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Professor Robin Jarvis Head of SME Affairs

Professor Robin Jarvis Head of SME Affairs. Developments with the small audit. European Audit Thresholds. The option to exempt small entities from the statutory audit was introduced under the EU 4th Directive

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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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