22: Earl Steyn
Founder and Managing Director : Draftworx
Drawing on his IT knowledge and experience, an accountant has developed a revolutionary accounting software suite that’s now operating in 22 countries.
11 July 2019
CIARAN RYAN: This is CFO talks and today we’re joined by Earl Steyn, the managing director and founder of a company called Draftworx. Draftworx is operating now in 22 countries worldwide and it is a great South African success story. What Draftworx does, well, we’re going to find out about that but essentially it automates financial statements, the preparation of financial statements and audit compliance. Welcome, Earl.
EARL STEYN: Thank you so much for having me here today.
CIARAN RYAN: First of all, tell us what is Draftworx and just tell us what does it do?
EARL STEYN: Draftworx is basically a software suite and, of course, it’s available on desktop and Cloud. The focus of the product is to provide IFRS automation and, of course, that assists the auditor or the accountant in their engagements in terms of audit compilation, review…
CIARAN RYAN: Let’s just spell out IFRS for people who may not know what that is, it stands for?
EARL STEYN: International Framework for Reporting Standards, so it’s the global – except for the United States – way of reporting your financial results. There are different classes of IFRS, there’s IFRS for SME and, of course, the larger standard is IFRS itself.
CIARAN RYAN: So what does Draftworx do?
EARL STEYN: It basically takes your trial balance and it ensures that you disclose IFRS-compliant financial statements in the quickest way possible. If you are an auditor, it goes through and assists you doing the working papers to ensure that those financial statement figures are correct.
CIARAN RYAN: So if I give you my trial balance, within a microsecond you can tell me whether I’m compliant with IFRS or not?
EARL STEYN: It goes a little bit more detailed than that, with the figures that we get you need to ensure that the transactions have been placed on an IFRS level, so there are a lot of items that go into IFRS, not just the disclosure. We handle the disclosure side but the trial balance that’s coming from yourself or the accountants, they need to be equipped to understand what the IFRS requirements are for splitting out that data, so that we can plug it into the appropriate places.
Unpacking the complexities of IFRS
CIARAN RYAN: So there are certain building blocks in order to be IFRS compliant?
EARL STEYN: Yes, unfortunately IFRS is extremely complex and it’s just changing every single year, so it’s becoming more and more complex. It’s really become a niche in that accountants find themselves providing consulting on, it’s becoming a highly complex animal.
CIARAN RYAN: One of the things IFRS deals with is revenue recognition…
EARL STEYN: Yes, IFRS 15, you’ve done your reading.
CIARAN RYAN: That can be quite a complex thing because different types of transactions will have different criteria for recognition.
EARL STEYN: And depending on what type of company you are and what revenue you have, there are different implications against that. If you are a general small to medium-sized entity it’s something that you don’t have to worry about but if you are a larger entity and definitely for an entity that’s listed, then it’s something that you have to focus on. But I am sure all the listeners have already implemented IFRS 15 at or you should have by now, otherwise the auditors are going to give you a scolding.
CIARAN RYAN: Now, tell us about yourself and how you got involved in this.
EARL STEYN: It’s a long story, it started many years ago…
CIARAN RYAN: You’re an accountant by background?
EARL STEYN: I’m an accountant by background, I’m actually IT (specialist) before (I did) accounting, I knew my way around a UNIX mainframe before I knew debit and credit. However, with the 2000 dot-com bubble I actually changed focus and I looked at accounting. I’ve always enjoyed people, I’ve enjoyed business, and accounting suits that very well. So I began my articles at a firm and they used a certain software package and after a few months I thought, I think I can do this better, and one thing led to another and after many years of considering I actually sat down and I wouldn’t say I coded the alpha, it was really rough back in the day, but the proof of concept. So I developed the proof of concept…
CIARAN RYAN: Sorry, I don’t understand, what is an alpha?
