On 18 April 2024, experts discussed the main features of the ISA for LCE and presented case studies on how some European countries are planning to use the standard during IFAC, Accountancy Europe and EFAA for SMEs’ joint webinar, organized in collaboration with the IAASB. It brought together over 400 live participants, from over 120 jurisdictions.
Watch the full recording here.
In December 2023, the IAASB published the International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE), a standalone, proportionate global auditing standard, designed and tailored specifically to the needs of smaller and less complex businesses and organizations.
Built on the foundation of the International Standards on Auditing (ISAs), audits performed using this standard provide the same level of assurance as audits performed using the ISAs: reasonable assurance. The standard is effective for audits beginning on or after 15 December 2025 for jurisdictions that adopt or permit its use. Early adoption is permitted.
After a presentation of the main features of the ISA for LCE by the IAASB team, Christopher Arnold, Director at IFAC, moderated the experts’ discussion. This highlighted the benefits of the standard—both for auditors and SMEs—as well as potential challenges, and the need for clear communication and capacity building for its successful adoption and implementation.
Towards more Consistency, Efficiency and Clarity while Preserving Quality
“The current ISAs were perceived as too complex for the needs of LCEs and their auditors. As jurisdictions began to develop their own standards for auditing less complex entities, there were concerns of possible fragmentation and diverging standards, which led the IAASB to develop the new ISA for LCE,” explained Kai Morten Hagen, IAASB Member and the ISA for LCE Task Force Chair.
Salvador Marin, President of the European Federation of Accountants and Auditors for SMEs said: “We congratulate the IAASB for producing a high-quality standard in such a short timeframe. We believe it will help ensure the viability of the LCE audit and serve the public interest by driving the consistency and quality of LCE audits, and, in turn, foster trust and confidence in LCE financial statements.”
This was echoed by Paul Gisby, Accountancy Europe’s Director for Professional Services, who added: “The new standard is an excellent step towards making LCE audits more efficient and effective.”
For Helene Agélii, Secretary General and CEO at the Nordic Federation of Public Accountants (NRF), “It’s important to note that this is not a simplified standard, but a tailored/customized standard drafted with a specific audit segment in mind. It will drive consistent application.”
“ISA for LCE provides the same level of assurance—reasonable assurance—as the full ISAs,” concurred Inge Vanbeveren, Deputy Secretary General at the Instituut van de Bedrijfsrevisoren - Institut des Réviseurs d'Entreprises (IBR-IRE) in Belgium. “It is easier to understand and navigate, and more to the point, auditors don’t need to do a lot of ‘just in case’ actions and documentation based on uncertainty regarding how to apply the full ISAs in a scalable way,” stressed Helene Agélii, adding that “the standard is pedagogic and creates an understanding for the entire audit process.”
Experts also highlighted the benefits of the structure, layout and flow of the ISA for LCE -- which stands out for its readability, short length and navigability.
Facilitating Access to Finance & Opening New Business Opportunities for SMEs and SMPs
Iwona Warzecha, Senior Financial Management Specialist, REPARIS for SMEs Task Team Leader at The World Bank said: “SMEs often struggle to access financing and other services necessary for their business expansion, which is why accounting and auditing services are vital for their success. The new standard for less complex entities is a timely response to the increasing need for reasonable assurance and audit reports for SMEs.”
“These audit reports can open doors to new business opportunities, including access to credit, financing, capital, and investment proposals. They can help SMEs elevate their businesses to the next level if they have an appetite for growth,” she noted.
Inge Vanbeveren recalled that understanding the scope is key: “The ISA for LCE is designed for less complex entities, which includes a broader range of businesses beyond just micro-sized companies. It recognizes the importance of smaller businesses and their specific audit needs.”
Helene Agélii highlighted that “This new standard also presents a great opportunity for small and medium-sized practices (SMPs) to provide audit services in a more efficient and effective manner. Since the structure of the standard follows the audit process SMPs can be more confident in performing the expected work effort to address the requirements, thereby greatly reducing the uncertainty that comes from applying the much more complex ISAs.”
She added that “the introduction of user-friendly audit tools based on the new standard can also contribute to the attractiveness of the profession, incentivizing the new generation to join the auditing profession.”
