Professor Robin Jarvis

Head of SME Affairs

Developments with the small

audit

• The option to exempt small entities from the statutory audit was introduced under the EU 4th Directive

• Thresholds based on a business entities level of annual turnover, balance sheet total and the average number of employees

European Audit Thresholds

• Annual Turnover – £6.5m

• Balance Sheet Total - £3. 26m

• Average Number of Employees – 50

(In Pounds Sterling – from April 2008)

Current EU Thresholds

• ..not enough auditors in mainland Europe

• Cost and benefits …burden on small business entities

• Political motive e.g reduce the regulatory burdens on SMEs

Motive for introducing the audit exemption

• Burdens and ‘Simplification’ policies• Impact assessment = cost and benefit analysis but

have they been rigorous?• Easy to calculate costs but much more difficult to

calculate the benefits • BUT well functioning capital markets are those

which have an effective framework of regulations

Burdens: Cost / benefit issues

• Primarily designed for large listed companies are they relevant for small entities?

• Growing recognition of complexity of ISAs

• IFAC SMP Committee input into IAASB

• IFAC Guide

International Standards of Auditing (ISA) (1)

• Sylvie Voghel …improved quality but at the same time a disproportionate increase in cost

• Wong Report – September 2004

• The case for separating auditing standard for small and large companies?

International Standards of Auditing (ISA) (2)

• ‘An audit is an audit’

• John Kellas …• Maintains credibility – in terms of user

perception!• Reduces uncertainty about the levels of

assurance

• Conclusion: ISA’s represent an increase cost burden on SMPs > SMEs

International Standards of Auditing (ISA) (3)

• UK experience

• Compilation Report

Alternative forms of assurance

• Research – determining the demand for the audit from a small companies perspective (ICAEW 2000; DTI 2004 ; BERR 2008)

• Expectation from research: high uptake of voluntary audit if max threshold applied

• Reality: only 17% have a voluntary audit…this may be driven by Trade Associations etc

UK experience of the effect of introducing audit thresholds (1)

• Government Consultation: many users ‘supported’ the increase of the threshold to max level; including Tax Authority!

• Research in Denmark and Sweden: Tax Authorities support the case for audited accounts

• Reduction of SMPs being able to offer training contracts ….will the ‘big four’ be the only trainers?

UK experience of the effect of introducing audit thresholds (2)

• Current environment: The number of large and medium firms are declining in the UK!

• A worry - Non professional accountants moving into

the market …quality of service …ethical codes! • Accounting profession lobbying Government to

recognise and protect the brand/label ‘Accountant’

UK experience of the effect of introducing audit thresholds (3)

•

• BUT Accountants are in a preferred position!

• In all the surveys/research world wide Accountants are the first call by businesses for advice ….

• Mainly from UK sources ….but research in Norway by Paul Gooderham supports this position

SMPs : a way forward

• Financial Reporting for SMEs…compliance and enforcement of accounting standards e.g. IFRS for SMEs?

• It is important when constructing regulation/standards they must be bottom up

• Opportunities for accountants

Conclusion