RegulationCorporate GovernanceAdviser: shrink to fit

Adviser: shrink to fit

Setting standards is all very well – but when it comes to small companies, one size does not fit all. We examine the need for a tailored approach

My firm, along with the majority of others serving small and medium-sized
businesses, has grappled with the explosion of standards, guidelines and
exposure drafts that descend from above like confetti.

All the while, these standard setters have understood (but not resolved) the
difficulties of maintaining double standards ­ those relating to high profile,
public interest, plcs and those aimed at owner managed businesses.

So the FRSSE was developed in the UK, and the small company audit report was
used for a short while (remember example 6?).

The noble volunteers on committees up and down the country struggled with the
dilemma of deciding just how much consistency and accountability was necessary
for smaller companies, all the while looking over their shoulders at the
high-profile business failures that appear every time the economy takes a dip,
and trying to avoid the blame for the failure.

But they found it difficult to export these small company regulatory
concepts, and the acceptance of the definition of ‘small company’ for audit
purposes was always the subject of much heated discussion.

Eventually we began to move in the direction of the majority of other
countries and raise the audit threshold to encourage the problem to go away. I
was always surprised by just how many of my clients still wanted an audit,
however.

There are so many family businesses that have one member of a family
committed to running the business, with others playing the role of outside
investors. These outside investors feel much happier if an independent person
has looked at the accounts.

The problem is that they don’t really understand what an audit is and what is
involved. Nevertheless they are quite happy to pay for the services of a
financially-aware businessman to check the books.

And the other stakeholders ­ bankers, the revenue authorities, creditors ­
all want some kind of regulated framework so that they can get on with their
business in a trustworthy environment.

If we want that, just imagine how important it is in developing countries,
who are grappling with expanding economies based on small businesses, and where
the accounting expertise is limited.

In the US, a recent report of the AICPA private company financial reporting
task force questions the necessity and cost effectiveness of applying GAAP to
private companies and concludes that a completely new set of GAAP for private
companies needs to be developed.

A recent IFAC conference reached similar conclusions. Discussions are
currently being held about re-introducing ‘negative assurance’ reports in the
UK. The challenge to all of us is to cooperate to solve a globally recognised
issue.

It’s not going to be easy. Even translating existing GAAP is coming up
against huge problems. Creating a common small business accounting and reporting
framework will tax the best brains, but it’s a task that needs doing, and one
which could save considerable regulatory costs.

Mark Spofforth is an ICAEW council member at a partner at Spofforths

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