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EFAA: EC may have gone too far in exempting small companies from mandatory audit

The European Federation of Accountants and Auditors (EFAA) has said the European Commission (EC) and national regulators, which have attempted to reduce regulatory burdens on SMEs, may have gone too far in exempting small companies from mandatory audit.

In the report, Evidence on the Value of Audit for SMEs in Europe: Perspectives of Owner-Managers, Company Accountants and Directors, the EFAA presented evidence on the perceived value of audit for SMEs.

EFAA president Bodo Richardt said: "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. The value of the SME audit is central to the public interest, and the benefits for the public may have been undervalued."

SMEs are the most populous category of business entity in Europe and the sector accounts for the majority of private sector GDP and employment. Audits for SMEs have been steadily declining in number across Europe as the EC has raised audit thresholds.

EFAA director Paul Thompson said: “Regulators might wish to reassess the existence and extent of audit thresholds given potential risks to the economy and public interest. The setting of thresholds deserves a thorough and robust evaluation of both costs and benefits of audits for SMEs.”

However, in response to a question on audit exemption, over half of the SME respondents (59.07%) support extending the exemption threshold to medium-sized companies.

The report found that the 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'
  • ‘Improves internal control'

These reasons were significantly ahead of the ‘gives assurance to external providers of finance’. This suggests that SMEs perceive the audit to have benefits that go beyond the central purpose of the audit of providing assurance on published financial information.

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