While the financial and economic crisis has taken its toll on businesses worldwide, it has also helped to fuel entrepreneurial growth and development. In fact, around the world, small and medium-sized enterprises (SMEs) are exerting their entrepreneurial spirit to keep their doors open. The accountancy profession is playing a critical role in that process by providing the services necessary to help small businesses obtain the financing they need and by advocating on their behalf with standard setters, regulators and governments.
There is good reason why the accountancy profession remains focused on supporting SMEs. In many countries around the world, SMEs account for the vast majority of commercial enterprises as well as the majority of private sector employment and gross domestic product. According to the Organisation for Economic Co-operation and Development (OECD), SMEs account for more than 95% of enterprises and 60% to 70% of employment in OECD countries. And those numbers are likely to remain steady.
SMEs poised to grow
According to Emergent Research, a consultancy firm that identifies, tracks, analyses and forecasts the significant trends and forces impacting small business formation and growth, economic stress leads to small business innovation. Driven by the need to improve productivity and increase customer value, in times of crisis small businesses will not only focus on cashflow and cost containment, they will also re-evaluate, redesign and refine their products, processes and business models. Therefore, despite the adverse economic climate, innovation will create new opportunities for many small businesses, and small businesses will continue to be the key to job creation and future economic growth.
With job losses high and traditional employment options limited, many individuals are likely to turn to self-employment and small business in 2009. History substantiates this possibility. The past three recessions have seen small business formation rates increase.
Given today's economic conditions and the vital role that small businesses can play in bringing about a global recovery, lenders, governments and regulators need to focus squarely on SMEs' unique needs. Members of the accountancy profession, long recognised as the trusted advisors of SMEs, are challenged to meet these needs and to spark actions among others who can influence SME success.
The role of the accountancy profession
Accountants working within SMEs as well as those working in small and medium-sized accounting practices (SMPs) can contribute to the sustainability of SMEs in two key ways: by helping them to perform better and by helping them to comply with regulation. Accountants can work with the management of an SME to help it create a financial or strategic plan. They can also provide the business support and advice needed to help SMEs to achieve their plans. In difficult times like these, business support - such as advice on obtaining financing, cost control, risk management, fraud prevention and working capital management - can help SMEs to survive the economic crisis and ultimately thrive.
Professional accountants have a special role to play when it comes to SME financing - one of the greatest challenges to SME growth. For example, many SMPs have the expertise to help SMEs determine what kind of financial structure best meets their needs and then help them to obtain the capital they need to grow. According to the results of The Banker's global SME lending survey, carried out in association with the International Federation of Accountants (IFAC), when considering extending credit, lenders said they were highly influenced by the fact that an SME had engaged an external professional accountant to provide assurance services and/or financial advice. The highest number of respondents - nearly 60% of the lenders surveyed - said that accountant involvement in an SME's business would significantly and positively influence their lending decisions.
What lenders value
According to the survey, lenders put particularly high value on SMEs that have engaged an external professional accountant to provide audit and assurance services and financial advice. Respondents said the information that the SME's accountants provided also played a key role in lenders' decision making. The majority of lenders (more than 65%) stated that their policies required some form of assurance on the SME's financial statements from an external professional accountant. Looking ahead to the next few years, lenders said that the information they would most rely on when considering SME loan applications were key risk indicators, cashflow information, industry trends and financial statements accompanied by an audit report.
SME financial reporting: critical issues
SME financial reporting is vital for various reasons: for transparency and accountability, and to help investors, creditors and others make informed decisions. Moreover, adhering to high-quality standards has become more critical in today's economy. International regulators around the world have reiterated the importance of a common set of high-quality, principles-based international financial reporting and auditing standards. Internationally comparable financial reporting that meets the needs of market requirements can boost investor confidence, reduce the costs of capital and help to minimise risk.
However, IFAC, the global organisation for the accountancy profession, recognises that SMEs face numerous issues in meeting international standards. We have encouraged international standard setters, including the International Accounting Standards Board (IASB), to address these issues. In fact, IFAC and its member organisations were strong advocates for the development of an International Financial Reporting Standard for SMEs, which was recently released by the IASB.
To help SMPs and other accountants better understand their responsibilities with respect to the audits of SMEs, IFAC has published a policy position, IFAC's Support for a Single Set of Auditing Standards: Implications for Audits of Small and Medium-sized Entities. The paper sets out IFAC's view that International Standards on Auditing (ISAs) are designed to be applicable to audits of financial statements of entities of all sizes and highlights the ways in which the International Auditing and Assurance Standards Board (IAASB) considers the needs and perspectives of SMEs in the development of those standards. The paper emphasises that the consistent use of ISAs is essential to meeting the public interest expectations of an audit. It also stresses the importance of professional judgement in determining the most effective approach for a particular audit. The paper points out that SMEs may have an alternative to obtaining an audit: they may obtain a review of their financial statements.
The International Standard on Review Engagements 2400, Engagements to Review Financial Statements, requires a different level of work effort by the practitioner and results in a different and lower level of assurance. The IAASB will be considering changes to this standard in light of the current needs of the marketplace, including SME lenders.
Standard-setting support
Several other IAASB initiatives are designed to assist SMPs and SMEs. For example, the IAASB staff has developed a 'questions and answers' publication explaining how the design of the ISAs issued under the Clarity Project enables them to be applied in a manner proportionate with the size and complexity of an entity. The publication is relevant in the context of any audit, but is of particular help to those who audit or oversee the audits of small and medium-sized entities.
New implementation guidance in the form of video modules and slide presentations is also being developed to assist SMPs and others in understanding key changes to the Clarity ISAs. Additionally, a new 'impact analysis' assessment will be performed on all new or revised standards. The impact on SMPs and SMEs will be a key consideration.
IFAC speaks out for SMEs
In addition to the initiatives by the IAASB, IFAC is also taking a leadership role in calling for regulation that considers the needs and challenges of SMEs. In its communications to the G-20 countries, IFAC has emphasised that financial reforms should not be overly burdensome to SMEs and cautioned that over-regulating SMEs may stifle their ability to lead the global economy out of recession. Similar messages have been communicated by IFAC's member organisations around the world.
Through a combination of leadership, advocacy and technical support, the international accountancy profession is working to ensure that SMEs are positioned to obtain the financing they need to grow and to sustain their businesses, and to exert their potential for innovation and job creation.
For more information about IFAC, e-mail pr@ifac.org.
