Ethical standards could force up SME audit costs

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Accounting body ACCA has warned that ethical standards drawn up by the Auditing Practices Board risk placing an unfair burden on smaller companies. It may force SMEs to hire two firms to do the work previously undertaken by just one.

The controversy centres around the introduction of a category called ‘management threat’ in the standard on provision of non-audit services. This is where auditors make judgements and decisions that are ‘properly the responsibility of management’.

Where a client has ‘knowledgeable management’ to oversee the provision of non-audit services, the firm can continue its engagement. But according to ACCA, smaller companies will struggle to meet this requirement as their management may be considered less knowledgeable.

‘Most smaller businesses rely on their accountants as a one-stop source of advice,’ said ACCA president John Brace. ‘It will be much more costly for them to have to employ two separate firms of accountants. The APB is going to impose rules designed for the stock exchange that make no sense for smaller companies.’

The extra costs associated with using two firms may discourage some companies from having voluntary audits or using additional services to benefit the business, said ACCA.

APB executive director Jon Grant said the board had proposed exemptions for smaller entities for the next three years, during which time the effects of the standards on such companies could be researched. The proposals will be discussed at a meeting on Tuesday.

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