EARL STEYN: Alpha is when you go past the proof of concept. So in the software development you have something that kind of works, it’s an alpha, a beta is nearing release, so many core components work but when you get to release it it’s now available for general use. So proof of concept is a basic structure and it does the very, very, very core basic items, just to show that we actually can achieve this. Part of the proof of concept was transferring our data from the other software package, so that we could offer our future clients - at that time we were still thinking big – a seamless way to transfer to our package.
CIARAN RYAN: Are your clients large corporates, medium or what are they?
EARL STEYN: It ranges, we have about 6000 firms in South Africa alone and part of that mix are one-man accountants up to large firms with 200 clerks, so fairly large firms. Then on top of that we also have a large amount of corporates, so those that are on the JSE that require to report in terms of IFRS but using Excel is just too time consuming. If you are using such a platform, you need to know your standards inside out, so you basically are building the financial statements. If we look at our IFRS template, it took us about three or four years of continual development to get it to where this stage is, a corporate just doesn’t have that time. So for a licence fee we offer them our knowledge for a year…
CIARAN RYAN: Is it a single licence per corporate, generally speaking, because it really is the end user, this is the final step before you release the statements.
EARL STEYN: 100%
CIARAN RYAN: What about if the company is using one of these enterprise-wide software packages like SAP or NetSuite or something like that, can that be used and integrated in that situation?
EARL STEYN: Not to the extent that we can, it gives you very basic…
CIARAN RYAN: That’s what I’m asking, you can put your product on top of…
EARL STEYN: Yes, basically any system we can import from, whether it’s direct import or just simply an import from Excel and then the software can do a linking where we take the transactions that have occurred and then populate them to the financial statements.
CIARAN RYAN: So the end user of the product when you’ve run your trial balance through Draftworx, who is the end user there, is it the shareholder, is it government, is it the compliance officer, who is it?
EARL STEYN: It depends on the entity, so it could be all of those and, of course, SARS, they would like to see your results, CIPC, the Companies and Intellectual Property Commission. Over the years financial statements have evolved, normally financial statements were purely for the government, where you would say this is how much money I’ve made, this is the tax I’m going to start paying. But companies now have big groups of shareholders, everything’s gone into listed entities, so you have to report not only to the government entities but now also to shareholders, to banks, so there are quite a number of users of those financials. CIPC recently released a requirement for listed entities, there’s quite a breakdown if you qualify, listed entities and any other entities that qualify for an audit that now need to present your financial statements in a specific format called XBRL. So not only do you have to now provide IFRS financials, you have to provide financials in XBRL.
CIARAN RYAN: We’ve got Nicolaas van Wyk here, he’s the chief executive of the South African Institute of Business Accountants. Nicolaas, I see you are jumping up and down in your chair and you want to say something.
Working on a US GAAP project
NICOLAAS VAN WYK: Earl, when you did your introduction, I was quite impressed to hear that you are in 22 countries. I’m sure that some of our listeners, being CFO’s themselves, are working for multinationals and they are also in multiple countries, especially in Africa. If I were looking for a provider to partner with in assisting me with drafting my financials, I would appreciate the fact that my partner is also in 22 countries. So would you just explain to us a bit, that’s quite interesting, how do you manage to expand to a new country and how do you manage the different compliance aspects?
EARL STEYN: It’s quite a process when we are expanding to a different country. Thankfully IFRS is more or less a global standard, except for items such as US GAAP, we already know the standards that they need to apply but every country has its own Companies Act, so it’s own tailoring of what they need to comply with within the country. So we have to go through with specialists and analyse their companies act, analyse their requirements and often what’s in the Companies Act isn’t always what transpires as a requirement or at least for legacy issues of what you need to go out to. So we partner up with a local firm and we analyse exactly what they need, and in about a month to two process we can actually produce localised financial reporting statements. So anything that changes from thereon we’re able to measure with our contacts within a country, change and distribute. Our desktop software includes an automatic updater, so if anything changes for a specific country we can update it and deploy it on the same day. With our Draftworx Cloud anything we do and change is right there and then available. So we’re actually quite excited about what the rest of the world holds for us. We’ve ported to multiple languages now too, so not just English, we’ve done Spanish, we’ve done Arabic, we’re busy with Portuguese, we are about to start French. So we’re looking at a global package and solution that’s available for whichever country you are in to comply with your financial statements and not just on IFRS, we’re busy with a US GAAP project. So if you are a company that needs to start reporting in US GAAP, something is coming for you and it’s going to be very cost effective. Our Cloud platform changes up the mix massively but I think that we can chat about a little bit later.
