What is the Future for Assurance and Small Business?

Paul Thompson | April 15, 2014 | 4

For a number of years, small businesses have increasingly voiced concern that regulation is overly burdensome and impedes their innovation and growth, including their ability to hire more staff. Small businesses yearn for fewer rules and more freedom. However, regulation is important—it is intended to help markets operate efficiently and fairly, but sometimes the costs may exceed the benefits—and many claim this happens most often in the small business sector. Regulation directed at holding big business to account often just creates paperwork for a small business whose transgressions are unlikely to impact the broader economy. This has sparked a trend toward the cutting of “red tape.”

In many jurisdictions, perhaps most noticeably in recent years in Europe, the emergence of a “think small first” mentality has resulted in a light touch approach to policy and regulation for small businesses, releasing them from the obligation to have an audit, and from many financial reporting requirements.

This begs the question, how can accountants best support small- and medium-sized entities (SMEs)?

Governments are keen to champion the cause of SMEs. Not surprisingly, given, aside from the public popularity of a robust pro-small business stance, they typically account for the majority share of private sector GDP, employment, and economic growth. As the core source for innovation and development, they count among their ranks entrepreneurs destined to expand their operations from local garage to global conglomerate.

On February 19 2014, the Federation of European Accountants (FEE) and the Institute of Chartered Accountants in England and Wales (ICAEW) co-hosted a debate in Brussels. Set against the backdrop of the new Accounting Directive, which has significantly raised the upper limits for the thresholds that define a small business, and potentially exempted many more small businesses from the audit requirement, the event discussed what opportunities exist for accountants to support small businesses.

One service the event debated that may suit the needs of many small businesses and their stakeholders is a review engagement, which is supported by International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review Historical Financial Statements. Review engagements provide a limited form of assurance on historical financial statements. As such, they may provide a cost-effective way of adding credibility to the financial statements of small businesses. IFAC SMP Committee member Phil Cowperthwaite has presented the benefits of reviews and the resources and tools available to help practitioners apply ISRE 2400 (Revised) in a recent article.

Concern has been raised on whether the growing trend toward audit exemptions may also result in a related move toward lower-quality financial reporting. This trend presents broader questions about the future of audit and assurance for the accounting profession.

The profession needs to continue to consider how accountants can best serve small business. In Europe, FEE is leading the debate on this and other issues with its Discussion Paper, The Future of Audit and Assurance. The profession needs to continue to explain the range of services it can offer, and professional accountancy organizations need to continue to produce resources that will help firms present the options and help their clients select the right service to best fit their circumstances. For example, see Assurance options: a credible choice for audit exempt financial statements from ICAEW.

For small businesses, audits build confidence in their financial statements, improve their access to finance, and enhance their internal processes. While there is life beyond audit, there is also much life in the audit, and the profession needs to continue to promote this value.

What do you think is the future for assurance and small business? 


Paul Thompson

Director, European Federation of Accountants and Auditors for SMEs

Paul Thompson is EFAA Director and a consultant dedicated to thought leadership and development of the global accountancy profession. From 2004 to 2016 Mr. Thompson worked for IFAC latterly as Director, Global Accountancy Profession Support, a role that extended to overseeing the IFAC Global Knowledge Gateway, research and innovation, and activities in support of small- and medium-sized practices (SMP) and professional accountants in business (PAIB). Mr. Thompson also serves on the SME Implementation Group, an advisory body to the International Accounting Standard Board (Board), and is a member of Nottingham University Business School Malaysia’s Industry Advisory Board (IAB), an advisory group providing strategic advice to the Business School. He advises developing professional accountancy organisations in Europe and Asia. Previously Mr. Thompson worked for Touche Ross & Co., London before going on to lecture on corporate reporting and analysis at universities in the UK, Singapore, and Malaysia. He has a number of publications in academic journals and the professional press in the areas of ethical finance, corporate reporting, corporate governance, integrated reporting, practice management and the future of the profession. Mr. Thompson graduated from the University of Warwick with a bachelor of science in accounting and financial analysis and is a fellow of the Institute of Chartered Accountants in England and Wales. Mr. Thompson is an internationally ranked masters distance runner. See more by Paul Thompson


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krzysztof burnos July 1, 2014

I believe that there is no doubt about the future of the assurance services. The question is about the shape of this future. Among others, the question is whether the audit service will stay as it is today or will be fit more for the nature of small business markets. The worldwide debates show that ISAs are not regarded as relevant for small businesses. The promotion of other assurance services is a right direction. The assurance on financial standing can be provided with other assurance services based on ISRE 2400 or designed within the framework of ISAE 3000. I think that the issue is how to recognize the individual needs of our client, design the adequate service with the help of the standards and communicate that service to the client in understandable way. We should not talk about standards over and over. This is wrong direction, we’ll lose this battle because our standards are understood only by us. It is sure that the standards help us to communicate our clients what and how we are doing some services but nothing more. Maybe we should consider starting the debate about the definition of assurance. IAASB is saying that audit, review and other assurance services provide the assurance defined by IAASB. However at the same time it is said very commonly that the clients take the assurance from non-assurance services if the professional accountant is engaged.

