Perspective
Changes Needed for SME Standards
Over the past several years, accounting and auditing standards have undergone change on a scale more swift and extensive than anything we've seen in decades. Thrust into the spotlight by high profile accounting scandals, the heightened attention paid to reforms was driven as much by public opinion as it was by the need for tighter controls. The watershed milestone came with the passing of the Sarbanes-Oxley Act in the United States as regulators and legislators moved to restore confidence in financial reporting.
Widely hailed at the outset, the legislation, though aimed at large, publicly-traded firms, brought smaller firms into the broad sweep of its regulations. It soon became apparent that Sarbanes-Oxley placed a sizeable and, by all accounts, unnecessary burden on small and medium-sized enterprises (SMEs), a point acknowledged earlier this year by U.S. Representative Michael Oxley, co-author of the legislation, who urged the U.S. SEC to roll back the stringent internal control provisions, especially for smaller firms.
In the international arena, standard setters have been active on the SME front for some time. SMEs represent more than 95 per cent of developed and developing economies — 95.77 per cent in the EU, 97 per cent in the Asia-Pacific region and over 99 per cent in North America. With numbers like these, regulators both in Canada and internationally must take the unique needs of this sector into consideration.
The International Federation of Accountants (IFAC) recently issued a statement urging standard setters around the world to develop guidance for small and medium firms that is clear, straightforward, and balances cost and resource burdens with benefits. Such guidance must also reconcile the distinct and separate needs between smaller and larger entities. CGA-Canada unequivocally supports this position.
The International Auditing and Assurance Standards Board (IAASB) has put in place processes to ensure that SME and SMP (small and medium-sized practitioner) issues are reflected in International Auditing Standards (ISAs). However, the International Accounting Standards Board (IASB) appears to have wavered in this regard. Its current direction does not fully address the unique needs of SMEs, leaving them with the onerous cost burden of complying fully with International Financial Reporting Standards (IFRS). The situation is of particular concern in developing economies where the additional costs lead countries to seek out alternatives to international standards or to delegate the standard setting role to other entities. The danger here is that they will look to organizations ill-equipped to carry out this role — and this is neither in the sector's nor the public's best interests.
In Canada as elsewhere, a dynamic SME and SMP sector is vital to the economy and to our profession. It is critical that standard setters understand that one size does not necessarily fit all and that the best approach will be to develop a set of standards that can balance the cost-benefit needs of SMEs with the needs of all users of financial statements.
CGA-Canada is committed to supporting this objective. Later this year we intend to publish a comprehensive research report based on a survey of publicly listed Canadian SMEs about issues and concerns regarding regulatory obligations. We expect the research will provide critical analysis and insight to help governments and regulators make decisions that are in the best interest of all stakeholders. In the meantime, CGA-Canada will continue to bring its influence and voice to bear regarding this important issue.
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