SMEs can benefit from independent audit

News & Events - By administrator on Wednesday, February 3, 2010 - 01:32

It enhances the confidence level of users of financial statements

THE attempt by accounting standard setters worldwide to harmonise international accounting and auditing standards on the back of globalisation and the increase in cross-border activities has resulted in the development of complex accounting and auditing standards.

This has created some difficulties for many small and medium-scale enterprises (SMEs) which did not have much problems interpreting and applying accounting standards in their financial reporting.

At the same time, external auditors, who have been tasked with the statutory responsibility to report on the financial statements, have to ensure that the audits of entities, whether small or large, simple or complex, have to be performed to the same high standards to maintain the confidence of the users of those financial statements. There are two points for discussion here.

First, is an audit, which is currently mandatory for all companies incorporated under the Companies Act 1965 in Malaysia, beneficial to SMEs and second, how relevant and effective are these increasingly complex auditing standards to SMEs whose operations are relatively simpler with little control activities?

It has been acknowledged that an independent audit can benefit an SME although the types of benefits obtained by SMEs may differ from those enjoyed by large entities operating in the global capital markets.

An audit lends assurance to the reader that the preparation of financial statements is in compliance with the applicable accounting framework; thus increasing the credibility of the figures presented in the statements of financial position and financial performance of the entity.

This independent health check, which covers the ability of the entity to continue as a going concern also acts as a main fraud deterrent. Furthermore, where control deficiencies are identified during the course of the audit, they are brought to the attention of management for rectification.

Nonetheless, these benefits do not come without costs, especially for SMEs that are relatively more cost conscious.
It must be also be highlighted though, that there are no auditing procedures that can provide absolute assurance in detecting all fraud, may it be fraudulent financial reporting or misappropriation of assets.

The balance between benefit and cost is, however, rather judgmental and it depends on the perspective it is viewed from. For example, the provision of accounts that are independently audited to lenders of finance that would result in lower borrowing cost for the SME, or when they are used in the negotiation for a better price with a potential investor, may far outweigh the costs.

Regulatory reform

As part of the overall Government’s objective to reduce the cost of doing business in Malaysia, perhaps legislations can be introduce to only subject SMEs of certain sizes with no public accountability to an audit. Alternatively, it has been questioned whether a separate set of less stringent auditing rules be applied in the audit of SMEs. After all, some of these enterprises may well be family businesses or are owner managed and do not have external stakeholders.

However, we believe an audit is an audit. The auditor has to undertake certain processes and procedures in accordance with auditing standards to collect sufficient evidence to enable them to draw reasonable conclusions to support their opinion.
This same objective applies to all audits, regardless of the size or type of entity being audited. Notwithstanding, auditing standards permit the auditor of an SME to exercise appropriate professional judgment to the proper conduct of an audit, especially regarding decisions about the nature, timing, and extent of audit procedures used.

The application of judgment, premised upon the risk profile, size and nature of business of the entity audited, should result in an audit that is both efficient and effective.
To lend some credibility to accounts which are not subjected to audit, a review should be performed. The level of assurance from an audit differs distinctively from a review wherein the latter provides only limited assurance.

Generally, review procedures consist of enquiries of, and discussions with, company personnel and consideration of ratios and trends to assess the overall plausibility of the financial statements. It can be said that a review has the same breadth as an audit but is not as in-depth.

The different financial reporting rules for SMEs, classified as private entities in Malaysia, has also resulted in somewhat straightforward and less onerous audit procedures being required in the audit of their financial statements.
These rules are much less complex compared to international financial reporting standards which are applicable for non private entities, comprising typically public listed companies.

Considering that this reprieve has helped to further reduce cost of compliance, it is to the benefit of the SMEs to have their accounts audited or at minimum be subjected to a review by an independent external auditor to enhance the confidence level of the user of the financial statements.

● Annie Look is technical director of RSM Robert Teo, Kuan& Co.

Source - The Star, February 2, 2010