A Roadmap to Ensuring the Sustainability of SMP
| by Paul Thompson 25 Jul 2007 Topic: IAS, SME |
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Paul Thompson looks at the IFAC SMP Committee Strategic and Operational Plan for the years 2007-2010In the recent past, issues impacting small and medium-sized entities (SMEs) and small and medium-sized practices (SMPs) have risen to the top of the agenda of the International Federation of Accountants (IFAC). There are a variety of reasons for this including concerns over regulatory overload, acute competition from non-accountants and non-professional accountants, a recognition that SMEs and SMPs make up the majority of entities and practices, and a belief that while large entities and large practices can look after themselves, the same cannot be said of SMEs and SMPs. This article will explain the main issues faced by SMEs and SMPs as the SMP Committee sees them and outline its approach to dealing with them. This approach is summarised in the recently approved SMP Committee Strategic and Operational Plan for the years 2007-2010 (1), which complements the wider IFAC one (2). The IFAC SMP Committee The committee started life as a working group of the IFAC Board. It became a full standing committee of IFAC on 1 January 2006. It has 18 members drawn from 17 countries including one from ACCA. Its current chair is Sylvie Voghel from the Certified General Accountants Association of Canada (CGA-Canada) (3). The committee was established to represent the interests of professional accountants operating in SMPs and other professional accountants who provide services to SMEs. It represents these constituents by: ensuring international standard setting bodies consider issues relevant to SMEs and SMPs; facilitating the sharing of knowledge amongst SMPs; and developing guidance for SMPs. Issues facing SMPs The SMP Committee has identified three main issues facing SMEs and SMPs irrespective of geographical location. First, there is the issue of the relevance of international standards of auditing and assurance, accounting, and ethics to SMEs and SMPs. These standards tend to be written primarily for larger entities and practices with the result that they may over-regulate SMEs and SMPs. For example, in the sphere of auditing and assurance we have witnessed new International Standards on Auditing (ISAs) on risk, fraud, quality control and documentation. Early evidence from those countries - UK, US and Australia - that have already adopted these standards suggests that while they have improved audit quality they have also disproportionately increased the cost of conducting SME audits. Higher costs may undermine the viability of SME audits, and this may not ultimately be in the public interest. Secondly, there is the issue of the capacity of SMEs and SMPs to efficiently implement and comply with these standards. Often, SMPs lack specialist in-house resources and suffer from professional isolation. Moreover, their member bodies lack the resources to help fill the void. Thirdly, SMPs face acute problems including: increased competition from non-accountants, non-professional accountants and larger practices; a diminishing amount of staple regulatory/compliance work as SMEs are increasingly exempted from the requirement to have an audit; and operational problems such as staff recruitment, succession planning and networking. Overarching strategy The SMP Committee Strategic and Operational Plan for the Years 2007-2010 has been developed to tackle the aforementioned issues. It is important to note that this plan is the result of extensive consultation with all relevant stakeholders. A key component of this consultation is the annual global IFAC SMP Forum, but outreach also includes conference presentations and workshops by IFAC staff and/or volunteers. Such outreach activities help to: identify pertinent issues; inform the development of our plan; and provide a means of reporting back to our constituents on progress made. The last IFAC SMP Forum was held in Hong Kong in July 2006. This event drew representatives from 35 countries including some from ACCA. This year’s forum will be held in Malta on 30 October. The strategy takes a two-pronged approach to helping SMEs and SMPs converge and comply with international standards of auditing and assurance, accounting and ethics, and ensuring SMPs remain profitable and sustainable. First, we are helping to shape the form and content of those standards, largely through direct input to the standard setting process, so as to enhance their relevance to SMEs and SMPs. Secondly, we are providing practical support to SMPs, mainly through the provision of explanatory guides and web-based information resources, so as to raise their capacity to efficiently implement international standards and to be competitive, client-focused and profitable. Input to standard setting How are we seeking to improve the relevance and cost effectiveness of international standards for SMEs and SMPs? This is being done by way of directly inputting to the standard setting process so as to ensure they develop succinct, relevant and understandable guidance for SMEs and SMPs. This guidance should ensure a favourable cost-benefit outcome for SMEs and SMPs - that is, the costs of preparing, disseminating and using financial statements should be proportionate to the benefits accruing to the users of those financial statements. We focus our input to the International Accounting Standards Board (IASB) (4), the International Auditing and Assurance Standards Board (IAASB) (5), and the International Ethics Standards Board for Accountants (IESBA) (6). IASB The SMP Committee has been providing input to the IASB’s SME accounting project ever since its inception in 2003. We led the drafting of the IFAC responses to the IASB Discussion Paper issued in June 2004, Preliminary Views on Accounting Standards for SMEs (7), and Staff Questionnaire on Possible Recognition and Measurement Modifications for SMEs (8), issued in April 2005. In October 2005 IFAC staff presented our views at the IASB’s orchestrated public roundtable