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?