other forms of entity), an accountant must have met specific qualifying criteria. This usually means being a member of and authorised to practise by ACCA or one of the three Institutes of Chartered Accountants. If you wish your accountant to offer you investment advice (within the limits allowed by the law), the accountant must again be a member of one of the same group of bodies.

Even where specific activities are not regulated by law, you will wish to run through with a prospective accountant the range of services you will wish him or her to provide for you and satisfy yourself that these can be provided to an acceptable standard. If you are in a ‘special’ line of business then you should establish to your satisfaction whether the prospective accountant has knowledge and experience of the industry or sector concerned.

How long has the prospective accountant been a member of his professional body? All reputable professional bodies require their members to obtain a period of practical experience before being admitted to membership and an additional period of experience in public accountancy before being authorised to practise. Length of membership may be seen as an indication of experience and good standing.

Does the accountant hold adequate Professional Indemnity Insurance (PII) cover? PII cover is essential in order to protect the clients of professional advisers should they feel the need to take civil action against the adviser for negligent advice or work. Professional bodies usually insist that their members take out a level of PII cover which is sufficient, bearing in mind their overall fee income and the size of their clients, to guard against the risk of a claim being made. Make sure that a prospective accountant is carrying appropriate cover.

Does the accountant have the resources and flexibility to respond to your needs? In addition to helping with accounts preparation, payroll systems and taxation matters, new and small businesses will usually look to their accountant for advice and guidance on grants and loans, credit and financial management, information technology, pensions and business issues generally. The greater the range of services you require (and the greater the complexity of your own business) the more likely it may be that you will need a larger firm with greater staff resources.

Your exact requirements should be made clear to the accountant. Depending on the size and nature of your business, you may have a view on whether you are likely to need round the clock access to a firm and whether you wish to be able to deal with a single contact point for all your requirements.

Although most businesspeople see the input of an accountant as essential, it is important to remember that, in most cases, an accountant is engaged to perform work which, ultimately, is their client’s responsibility. For example, if you are a director of a limited company, you are required by law to prepare annual accounts for your company and to file them at Companies House.

Legal requirement

You may engage an accountant to prepare and audit these accounts but the final responsibility for them rests with you. Likewise, the responsibility for submitting tax returns and making full disclosure to the tax authorities is yours. In both these cases, sanctions for non-compliance are imposed on the business itself.

As is often the case with regard to service providers, the best way of making contact with an accountant is following a personal reference. If you wish to take the initiative yourself, you will come across advertisements by accountants in all branches of the media and in telephone directories. As indicated above, however, you should be prepared to ask certain questions of your prospective accountants in order to ensure that you make the correct choice.

As regards the fees you should be prepared to pay for an accountant’s services, there is no officially recommended scale of charges for general professional work. Much will depend on the size of the firm, the breadth of its services, its location and the qualifications of its partners. Large international firms based in central London may be expected to charge higher rates than small firms outside London. As a rule of thumb, however, accountants’ fees are calculated by reference to the time spent on a particular job and the skill and level of seniority of the partner or staff member who is assigned to do the work. You should establish the hourly rates that will be charged to your account before you formally engage the accountant to act for you.

It is worth remembering that insolvency practitioners regularly report that the single biggest contributory factor in business insolvency is the absence of sound financial management. It is perhaps not surprising that this is the case – the primary interest of most small businesspeople is the creation and marketing of the firm’s goods or services rather than the management of the firm’s finances. Failure to devote due attention to the proper financial management of the firm, however, not only risks the survival of your business, and the jobs of your staff, it could also lead to penalties being imposed against you, whether you trade through a limited company or not.