meetings on possible recognition and measurement simplifications. In addition, two SMP Committee members sit on the IASB SME Working Group that offers guidance to the IASB on the SME project. IFAC hopes the project will culminate in a globally applicable SME standard that is consistently implemented. The standard must ease the compliance burden on SMEs and ensure that the benefits from using SME financial reports exceed the costs of preparing, disseminating and using them. On 15 February 2007 the IASB published for public comment the 254-page exposure draft (ED) of its International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) (9). The deadline for comments on the ED is 1 October 2007. The primary reason cited for developing the IFRS for SMEs is to provide a simplified, self-contained set of standards that are appropriate for smaller, non-listed companies while still based on full IFRSs, with modifications based on user needs and cost-benefit considerations. The IASB plans to issue a final standard by the end of 2008. During the exposure period the IASB is conducting roundtable meetings with SMEs and SMPs to discuss the proposals and encouraging field-testing of the ED on real life SMEs using a field test kit (10). The deadline for submission of findings from field-testing to the IASB is 31 October 2007. IFAC regards this as a significant milestone for the global accountancy profession. The IFAC Board has expressed strong public support for the project and is committed to assisting the IASB secure an optimal outcome. IFAC, largely through its SMP Committee, is taking various measures to assist. First, it is responding to the ED of the proposed IFRS for SMEs using a global public interest perspective. The SMP Committee is taking the lead role in drafting. The comment letter is likely to make a range of suggestions for improving the draft spanning both its substance and its structure - for example, further recognition and measurement simplifications and elimination of cross-references to full IFRS. Secondly, IFAC is encouraging participation in the debate by its member bodies and regional accountancy organisations - for example, by responding to the ED, participating in IASB orchestrated roundtables, and undertaking field tests using the IASB’s field test kit. We hope that SMEs and SMPs will participate. Finally, IFAC, recognising that the users and preparers of SME financial statements often do not get involved in the international standard-setting process, is actively encouraging such groups to participate. SMEs and SMPs reading this should consider commenting on this ED. To help do so the IASB has prepared an executive summary of the ED (11). In response to concerns from its constituents that the ED may prove inappropriate for the smallest entities, so-called micro-entities, we are undertaking a micro-entity financial reporting research project to test the suitability of such an SME standard for such entities. The first phase, to summarise the available research evidence on the needs of users and preparers of the financial reports of micro-entities, culminated in the publication of an IFAC Information Paper in December 2006, entitled Micro-Entity Financial Reporting: Perspectives of Preparers and Users (12). The second phase is investigating, by way of focus group interviews, whether the ED is likely to meet the needs of users of micro-entity financial reports and whether it can be easily applied by preparers. Fieldwork across seven countries is nearing completion. The findings will be used in the IFAC response to the ED and form the basis for an IFAC Information Paper. We hope the findings will help provide a better understanding of what micro-entities and their stakeholders are looking for from an SME standard and, in particular, identify what changes to the ED are necessary if it is to be applicable to such entities. IAASB Input to the IAASB is perhaps the most important element of our work programme. We have articulated some broad policy positions to underpin this input. For example, we believe ‘an audit is an audit’, that there be a single set of high quality auditing standards, and that ISAs should permit the auditor a reasonable degree of flexibility to exercise their professional judgment in deciding how best to achieve the audit objective. Given that the vast majority of audits are SME audits, it is vital these standards are equally applicable across all audits - small, medium and large. We believe that if those drafting can keep the ISAs simple, straightforward and focused on what is essential, then we should avoid disproportionate burdens on, and so safeguard the viability of, SME audits. We have been closely following the Clarity project (13) since this promises to be one of the most important changes to auditing standards for many years. It will improve the understandability of ISAs, make them easier to translate, and clarify what the auditor is required to do and what is simply guidance. We are, however, concerned over the increase in the number of requirements. We input, largely via comment letters, at all key stages of the development of a standard from project proposal through to the draft ED. Our input is a considerable task. We track virtually every IAASB project. In 2006 we reviewed over 3,000 pages of IAASB material and submitted over 30 comment letters. We also have SMP representation on some IAASB project task forces, the IAASB, and the IAASB Consultative Advisory Group (CAG) (14); the CAG provides general guidance to the IAASB on its strategy and work programme. While our input seems effective there is always more that needs to be done. We hope that SMEs and SMPs worldwide will comment on the EDs of new, revised or redrafted ISAs (15). We are also inputting to the IAASB Strategic Review. In our response to their survey questionnaire we called for, amongst other things: a moratorium on changes to the body of standards; an increased focus on implementation assistance: a cost-benefit analysis of all proposed future changes to the standards; and, in the light of the global trend towards exempting SMEs from the