Report on the Value of Audit for SMEs

EFAA Presents Evidence That Auditing SMEs Is Central To The Public Interest

EFAA has published a new report 'Evidence on the Value of Audit for SMEs in Europe: Perspectives of Owner-Managers, Company Accountants and Directors' that presents new and recent evidence on the perceived value of audit for small and medium-sized entities (SMEs) in Europe.

"The evidence presented in our survey and the reports from other countries may have significant implications for regulators and policy makers, standard setters and the profession, especially auditors", says Bodo Richardt, EFAA President. "The value of the SME audit is central to the public interest, and the benefits for the public may have been undervalued".

SMEs are by far the most populous category of business entity in Europe and the SME sector accounts for the majority of private sector GDP and employment. Audit can help foster trust and confidence in published financial information. And yet for many years audits of SMEs has been steadily declining in number across Europe, as a consequence of the European Commission repeatedly raising audit thresholds.

The key finding is that the top three most commonly cited benefits from having an audit were 'audit provides a check on accounting systems and records', 'auditor provides useful advice to management' and 'improves internal control', significantly ahead of 'gives assurance to external providers of finance'. This finding and other evidence suggests that SMEs perceive the audit to have various benefits, benefits that go beyond the central purpose of the audit of providing assurance on published financial information.

The evidence has potentially significant implications. The European Commission (EC) and national regulators may have gone too far in exempting small companies from having to have an audit as part of reducing regulatory burdens on SMEs. "Regulators might wish to reassess the existence and extent of audit thresholds given potential risks to the economy and the public interest", explains Paul Thompson, EFAA Director, who goes on to say "the setting of thresholds deserves a thorough and robust evaluation of both costs and benefits of audits for SMEs."

There may also be implications for standard setters. In particular, if SMEs have a strong desire to receive advice from the auditor as part of the audit then this may ultimately demand that auditing and ethical standards be modified to clarify and allow for auditors of SMEs to render certain types of advice during the ordinary course of the audit engagement while still requiring their objectivity.