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Enhancing SME/SMP Compliance: IESBA Working Group Report Overview

The IESBA Working Group Report addresses unique challenges faced by professional accountants in Small and Medium-sized Enterprises (SMEs) and Small and Medium-sized Practices (SMPs) during compliance with the Code. This report, discussed during the IESBA Board Meeting in New York, outlines objectives, findings, recommendations, and next steps to enhance understanding and application of safeguards tailored for SMEs/SMPs. Key issues include the complexity of the Code, the importance of informed management, and the need for ongoing consideration of SME/SMP challenges by the Board.

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Enhancing SME/SMP Compliance: IESBA Working Group Report Overview

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  1. IESBA SME/SMP WORKING GROUP REPORT Don Thomson IESBA Board Meeting New York, USA October 17-19, 2011

  2. IESBA – SME / SMP Issues Topics for Discussion • Objectives • Feedback & additional input • Background • Information sources • Findings & recommendations • Next steps

  3. IESBA – SME / SMP Issues Objectives • Present the Working Group's report • Identify & advise the Board • Unique & challenging issues faced by professional accountants in SMEs & SMPs complying with the Code • Public interest entity auditor independence excluded – outside the scope of this initiative

  4. IESBA – SME / SMP Issues Feedback & additional input • Consider various circumstances • Geographic location, size of entity, etc • Synopsis desirable • Be careful not to modify or replace Code • Informed management important safeguard • Will require explanation • Does not justify inappropriate services

  5. IESBA – SME / SMP Issues Feedback & additional input • Tax court & valuation services • Consider threat & adequacy of safeguards • Address threat, not location • Address sole practitioners' challenges • Inspection may be an effective safeguard • Consider the risk of corruption • Be careful to avoid double standards

  6. IESBA – SME / SMP Issues Background – SMEs • More than 98% of businesses are SMEs • Major impact on economic & social health • Common characteristics of SMEs • Limited number of users of audit/review reports • Dominant owner-manager, limited controls • Resource constraints (time, funds, people, etc) • Value advice & other non-assurance services

  7. IESBA – SME / SMP Issues Background – SMEs & SMPs • SMEs' professional accountants often SMPs • SMEs & SMPs not defined in the Code • No definition considered necessary for the findings & recommendations in the report • Working Group mandate is SMEs & SMPs • Not recommending that SMEs & SMPs be singled out for separate treatment • Singled out sole practitioners but other recommendations applicable to all • Public interest entity auditor issues excluded

  8. IESBA – SME / SMP Issues Information sources • Experienced Working Group members • Research • Consultation • SMP Committee, SMP Forum, SMP poll • National standard-setters • IESBA; IESBA Chair briefed CAG • Other individuals from various jurisdictions

  9. IESBA – SME / SMP Issues Knowledge & Understanding of the Code • Challenges • Length of the Code & resource constraints • Recommendations • Synopsis, Q&As, case studies, etc; align PD • Brief synopsis, threats & typical safeguards, hotlinks to relevant areas • Q&As may address threats to fundamental principles, informed management, etc • Packaging to facilitate ready access • Hotlinks • Possibly an interactive version that enables tailoring to focus on relevant sections

  10. IESBA – SME / SMP Issues Safeguards - Challenges • Intuitive approach to safeguards impeded • Importance of informed management unclear • Professional judgment may be discouraged • SMEs' ability to benefit from the knowledge of their professional accountant to obtain services in addition to audits/reviews may be unduly restricted if ignore circumstances • Often limited number of users, lower risk

  11. IESBA – SME / SMP Issues Safeguards - Recommendations • Consider clarifying importance of applying professional judgment to circumstances • Clarify importance of informed management • Consistent framework of safeguards • Enables a more intuitive approach • For audits of entities other than PIEs, consider consistency of valuation & tax advocacy prohibitions with the basic framework

  12. IESBA – SME / SMP Issues Safeguards – Sole Practitioners, Small SMPs • Challenge • Many safeguards not readily available • Recommendation • Develop guidance to help identify safeguards • Encourage consultation, etc • Consider informed management combined with exposure to inspection • May be restricted to lower risk engagements with additional communication

  13. IESBA – SME / SMP Issues Network Firm • Challenge • SMP alliances may be confused with the Code's concept of a network firm • Recommendation • Develop guidance on a network firm

  14. IESBA – SME / SMP Issues Future Expansion of the Code • Challenge • Code does not provide guidance on specific services other than on auditor & other assurance providers' independence • Opinions divided amongst those providing input as to whether this warrants action • Recommendation • When developing future workplans, consider expanding the Code to deal more specifically with non-assurance services, particularly tax

  15. IESBA – SME / SMP Issues Ongoing Consideration of SMEs & SMPs • Challenge • SME/SMP issues warrant continuing attention • Recommendations • Processes to always address SME/SMP issues • Qualified nominations for Board (& CAG?) • Cooperate closely with SMP Committee • Consider continuation of Working Group

  16. IESBA – SME / SMP Issues Next Steps • Board &/or Planning Committee • Consider appropriate action arising from the recommendations in this report

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