audit requirement, an investigation into alternatives to audit where an entity opts not to have an audit. An ED of the proposed IAASB Strategic and Operational Plan is expected later this year. Readers may wish to comment and so help shape the IAASB’s future agenda. IESBA With respect to IESBA earlier this year we commented on the proposed changes to the Independence section of the Code of Ethics (16). While we welcomed some proposals we expressed serious reservations about some others, most notably mandatory partner rotation for the audit of entities of significant public interest and by new restrictions on the provision of tax services. These proposals would disproportionately adversely affect SMPs and their clients, and we see little justification on cost-benefit grounds. Encouragingly IESBA is carefully reconsidering these proposals (17). Just as with the IAASB the SMP Committee is also inputting to the IESBA Strategic Review (18) and, just like its response to the IAASB survey questionnaire, we called for: a moratorium on changes to the Code; an increased focus on implementation assistance: and a cost-benefit analysis of all proposed future changes to the Code. An ED of the proposed IESBA Strategic and Operational Plan is expected later this year, and again we hope that some readers will comment. Finally, we recognise that often the users and preparers of SME financial statements do not get involved in the international standard setting process for accounting, auditing and assurance, and ethics. Hence IFAC, through its various communications vehicles and outreach efforts, is actively encouraging such groups to participate so as to help shape the standards. Practical support Thus far, this article has focused on efforts to improve the relevance of international standards for SMEs and SMPs. This section looks at those initiatives aimed at increasing the capacity of SMPs to efficiently comply with international standards as well as improve their competitiveness. These initiatives fall into two categories: the development of explanatory guides and web-based information resources. Explanatory guides In response to the high demand for guidance on how to use ISAs on SME audits we have commissioned the development of the ISA Guide. The guide is intended to help practitioners around the world understand, comply with, and apply ISAs in SME audits. It is a non-authoritative implementation guide, not a standard. IFAC will assume full copyright in the guide and an electronic version will be distributed to all IFAC member bodies free of charge. ACCA will be able to use the content as a basis for developing a bespoke version suited to their local jurisdiction and for developing products derived from the guide (so-called derivative products such as audit software, checklists, and training materials). The guide will run to some 250 pages and will include an integrated case study throughout. We plan to issue it later this year. Updates will follow in 2009 and 2010. While it will not be the complete solution it will help SMPs perform high quality, efficient and cost effective SME audits. In addition, IFAC is looking at ways of facilitating and encouraging the market to develop and widely disseminate derivatives at affordable prices. In the long run, we have a vision of developing a suite of explanatory guides offered freely to all IFAC member bodies. Of course, realisation of this vision will depend upon the availability of resources and support from our constituents. In 2008 we plan to issue a Quality Control (QC) Guide. The QC Guide will assist SMPs in the consistent implementation of the firm level quality control standard, International Standard on Quality Control 1, thereby enhancing the quality of their assurance services to SMEs. On the more distant horizon is a Practice Management Guide. This would seek to help SMPs better manage their practices and would likely include guidance on things like marketing, managing people, client relationship management, strategy and IT. Finally, IESBA is considering the development of an Ethics Guide to help SMPs comply with its Code. Web-based information resources IFAC has launched a new International Center for SMPs on its website to provide SMPs with access to news, information and resources relevant to them as well as details of the activities of the SMP Committee (19). The resources section of this new website includes links to websites of relevance on business advice, accounting and audit, etc, as well as IFACnet (20). In addition, IFAC is seeking input to determine the level of interest in an online Community (21) which would facilitate the exchange of knowledge and best practices among SMPs through its website. IFACnet is a powerful information resource for SMPs. Launched last October IFACnet is an internet search engine tailored specifically for accountants. Located at www.ifacnet.com it provides free access to a wide range of materials and guidance developed by IFAC and participating member bodies. Currently, over 25 member body websites (22), including ACCA and many hosting significant practice related content, are now included. Later this year the search engine will be extended to cover non-member body websites such as those of select accounting firms and the IASB. Its future development may include an online communications centre for SMPs that would facilitate networking as well as promote input to standard setting. We are looking at the viability and value of the following: a firm directory, a discussion board, and web-pages on 'Doing Business Overseas…’ Conclusion Overall our work plan entails an allocation of resource as follows: 20% on collaboration and outreach; 40% on input to standard setting; and 40% on practical support. The plan is ambitious and will require increased funding. However, the demand and expectation on us to execute it, sooner rather than later, is compelling. If you wish to view a copy and/or have any comments on the plan, please e-mail Paul Thompson at paulthompson@ifac.org. References
Paul Thompson is senior technical manager of IFAC's Small and Medium Practices Committee. | |