| Irish SMEs failing to fast track euro preparations |
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| Vince D’Arcy reviews the state of readiness of SMEs in Ireland as the date for euro conversion looms ever closer. |
With just six months until its introduction, the euro is one of the most important issues facing companies this year. However, while recent surveys and publications indicate that larger firms seem best prepared for the changeover, it is SMEs who have made little progress on the issue.
There is no doubt that the introduction of the euro will have a significant impact on all organisations throughout Europe. The changeover will create a completely different business environment in which to trade, offering us a hugely expanded domestic market. Given the importance of SMEs in Ireland, from the retail sector to providing services to multi-national customers, the onus will be on these businesses to ensure that they are fully ready to deal in euros from 1st January 2002.
Who’s ready?
The latest survey conducted by the European Commission on the use of the euro within the eurozone indicates that approximately 53 per cent of SMEs in Ireland have started to set their prices in euros. This indicator is used as a benchmark on euro awareness throughout the SME business community. However, the survey also indicates that less than 1 per cent of Irish firms were making their VAT returns in euros. This leads us to believe that although awareness is high, Irish SMEs just aren’t fast-tracking their euro changeover.
Companies who are not prepared for the introduction of the euro will find themselves in an extremely difficult situation. The transitional period to facilitate a changeover runs out on 31st December 2001, which means that from 1st January 2002, as we keep being told, all business transactions must be conducted in euros. And just two months after that (by the 9th of February) Irish pound notes and coins will no longer be legal tender.
Case study 1 - spreadsheets
Company A uses a number of complex spreadsheets to supplement the preparation of management information. An initial assessment as part of their euro changeover plan, had not identified these spreadsheets as critical. The company are currently preparing an inventory of spreadsheets to assess whether it is more efficient to design an entirely new set of spreadsheets denominated in euros or whether it would be more practical to use a euro spreadsheet conversion tool to assist in the conversion process.
Unprepared SMEs face a number of considerable risks if they have not converted to the euro by the end of the year. These risks range from not being able to produce invoices in January 2002, resulting in disruption in the supply chain and the loss of key customers, to not being able to produce statutory returns such as VAT or PAYE/PRSI returns, resulting in possible interest and penalties being charged by the Revenue Commissioners. Organisations should assess the risk of severe reputational damage if they have not successfully implemented their changeover to the euro.
The size of an organisation in terms of turnover or net assets does not necessarily determine the complexity of the euro changeover process. The key is to understand the business processes and how the organisation interacts with all of its stakeholders from customers, suppliers, employees, bankers and shareholders in the case of limited companies. Communication is the key.
IT issues… a damp squib?
Undoubtedly, one of the most profound areas that will be affected by the transition to the euro is an organisation’s IT systems. Many people saw the millennium bug as somewhat of a ‘damp squib’ and consider the euro changeover to be equally over-hyped. All software containing currency values will be affected by the changeover to the euro. This will typically include accounting systems, treasury systems, payroll systems and any ad-hoc solutions (such as spreadsheets and databases).
In reality, organisations may be forced into a situation where IT systems are not ready to handle euro transactions from 1st January and may have to revert to using manual procedures. Thanks to our reliance on computers in today’s business environment there are obviously considerable risks associated with this course of action. Consideration should be given to the additional time required to deal with transactions manually and the scope for human error in dealing with the conversion of figures from Irish pounds to euros. Misstatement of Irish pound figures as euros may result in losses of up to 27 per cent!
Case study 2 - the business issues
A charitable organisation that relies on subscriptions (predominantly paid by standing order) to meet part of its cash flow requirements had to examine its euro changeover implications. When the subscription was converted to euros using the fixed rate of 0.787564 it converted as an odd amount. The charity considered rounding off the subscription amount but faced the risk of a substantial drop in this source of income as subscribers may inadvertently forget or chose not to return amended standing order forms.
An examination of all systems should be undertaken to establish how the transition to the euro will be achieved. This may require the replacement of aging legacy systems, upgrades to existing systems and conversion of existing financial data. The best method is to start by contacting the supplier.
A significant proportion of Irish companies have a financial year-end of 31st of December. Although converting to the euro is less complex at year-end, companies should bear in mind the strain that will be put on resources, both internal and external if conversion is left until the end of the year. In addition to completing year-end accounting procedures, companies must be ready to handle transaction in euros from the 1st of January 2001. This will place considerable strain on accounting and administrative staff and may also cause logistical problems with software companies trying to support the volume of software support issues. No two sets of financial software will be identical in configuration.
Case study 3 - make a plan
One company decided initially on the 31st of December 2001 as the conversion date for their accounting systems. The time required to complete the year-end close off procedures was assessed. As there was reluctance on the part of software suppliers to support the euro changeover process over the new year due to limited resources, this meant that the client decided to effect their transition to the euro from 1st of September 2001 which is a quiet trading time for the company.
Case study 4 - definition of ‘euro compliance’
Another Irish SME currently uses software provided by a UK software company. Since the UK is not joining the single currency at this time, the software supplier had not written a euro conversion routine. The SME had been told that there was an upgrade, however the solution on offer by the software company would result in substantial amounts of its historical financial data not being available for comparative purposes. This means that the company must examine all alternative courses of action immediately.
We recommend you follow the Euro Changeover Board of Ireland plan as set out on page 5. Ensure that the following elements are included:
• Assess - what do you need to do now i.e. risk assessment
• Transform - communicate, test and convert
• Sustain - monitor and report. |
Vince D’Arcy, ACA, is a manager in Deloitte & Touche specialising in Enterprise Risk Services, delivering risk, internal audit, computer audit and e-business security services. vince.d’arcy@deloitte.ie
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| Article appeared in the June 2001 issue.
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