Ricardo Rodil April 28, 2014

I'd like to add a perspective from my country (and many other South America's) regarding the issue in reference. I agree with most points Paul raised and agree with Phil Cowperwhite's fierce deffence/promotion of limited reviews. Overregulation from Governments is a fact and presents good reasons to exist. If we down here feel uncomfortable with it, it's another story. I understand and support the fight of SMEs against overregulation, as I would with any other 'overs' in the world. But I propose that we sit at the other side of the counter and rethink the question. Instead of trying to understand what we professionals can do with the diferente tools (audit, reviews and agreed-upon procedures) to help SMEs based on what we think their needs are, why not trying to understand the usefulness of each of those services for SMEs owners/managers? Usually, thresholds are in place in most countries to make full audit mandatory for certain enterprises. This, in general, target big and regulated companies. There is little choice at that point, and public interest justifies it. When we look at the remaining sector (vast majority of entities, employment champions, etc.) the main thing, under my point of view, is try to understand what benefit owners/managers can obtain from our work. At this point, it is clear to me that large proportion of the reasons the businessmen have to choice any of the services (or none) is related to the usefulness they perceive can be derived from the servisse, and the obvious cost-benefit relationship. For those microentities where the owners/managers do not have any special projects regarding growth, joint ventures, association with technology partners, or going public, the most natural choice would be not to hire any of the services above. A good bookkeeper, who can take care of the basics in accounting and keep a trained eye on compliance with tax and labour rules would be enough. For those owners/managers who envision growth through joint ventures, merger and acquisitions, or going public in the future, the choice should be better informed. Depending on the stage of the enterprise, the first service to hire would probably be an agreed-upon audit procedures, aiming at identifying internal controls and accounting criteria that are far from acceptable under the presently so international context. Once these services have identified problems and our colleagues have contributed to their solution, time may have come to try a limited review, in order to prepare the enterprise for a full audit. If, for some reason, an audit is not required and the financial partners (banks, financing companies or would-be partners) peacefully accept a limited review, this would be the obvious choice. Once the need for an audit comes, the enterprise's structure, internal controls and financial statements would then be ready for the final proof. At this point, one importante thing has to be said: it is our responsibility, as well-informed professional, to clarify these option to the businessmen. In Brazil, where the threshold for full audit is too high (something like US$ 140 million in anual gross revenues), I'm convinced that the choice is based on what I call OBR = other business reasons. And we, professional, have to be able to enlighten owners/managers on these reasons.

Ruth Ward April 17, 2014

This is a really interesting area, and one aspect that seems to have been highlighted by the debate in Brussels is that different jurisdictions have taken completely different approaches to supporting SMEs. It's quite possible that there is no one-size-fits-all solution, but it's clear that association with a professionally qualified accountant is invaluable to a small business. During a debate ICAEW hosted here in London in October 2013, I was particularly struck by the reaction of a representative of the business angel community to discussions about simplifying reporting and removing audit requirements for small businesses. She not only said that 'it will really be quite challenging for us if as investors we can’t exert an annual review in terms of our investments' but also emphasised that she would be glad to see her investment used to pay for a chartered accountant's involvement in preparing financial statements and/or reviewing or auditing them. I think this shows that accountants provide credibility that even very small businesses really need.

Kari Lydman April 17, 2014

Hi Do we have any experience on how e.g. ISRE 2400 -type of Assurance engagement has been received by clients/public in any jurisdiction, as an alternative for a full ISA statutory audit? Denmark? My point is that a statutory or alike audit engagement should be mandatory for SMEs bearing in mind their importance to the economy of many jurisdictions. But at the same time we have this mysterious phenomenon called expectation gap, i.e. the reality that even ISA-audit is not understood - so how an additional "lower level" service could be better received than full scope audit. Perhaps I am thinking, as we speak, that ISAs might include the flexibility (=less work) for SME audits but focused advice would be needed (the book on this already published is ambivalently received i.e. has not been a success?). The definition for a SME is too ambitious for many economies, we should rather talk about MSEs, Micro Sized Enterprises.


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