There are two main reason why FDs have been apathetic about the euro. First, the current international crisis has made even momentous events appear slightly irrelevant. (You can decide for yourself whether the arrival of a new currency in one of the world’s largest trading blocks is actually momentous or not).
Second, we want to think the introduction of the euro is simply an IT scare, a kind of Y2K Mark II. We’re quite familiar with this kind of event. There’s scaremongering, doom and gloom from IT experts and journalists, and then we all carry on as before. Of course, this theory is a simplification. It could be argued that the hype actually forces businesses to do just enough to cope.
The IT industry certainly played its traditional hand-wringing part in the introduction of euro notes and coins. It said anyone who traded in any way with Europe had a new crisis point – so-called e-day.
And maybe now there is good reason to worry. The euro note and coins are arriving in uncertain economic circumstances. This is not a point in the business cycle when companies are keen to splash out on another new IT project, so there is great temptation to be ready for the euro on the cheap.
But the real difference between e-day and other IT changeover dates was that this one was about cash. If businesses were not clear about how they will get by after 1 January 2002 then they have exposing themselves to the risk that they may be lengthening their payment cycle. The idea of cash flow slowing and debtors days going further out is not a welcome thought at any time, but that prospect is even less attractive at the moment.
The most comprehensive statistical data about UK corporate readiness for the euro comes from a study carried out for financial software house CODA, published in autumn (The Coda Euro-Readiness Study). Perhaps the most striking aspect of the survey, which was conducted among 67 UK-based mid to large corporates, was the fact that 38% claimed that they had no need to be euro compliant. Yet, the idea that four in every ten medium-sized or large UK companies will remain unaffected seems highly dubious.
Obviously, all companies with parents or subsidiaries in Europe should have realised they will have to update their IT and accounting systems. However, other companies that currently receive invoices denominated in good old pounds sterling from suppliers many soon find that that they are being requested to handle payments in euros.
On 9 February, the Irish Punt will cease to be legal tender – and you don’t have to be a global player to have connections with the Republic of Ireland, probably just business in Northern Ireland would do. There are even rumours that some suppliers will insist their customers take payment in euros – even though the bill will still be invoiced in sterling.
Of the 62% of companies in the CODA survey that believed they would be affected by the 1 January deadline, over half at the time of questioning had not yet made the necessary changes to their accounting systems or data for euro compliance.
Yet the Level 2 euro standard developed by the British Accounting Software Developers Association requires software to be capable of accurately handling multiple currencies and triangulation, plus a comprehensive base currency conversion routine that produces accurate conversion of all monetary amounts held in financial ledgers, that allows for rounding adjustments to be posted to a separate account and will show a full audit trail of the conversion.
Companies that don’t get up to speed will have to rely on manual workarounds and cope with a queries from customers, suppliers and auditors.
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There is also a need for companies to talk to suppliers and customers. EMU is designed to reduce costs and the administrative burden on the sales and purchase ledger. However, there is much risk associated with changing from individual currencies to euros. Outstanding ledger balances at 31 December in, say, francs, would have to by now, been switched to euros.
In discussing with customers when they are going to be invoiced in euros, it should be possible to find a logical time in the business cycle to make the switch, perhaps when the outstanding balance is negligible. If a large number of customers need converting, then a phased programme should be implemented. All of this may not be the strategic stuff FDs like to deal with but it does need sorting – and now.