The Changing Digital Transformation Landscape of the SME Practice

The scale and scope of digital transformation projects vary widely among accounting practices, particularly smaller to medium-sized firms. More than ever before, SMEs are driving their own technology vision, and increasingly, this is due to two factors.

First, SMEs are more in tune with the new practice growth opportunities that are becoming apparent today. The chance to broaden practice offerings is a great competitive differentiator, and many SMEs are engaging with new technologies and automation to achieve new efficiencies to fast-track practice growth.

Second, the tax and accounting regulatory landscape is moving quickly, and SMEs know that they need to keep pace when it comes to meeting compliance guidelines. With regulation driving innovation and the volume of practice data increasing daily, SMEs can see that keeping up with digital transformation is the only way to drive practice change.

In this article, I explore the current state of digital transformation in SME practices, and how the transition to the cloud is being accelerated by three separate trends: regulation, ESG, and managing talent.

How Regulation is Driving Digitisation

In terms of regulation, e-invoicing is a great example of one of the ways the regulatory environment is impacting SMEs, and how new regulatory requirements can shape their future paths and the technology choices they will use to achieve compliance.

There are just six months to go until each European Union (EU) country can make e-invoicing compulsory without having to request permission from the EU first. This should facilitate e-invoicing reforms, leading to improved efficiency. However, the reforms will require businesses to make major changes in the way they issue and receive invoices.

The VAT gap is an estimate of the overall difference between the expected VAT revenue and the amount actually collected. EU member states lost an estimated €93 billion in Value-Added Tax (VAT) revenues in 2020, according to the 2022 Report on the VAT Gap released by the European Commission. This translates to €3,000 in VAT revenues being lost every second in the EU. In a bid to improve VAT collection and mitigate these losses, the EU has launched an action plan which focuses on digitising all transactions, making them more transparent and traceable so that taxes can be collected correctly. VAT in the Digital Age (ViDA) is the package adopted by the EU Commission to optimise the EU’s VAT system.

As a tax advisor, whether you’re planning to implement e-invoicing or looking to move your existing e-invoicing system to the cloud, it’s useful to start with a clear understanding and a documented approach both for your technical architecture and best practices.

In 2019, Italy became the first country that mandated e-invoicing for B2B transactions. With cloud technology, Italian practices are removing the manual work of entering invoice information into an Access Point system, significantly reducing errors in data entry. This provides significant cost savings in printing, postage, intra-office routing, and archiving, as well as human resources. With the right cloud environment in place, these practices have been able to implement e-invoicing in a seamless, resource-efficient manner.

How the ESG Mindset Will Impact SME Practices

In addition to technology-driven responses to the changing regulatory environment, we are also hearing from our customers that many are expanding their roles, or plan to do so, to ensure they have the metrics in place to support their clients around ESG reporting.

Environmental, Social and Governance (ESG) is one of the defining trends for business in recent years. Among many benefits, it provides investors with the opportunity to mobilise support for greener industries and reduce exposure to unsustainable business practices. Large companies may have originally led the way with their ESG strategies as many are mandated to meet ESG regulations. However, SMEs may need to meet regulation requirements in the near future.

As interest around ESG issues continues to grow, the European Union’s Corporate Sustainability Reporting Directive (CSRD) has gained widespread attention since it was enacted in January 2023. The CSRD is intended to apply to EU-based companies and certain large non-EU companies with significant operations within that region. It aims to enhance transparency (ESG) information and encourage companies to integrate sustainability factors into their business strategies.

As noted by the European Commission, approximately 50,000 large, medium, and small-sized companies in the EU will need to apply the CSRD rules starting between 2024 and 2029. Large companies or large groups with consolidate subsidiaries must meet two of these three criteria (€40 million in net turnover, €20 million in assets, or 250 or more employees). International companies with subsidiaries located in the EU will need to abide by the CSRD if they conduct significant operations there.

The message for SME practices is this: it’s time to act on ESG, and compliance won’t be limited to large firms forever. Soon, all firms will have to be compliant in both their ESG efforts and the reporting of ESG activities. This is another area where digital transformation will play a key role, and there’s no time like the present to explore what it will take to get your sustainability data in line, and your reporting functionality fit for purpose.

Reflections on Talent for Future Growth

The successful digital response to changing regulations and the evolution of ESG reporting requirements will always come down to the people driving these initiatives, and managing talent for future growth is a top consideration during digital transformation.

Effective leadership is essential for driving digital transformation in practices, whether it’s moving from paper-based accounting, or moving on-premise tax and accounting systems to a cloud platform. Practice leaders need to demonstrate a clear commitment to the initiative and provide guidance throughout the process, but first and foremost, they should ensure their teams understand the ‘why’ behind the digital transformation. It’s difficult to foster a mindset of innovation unless employees understand exactly how the regulatory landscape and new proposed technologies will affect and support their roles.

While technology will allow us to do previously unthinkable things, we need to consider whether it will solve our customer’s problems. Academic Cedric Price said, ‘Technology is the answer, but what is the question?’ It’s one of my favourite quotes and it represents what we need to do as a business in order to balance challenges, risks, and opportunities. Only when we understand the challenges associated with new trends and regulatory compliance can we take the next step of looking at the technology solution.

Practices need to consider the same logic internally. Digital transformation should ultimately make the end user happy, but it should also be about driving internal efficiencies to grow and sustain practices for the future.

A compelling vision is critical. It helps employees understand the purpose and benefits of new initiatives, aligning their efforts towards a common goal. The vision should outline the desired outcomes, highlight the opportunities digital transformation brings, and address potential challenges.

By focusing on effective leadership, a compelling vision, transparent communication, fostering an innovative mindset, providing training and support, and clarifying employee roles, practices can increase the likelihood of successful digital transformation. These elements help to build employee engagement, create a shared understanding, and facilitate the smooth integration of digital technologies to support regulatory compliance-driven landscapes and trends that we see shaping practice growth today.

Wolters Kluwer will be exhibiting at Accountex Summit Manchester on the 19th September 2023 on stand G13.

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