NICOLAAS VAN WYK: So if I’m a multinational and I operate in SA and I want to expand, let’s say like MTN, into Nigeria or Morocco for that instance, your product will provide me with that solution for my subsidiaries?
EARL STEYN: 100% and you can, of course, consolidate and do the foreign currency translation at the click of a button. So consolidation has become much simpler, especially when there’s foreign currency translations, it’s generally extremely complex, specifically because the subsidiaries may not be finalised and you still are doing that consolidation. If you have to go back and do a consolidation mainly, again, from a simple change in the sub, it’s a complete nightmare. With us it’s pass a journal entry and it’s done.
NICOLAAS VAN WYK: You’ve mentioned a lot of technology, another thing I think as a CFO I would want to know is your team of developers, so obviously it’s not yourself doing all those things?
EARL STEYN: No, thankfully not.
NICOLAAS VAN WYK: Just share about how your team works and the type of person that you use in your company.
EARL STEYN: We have a very specific need when it comes to personnel in our company, we hand-pick them, so we go out and we look for the highly intelligent and very, very important is passion. If somebody doesn’t have passion for our business, for what we do, to go and say I need to get this done, I’m going to work until two, three, four o’clock in the morning and get it out, they actually don’t have a place in our company. If somebody does work graveyard shift then we don’t mind if they don’t come in the next day, you hit the deadline, take the day off. So it’s a very specific requirement for us and we’ve had multiple people join our company and they haven’t fitted into that and that just doesn’t drive what we do.
NICOLAAS VAN WYK: And your development, is it only local, do you outsource to India, where are your developers based?
We don’t outsource to India, the majority of our development is based within South Africa, as we’ve grown and our needs for understanding the global environment and for expanding our technology range, we have had to find developers outside of South Africa. Now, thankfully that enables more than just having to pay more for development, that enables us to develop almost around the clock, so we can actually do almost a 24-hour development cycle. With development available overseas we also have now identified key areas to whom we can supply to and key technologies, which has resulted in Draftworx Cloud that is something that is currently still unique in the world, what we did is we decided to shift what everybody is used to in the current financial reporting market, which is paying for a desktop licence, paying for unlimited clients. What Draftworx Cloud became is more consumption-based. So if you are an entity out there that needs to do a set of IFRS financial statements, what you are used to with other providers is paying about R100 000 to R120 000 a year. With our corporate desktop licence it’s R33 000 and we thought that’s not good enough, we want people to have easy access to reporting. So we turned it on its head with Draftworx Cloud and we went down to saying okay, if you have a single engagement on IFRS you can swipe your credit card and it’s R2000 and you’ll be able to have a fully IFRS-compliant reporting solution in your web browser and that allows multiple people to jump in and work on that set of financial statements at the same time. So you’re not limited by old tech, whereby only one person can work on the financials and then you have to pass it onto your colleague, who can then work on his section. So we think that’s a bit of a game changer in the reporting industry and we’re excited to see what it’s doing, and we’re very happy with where we are getting with it. We are, I think I can say, the technology leader now in the world.
CIARAN RYAN: Who are your competitors, name them.
EARL STEYN: Excel is one of them.
CIARAN RYAN: Great product.
EARL STEYN: It’s a lovely product but when it comes to do financial statements it has its quirks and we find that generally when we take over from a company that has used Excel and we start looking at their previous financial statements, all the errors start to become very apparent, where things have been forced, like retained income has been forced to agree with the opening balance, so the next year works. Meanwhile, three, four years ago there was a major error but because they were on Excel they never looked into what that was and now the company has to pass a R5 million adjustment.
