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March 30, 2009

Firms unconcerned about EU micro-entity exemption plans

By Nicholas Moody

New EU proposals to abolish financial reporting requirements for micro-entities will have a negligible impact on the bottom line of European accounting firms but are being blasted by professional bodies across the continent.

The EC proposals, released last month, give member states the option to exempt micro-entities from accounting and audit requirements in the Fourth Council Directive. The EC hopes the changes will result in cost savings as high as €6.3 billion ($8.05 billion) in areas such as external accounting and audit.

Moore Stephens Berlin partner Jens Polls said only very small firms that do not provide audit and other assurance services might be affected – although much of these smaller firms’ work is tax-driven.

“It is changing from more regulatory work to more compliance work concerning tax compliance. So the emphasis would change but I think the work for accountants would not get any impact,” he said.

Increasing the audit threshold has much more potential to impact the German accounting profession, Polls said.

“This is much more relevant for the structure of the profession because that would mean some smaller accountancy and audit firms would no longer perform audits and that would change the composition of the profession more,” he explained.

Some requirements remain

Micro-entities are defined as companies that do not exceed two of the three following criteria: a balance sheet total of €500,000; net turnover of €1 million; and, an average of 10 employees during the financial year.

Basic bookkeeping requirements will remain untouched and some national statutory accounting rules will still be present under the new proposal. Tax accounting and voluntary audit for external stakeholders will continue to require assistance from professional accountants.

Mazars’ head of international service line for owner-managed businesses Alistair Fraser welcomed the reduced regulation but expected little impact on business. He said it may provide the opportunity to talk to clients more about advisory related issues rather than being tied up with compliance work.

“There is the need for micro-entities to engage accountants irrespective of having to follow statutory accounting requirements [to understand their business]. There are still practical issues on a local level on how you set accounting rules and disclosures that give tax authorities, creditors and banks the information that they will require,” he said.

Erik Emilsson is managing director of MGI Revideco, a four-partner audit and accounting practice in Sweden. He agreed the simplification initiative would have minimal impact on his practice but said Swedish changes to remove statutory audit and reform tax regulations would have a far greater impact.

The European Federation of Accountants and Auditors for Small and Medium-sized Enterprises (EFAA), which says it represents more than 200,000 accountants and auditors, has criticised the proposal.

“The proposal is a step back from harmonisation of accounting rules in Europe and further complicates the business environment. Exempting more than 90 percent of enterprises defeats transparency,” EFAA president Federico Diomeda said.

One size does not fit all

The Federation of European Accountants (Fédération des Experts comptables Européens – FEE) supports simplification, but doubts the commission’s proposal will result in cost savings.

Speaking in January before the proposal was released, Compagnie Nationale des Commissaires aux Comptes European Affairs officer Jean Luc Doyle said the French institute was broadly supportive of simplification but was “very upset and concerned by some of the issues, particularly those dealing with auditing and accoun-ting”.

“The route taken by the commission is really a disaster and would affect about 80 percent of French companies,” Doyle said.

“We are not against simplification per se but clearly if you try to provide a definition of what a [micro-entity] is all about in the UK, or Germany, France or Italy, you can’t base your approach simply on thresholds.”

Institute of Chartered Accountants in England and Wales chief executive Michael Izza said the exemption had significant cost-saving potential for UK businesses but distinctions had to be made between reporting obligations that were necessary to protect the public interest and those that could be removed.

European Parliament and member states will now debate the proposal.

Nicholas Moody

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