Adoption and Implementation: Support from Regulators Is Key
Jasper van den Hout, Director, IAASB said: “As with the full set of ISAs, decisions about the required or permitted use of the IAASB’s auditing standards in individual jurisdictions rest with legislative or regulatory authorities or relevant local bodies with standard-setting authority. Firms will also need to create their own policies or procedures for use of the standard.”
“We must ensure that regulators, regional and national, professional accountancy Organizations, SMPs, SMEs and the wider public understand that this standard will provide the basis for an audit of equivalent quality to an audit performed using the ISAs,” said Salvador Marin.
Helene Agélii concurred. “One precondition for using the standard is the support from [the] regulator. In Sweden, Norway, and Finland the regulators are all very supportive, while in Iceland the regulator has not yet announced their view. [* Editor’s note: the day after the webinar Helene received confirmation that also the LCE standard can be applied in Iceland as from this year]. In Denmark, the situation is a bit different as there are two audit thresholds among which you can chose between having an audit or an extended review, so there is not the same urge to focus on ISA for LCE,” she noted.
Inge Vanbeveren said: “In Belgium, there is a specific standard applicable to the non-statutory audit of SMEs since 2019, introduced because there was a growing demand for ‘scalability of the ISAs’. Based on the ISAs, we have identified the aspects that are core to an SME audit. We are now doing this exercise again, making a comparison between the ISAs and ISA for LCE, and we conducted a SWOT-analysis to have a clear understanding of what the application of ISA for LCE could mean in Belgium.”
The discussions underlined the nuances involved in different jurisdictions’ decision-making processes, and highlighted some of the potential challenges that could arise: for example, in the authority of the ISA for LCE, including determining quantitative thresholds and the qualitative characteristics, as well as the potential impact on audit fees.
Multistakeholder Approach, Communication, Capacity Building & Training
Isabelle Raiche, Senior Manager, IAASB highlighted the various resources developed by the IAASB covering the standard's purpose, authority, structure and associated benefits, including a new video series on exploring the benefits, applicability and use, and a step-by-step walkthrough. She also noted that the following resources will be published by the IAASB in Q2 and Q3 2024:
- Supplemental Guide on the Authority
- Supplemental Guide on Reporting
- First time implementation Guide
- Adoption Guide
All experts agreed that clear communication, capacity building and training will be crucial to avoid misconceptions and ensure buy-in from all parties involved. The adoption and implementation journey will require all stakeholders.
Paul Gisby, said: “Although it is a high-quality standard, the success of the ISA for LCE will be measured by its acceptance and adoption. The main key success factor will be the communication efforts to get the buy-in from all stakeholders, including users—such as financial institutions and lenders—and, of course, local regulators, standard setters, and audit oversight bodies.”
Inge van Beveren recommended to “open a dialogue with users of financial statements to understand any concerns and explain how the ISA for LCE meets their needs for reliable financial information.” To help understanding and build trust in the audit quality, she also called for “transparency about the audit process and the standard used” and to demonstrate competence in “showing through the audit work and documentation that the auditors have the necessary skills and knowledge to apply ISA for LCE effectively.”
For Iwona Warzecha, “To successfully implement this new standard, a roadmap is needed, including capacity building for auditors, quality assurance staff, regulators, investors, training providers, and other users.” She added that “The World Bank's regional programs, such as REPARIS for SMEs, can be utilized to disseminate and raise awareness about the new standard among country stakeholders. This includes government officials, PAOs, chambers of commerce, and public oversight bodies.”
The crucial role of the PAOs in supporting adoption and implementation was also highlighted by Helene Agélii, who shared that in Sweden, Norway and Finland, the institutes are about to finalize the translation** of the standards and have already started preparing for training opportunities [**Editor’s note: the translation in Finnish is now available).
Watch our speakers key recommendations
Useful resources
IAASB
IFAC
- Practice Transformation Hub: www.ifac.org/practicetransformation
- IFAC SMP Advisory Group: www.ifac.org/SMP
- “IAASB’s New Standard for Audits of Less Complex Entities: A Game-Changer for the Accounting World”
Accountancy Europe
- Public letter to the IAASB: progress on draft standard for auditing less-complex entities
- Simplifying auditing standards for small or non-complex entities
