A new international standard for small to medium sized entities could unlock much-needed growth in this sector. (ISA for LCE)

BDO in South Africa recognises the importance of small to medium entities (SMEs) and the critical contribution which this market provides in economic growth and employment. According to the International Auditing and Assurance Standards Board (IAASB), it is estimated that 90% of entities across the world are SMEs, with some regions estimating that the percentage could possibly be higher. In the European Union it is estimated that over 99% of entities are SMEs. Small to medium entities play an important role across all economies, disrupting markets, unlocking opportunities and creating much needed employment.

Therefore, the importance and impact of small to medium entities across global economies cannot be underestimated.

The introduction of the proposed International Standard on Auditing Exposure Draft relating to Audits of Financial Statements of Less Complex Entities (“ISAs for Less Complex Entities) is thus relevant and requires discussion.

We believe that this is a positive step towards the development of a fit-for purpose suite of standards, thereby initiating conversation and engagement within the profession globally, with the potential of resulting in effective high-quality audits which are scalable to the needs of the small to medium market. Developing a scalable global solution through the performance of high-quality audits will provide significant synergies across this sector and potentially assist in promoting the growth of entities within this key market. These synergies may include, reduced compliance costs, thereby encouraging entrepreneurship which may be of particular importance for developing countries.

In South Africa, there could be implications or potential changes to the current Companies Act to allow for effective implementation of the proposed standard.  This could take the form of potential review of current legislation relating to when an audit may be required, or perhaps a review of the current Public Interest Score embodied in the Act, and to what extent inflation may impact this score.

The IAASB has noted that the development of a separate Standard for Audits of Financial Statements of LCEs is intended to serve the public interest by:

  • Maintaining confidence in financial reporting of LCEs;
  • Helping auditors of LCEs undertake consistent, effective, and high-quality audits;
  • Being responsive to stakeholder needs; and
  • Promoting a more consistent application of the auditing standards to audits of LCEs

At BDO several of our experienced audit professionals who work with small to medium clients have reviewed the current exposure draft, so that we can provide impactful and meaningful input into the development of the proposed standard.

In this way, we continue to ensure that we consider and remain responsive to the needs of our clients and stakeholders, while demonstrating commitment to the development of high-quality audit standards.

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