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International SME audit plan to fight “unworkable monster”

Reviewing the International Audit & Assurance Standards Board’s proposals for less complex entities, former LSCA President Malcolm Bacchus welcomes attempts to tackle the one-size-fits-all approach.

Malcolm Bacchus

August 2019

There is a saying that seeking the best can drive out the good and there is a feeling that this could apply to audit. In trying to obtain a set of rules that cover all circumstances that all auditors may face in auditing the very largest global group, has the International Audit & Assurance Standards Board simply produced a monster unworkable for the smaller business?

In my submissions on the Kingman enquiry and to BEIS, I have argued that this one-size-fits-all approach has meant that the audit model we have does not serve the need of the SME business and has become impossibly expensive. This has driven the demand for ever-increasing levels of audit exemption, so that while bigger audits have arguably improved in quality, smaller company audits are a thing of the past with no checks now being performed on the majority of filed accounts.

It is with pleasure, therefore, that I saw that the IAASB has produced a discussion paper, “Audits of Less Complex Entities: Exploring Possible Options to Address the Challenges in Applying the ISAs”, to seek views on how those challenges should be met. I believe this has been driven by the recognition that if the IAASB does not do something, countries will take it on themselves to do so. 

Indeed, this has already started happening. In 2015, the Nordic countries issued their own SME audit standard, Sri Lanka did so in 2018 and even more recently, in March 2019, Belgium has done the same.

The IAASB discussion paper highlights many of the issues faced as well as proposing three possible ways forward:

  • Revising the ISAs to make them easier to apply;
  • Developing a separate auditing standard for less complex entities, or;
  • Developing guidance for auditors on applying ISAs

There are gaps in the discussion. For example, there is no mention of how poor regulators can promote a “tick-box” approach to the application of standards in order to make regulation easier. 

But, overall, it is an interesting summary of the problems facing small audits. More importantly, it is also a paper that seeks ideas about how those problem can be solved.

It is a short paper (20 pages) and is open for consultation until 12 September. I would really urge all those who have an interest in SME audit – not just auditors but those who run smaller businesses, charities and other audited entities – to respond. It is an initiative which should not be allowed to lapse.

Malcolm Bacchus is an ICAEW Council member, an ex-president of the London Society of Chartered Accountants and a member of the ICAEW Technical Strategy Board and the LSCA’s Technical Committee. He has public and private company interests as well as a (non-audit) accountancy practice.

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