ICAEW calls for action on new LCE audit standard
11 December 2020: ICAEW has reiterated its appeal for the world’s auditing standard-setter to act decisively on a new audit standard for less complex entities, amid ongoing concerns that the complexity of current audit rules could hamper efforts to rebuild the global economy.
In a letter to Tom Seidenstein, Chair of the International Auditing and Assurance Standards Board (IAASB), ICAEW chief executive Michael Izza said prioritising the new less complex entities (LCEs) standard would offer welcome support to the world's SMEs.
In the UK, the length, complexity and inflexibility of current audit rules has already resulted in an exodus of firms offering audit services to the SME market (including academy schools and charities), with the number dropping from more than 6,000 firms to around 5,400 in just two years from 2016 to 2018. The main cause often cited by firms exiting this market is that the fees they earn don’t justify the complexity of the work.
ICAEW is calling for radical simplification of auditing standards for LCEs, with a greater focus on articulating those requirements in less complex and clearer terms to improve accessibility. That should enhance audit quality, Izza says in the letter. ICAEW also expresses concern that IAASB's current deliberations about definitions and scope are a distraction from the more important objective of developing a workable standard.
ICAEW stresses that the LCE audits project is not about doing less work or lowering audit quality. “There is a public interest issue here. Auditing needs to be accessible to businesses around the world – regardless of their size and particularly in countries that can’t afford their own standard setting structure. If you haven’t got workable standards for the bulk of the world’s businesses, a lot of things could unravel,” warns Robert Hodgkinson, Executive Director, Technical at ICAEW. “Auditing standards are a vital part of the infrastructure that makes things work.”
In the letter, Izza also warns that the success of the LCE audit project is critical to IAASB's continued position as the world's auditing standard setter. “We urge IAASB to act decisively now, and deliver this new standard quickly, to prevent the disintegration of the remarkable global consensus on auditing standards that has so been painstakingly built over 40 years,” the letter adds.
“We know this is an issue that resonates with our members,” Hodgkinson adds. “The risk is that we end up with no auditors for SMEs at all. We want to make sure that audit remains a viable service line. The current rules mean that even good auditors often feel intimidated by the complexity of the rules.”
Katharine Bagshaw, Manager, Auditing Standards at ICAEW, said since the conception of auditing standards in the 1970s, they had been overengineered to deal with the challenges of globalisation and business complexity, and were no longer relevant to many smaller businesses. “The standards need to be articulated clearly otherwise they won’t work, they won’t be usable and we won’t serve the world’s SMEs who support so much of the global economy.”
Read the letter in full here.