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Professor Robin Jarvis Head of SME Affairs

Explore the impact of EU audit thresholds on small entities, burdens, ISA relevance, alternative assurances, UK experience, and future opportunities for accountants.

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Professor Robin Jarvis Head of SME Affairs

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  1. Professor Robin Jarvis Head of SME Affairs

  2. Developments with the small audit

  3. European Audit Thresholds • 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

  4. Current EU Thresholds • Annual Turnover – £6.5m • Balance Sheet Total - £3. 26m • Average Number of Employees – 50 • (In Pounds Sterling – from April 2008)

  5. Motive for introducing the audit exemption • ..not enough auditors in mainland Europe • Cost and benefits …burden on small business entities • Political motive e.g reduce the regulatory burdens on SMEs

  6. Burdens: Cost / benefit issues • 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

  7. International Standards of Auditing (ISA) (1) • 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

  8. International Standards of Auditing (ISA) (2) • 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?

  9. International Standards of Auditing (ISA) (3) • ‘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

  10. Alternative forms of assurance • UK experience • Compilation Report

  11. UK experience of the effect of introducing audit thresholds (1) • 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

  12. UK experience of the effect of introducing audit thresholds (2) • 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?

  13. UK experience of the effect of introducing audit thresholds (3) • 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’

  14. SMPs : a way forward • 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

  15. Conclusion • 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

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