CIARAN RYAN: Sorry, Excel is one, just so that people know…
EARL STEYN: There’s a Canadian entity called CaseWare.
CIARAN RYAN: Are you bigger than CaseWare?
EARL STEYN: No, they’ve been around for about 40 years, we’ve been around I think in the market for about eight or nine years now.
CIARAN RYAN: But you’re catching up fast.
EARL STEYN: If you had to ask them who’s losing more clients to whom, hopefully they’ll tell you the truth.
CIARAN RYAN: Put it this way, CaseWare certainly knows who you are?
EARL STEYN: Yes, yes, they do [laughing].
‘I think the problem started when we believed that IFRS is the answer for everything’
CIARAN RYAN: I have a question from a technical point of view, maybe Nicolaas you can also chime in on this one, the level of complexity in putting together financial statements and audit requirements, the IFRS, the GAAP, are we going too far down this road of rules-based accounting and you remember in the old days it used to be principles-based. In other words, now you have to tick all these boxes in terms of how you account for your assets and how you value them and all that sort of thing, how you recognise your revenue. Should we not be going back to a simpler system?
NICOLAAS VAN WYK: I suppose your question has two parts to it, on the one hand there’s this need to reflect reality in financial statements and reality is complex, and the more we approach reality, the more complex the financials become. The intention is good because then we believe we get more information to the user and he can make more informed decisions but the real reality, life, is different. Maybe you don’t need so much disclosure, you need more ethical conduct by the CEO, by the CFO, you need more clarity in financial statements because we’ve tried to make IFRS so unique that it’s not comparable anymore. So it’s not the answer for everything that I think a few years back we all believed it to be when we started the harmonisation and said all countries now follow IFRS, each country is unique and different from the next one and they value differently. So I think as a profession we are learning, there will be a correction. We also discovered of late that there are four or five pillars to financial reporting, of which the accountant and the auditor is but one, there are analysts who discover things that the auditors missed, like we’ve seen with Steinhoff. There’s the audit committee that has to play a more important role, there’s the CEO and the CFO and the relationship that they have. So I think the problem started when we believed that IFRS is the answer for everything, when it’s only part of the answer to get the picture of the business. That’s the one part of the answer. The second part is whenever we as people, as humans, make things too complex for ourselves, our saving grace has always been technology. Technology then with companies like Draftworx and Earl, they then figure out these complexities and present it again in a much more simpler way and in that way our civilisation progresses. So it’s a bit of a philosophical answer but coming from our policy perspective that would be my perspective.
CIARAN RYAN: Earl, you would probably have a slightly different answer to that because your business is built around this complexity and trying to simplify it.
EARL STEYN: [Laughing] Very well said, yes, we actually make money from complexity. So we often look at new markets and we see that they have a much more simplified reporting requirement and it actually doesn’t make sense for us to go into that market. However, I do think that there could be some changes made in South Africa. If we look at the UK, they have varying standards that are based off IFRS and if we look at FRS 105, for basically any entities below £600 000, off the top of my head, they can apply a microframework and that’s a set of financial statements that are literally about four or five pages long, just because they’re deemed not too big, so they don’t have to apply all of these interesting standards such as IFRS and IFRS SME. So that lowers their cost to produce financial statements, so it’s less of an impact on the actual business itself. So they can still be compliant but just at a reduced level. I think that’s something that we need to maybe learn from, specifically for the South African market, to go out and if you’re a small entity and have financial statements done now, it’s a burden that you have to look at every single year. You have to have financial statements because you have to comply. If you’re a big entity, you then have to have someone doing your XBRL, it just starts to lay on and on and on. So as much as we make money from it, I think there should maybe be changes made just to ease the end consumer right now, especially in an economy like this.
CIARAN RYAN: I notice that the CIPC is now starting to issue fines for companies that are not submitting their annual financial statements on time. There was a story out a few months ago about companies being fined 10% of their turnover, it’s a huge fine. I guess your software is one way of A. ensuring that the compliance is in order and B. that from a regulatory point of view they’re not going to run into that kind of trouble with the CIPC, never mind the taxman.
