The Latin word ‘audire’ means ‘to listen’, so the word ‘auditing’ means ‘to listen’ – not tick boxes, says Howard Gross BFP, FCA, FCCA, CTA

In December 2023 the International Auditing and Assurance Standards Board issued an International Standard on Auditing (ISA) on Audits of Financial Statements of Less Complex Entities (the ISA for LCE).

Since then, it has been endorsed by the International Federation of Accountants and certified by the Public Interest Oversight Board as responsive to the public interest. More recently the World Bank has been actively supporting the ISA for LCE as it would help SMEs have access to credit, finance, capital and investment packages.

This has happened because many countries particularly in Europe have been pushing back against the full suite of ISAs which runs for over 1000 pages. This has already led to Germany, France and other countries issuing their own standards for small or less complex entities.

They argued that ISAs have become disproportionate and insufficiently scalable for SMEs because of regulators of listed companies, banks and insurance companies wanting ISAs to address issues relating to these entities.

SPA members are concerned and frustrated at the ever-increasing regulation and cost. Yet there is a simple solution. It is to listen and act on the new proposals.

The proposed new ISA for LCE runs for 158 pages compared to over 1,000 pages of the full suite of ISAs. But not in the UK.

We have been told that the full suite of ISAs is far too long, too detailed and overly complex. It is resulting in too many smaller firms having left, or thinking of leaving, the audit market.

We have been told that the full ISAs are anticompetitive as they are designed to fit the needs of larger companies but not SMEs. The full ISAs have also led to mountains of checklists and far too much box-ticking which distracts SME auditors away from the big issues. In short, they reduce the quality of audits and their output.

The full suite of ISAs increases the cost of audit for SMEs and are burdensome for audit firms and the directors, management and staff of SMEs who are at the receiving end of the standards. More and more information so that we can tick boxes.

Audit staff are difficult to retain as they find box-ticking audits boring and tedious. The full ISAs suppress critical thought and are bureaucratic. Too much time is spent documenting compliance with standards that are far too long and often not applicable.

The current standard ISA (UK) 315 (Revised) on risk identification and assessment is widely seen as a total disaster particularly for SMEs. It’s 181 pages, too theoretical, and suppresses thought with just more excessive box-ticking and confusion.

There are no winners except for those in the standard-setting industry. The ISA for LCE is clearly needed. It will help the economy grow as better and more focused audits would become a meaningful financial MOT on the building blocks for SME survival and growth.

The arguments for change are compelling, but the counterarguments, given by the UK standard setters are very weak.

They say that there is not enough guidance when about 90 pages of the ISA for LCE contain application guidance. They say that it would create two tiers of auditors, but that exists already as small practice firms wouldn’t touch large company audits with a barge pole because of the oppressiveness of the full ISAs, huge professional indemnity insurance premiums and massive regulatory fines.

Where there are significant risks or complexities encountered, the audit would have to start again with the full ISAs. But all that is needed is some guidance to say that, when this happens, consult the full ISAs and design and perform appropriate procedures based on the relevant ISAs.

The ISA for LCE is not in the public interest, diminishes audit quality and does not provide reasonable assurance. This is wrong of course when the ISA for LCE has been approved internationally and when the UK is now a laggard in the setting of auditing standards and facing a tough time economically.

The World Bank clearly thinks that it will help SMEs greatly. Amazingly, given the importance of the issues, no UK exposure draft has been issued. It cannot be right that the true needs of smaller businesses are being ignored without proper consultation.

The main counterargument that has been used in the UK is that the need for proportionality is met by a policy of progressive increases in the monetary thresholds for statutory audit exemption. But that is fiscally irresponsible.

Audit is an excellent deterrent and detecting device of economic crime including tax evasion. The latest tax gap between tax expected and received is £39.8bn and 60% has been attributed to small businesses. Meanwhile the shortfall reported in the public finances is £22bn.

This means that the real losers with current UK policy making are not only SMEs and their auditors but also pensioners and others at the other end of austerity cuts. As the audit exemption thresholds go up, so will the tax evasion, the tax gap and then austerity measures.

All we are asking for is a level playing field internationally; a proportionate auditing standard for SMEs; higher quality audit with more added value outputs; less overregulation, fiscally responsible policy making; and more engagement by the standard setters with a sector that represents over 99% of UK businesses by number, 61% of UK private sector jobs and about half of UK turnover.

SPA would welcome more representation from smaller firms and business on FRC and its committees.

Howard Gross BFP, FCA, FCCA, CTA Director of the Society of Professional Accountants Limited (SPA)