EARL STEYN: I’m not sure if the CIPC actually went through with those fines.
CIARAN RYAN: They are certainly threatening it.
EARL STEYN: They are threatening it, so I think eventually there will be. So it is something to consider going forward. There is a bit of a break period now in terms of XBRL that no one has been fined as yet but as XBRL grows and everybody becomes more ofay with it I think it’s going to be determined that you have to comply or you will be fined. I think XBRL is probably going to grow as well now, not just the larger entities, the listed [companies] and the mandatory audits but I think it’s going to go to the reviews, the compilations, in due course. There is SARS involvement within the XBRL projects, so I think we are going to see a future where maybe when you submit your financial statements that’s going to include your tax calculation in [it] and ITR14 may be a thing of the past. I’m not sure, it will be interesting to see where that goes.
CIARAN RYAN: In the old days it was very common in business that you prepared two sets of accounts, one for the banker and one for the taxman, is that still the case?
EARL STEYN: Or three and one for your wife.
CIARAN RYAN: [Laughing]
EARL STEYN: But that’s old school now.
CIARAN RYAN: So are they all reading the same financial statements now?
EARL STEYN: They have to, there is so much cross-sharing of all that information, when you upload your financial statements in XBRL everybody can take a peek at it, well, everybody who’s allowed to. So it’s hard to do exactly that. There’s going to be one source of financial statements.
‘Everybody is using this AI marketing push’
CIARAN RYAN: Okay, here’s the final question, the future of accounting, we hear about artificial intelligence and robots and that kind of thing, how much of this can be automated. It is kind of what you are doing…
EARL STEYN: Yes, to a degree, if you look at the definition of AI and what a lot of these service providers are offering in the market now, I still believe AI is something that is really just becoming the next Cloud marketing term. We have AI, AI, AI, not many people are going to say it’s machine learning, it’s got less of a twang to it. So AI is in the movies and everybody is using this AI marketing push. If we look at it it’s really just machine learning, you teach a computer how to handle a certain set of data. That’s not artificial intelligence by any means. So machine learning is something that’s real and a lot of people apply it, we apply it at certain levels as well and right now machine learning is going to take away the lower level, so if you’re a bookkeeper that’s possibly something that’s going to impact you later on in life. It has already started now but there’s going to be more automation in terms of bookkeeping, capturing and processing invoices and receipts, there are a multitude of solutions out there. There will always be a need for a bookkeeper because not everything is currently digital, you still get the businesses that drop off a shoebox filled with all the invoices and receipts and they expect somebody to process that. They don’t want to pay for the service of doing an OCR scan and this automated capture, it’s something that they either don’t know or it’s too expensive and they don’t need it. So I think everybody is worried about something that’s going to impact them that I think will be more of a minimal. Twenty or 30 years from now things could be different but I think in the next five to ten years accounting levels are going to be automated, so accountants right now are changing their shift from doing time billing, focusing on the processing of those manual monthly invoices, and they’re looking to do more value-added services. So instead of just sending financial statements and saying please sign and here’s the invoice, they are going and they’re sitting down with their clients and saying, these are your financial results, last year you had a profit, this year you had a loss, what’s happening, let’s look at your GP, why have your cost of sales skyrocketed but your revenue has stayed the same, there’s a problem there, have you lost a supplier, have you changed suppliers. So starting to drill more into the business and actually offer value-added services. I know a lot of our clients are doing that at a monthly level now. So with our products it also allows monthly management accounts but pretty much every single accounting package does and they’re scheduling a meeting either in person or via a Zoom session or a Skype session and they’re actually going through the performance on a monthly basis. So I think that’s much more valuable to any business owner. If you’re a business owner and you don’t have an accounting background that information is golden. So I have seen a massive change heading that way more to the let me grow your business because then I grow if your business grows. So I think that’s going to be the future.
CIARAN RYAN: We’re going to have to leave it there, thank you very much for coming in. That was Earl Steyn, managing director and founder of Draftworx.
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