Gershon Feldman,
Israel
Mr.Başkan.
Collegues, Friends.
The subject is SME's, small and medium enterprises. First thing we have to do is trying identify and define what we consider to be an SME. I looked Europe and because that is something we are particularly interested in our office, I looked the definition under the fifth framework program for research and development. Here they divided very precisely. An SME is a company it does not include a nonprofit organization. We are going to include them this morning. It has a turnover less than 250 employees and less than 40 million Euro or if its on research and development particularly. I have no turnover tool, has total assets of less than 27 million Euros. I suggest you that for most of us from Mediterranean region that is probably, totally inappropriate. The IS, on the other hand, allows us same subjective definitions. Their definition in IS 1005 which specifically deals with SMEs, it has a small number of owners and management, all management perhaps. Indeed, most cases of SMEs have one entrepreneur who is the main investor, the owner manager. The SME would probably have a few sources of income. It's not going to be a conglomerate with the large number of different products. Because of size and that because it is a new company, it will have unsophisticated methods of recording. The brown paperback comes in for noted each year from our clients. Because of the lack of number of people in the SME, it is going to be difficult to devise an effective internal control system. Unlike, the European definition the fifth framework program, a non-profit organization can be an SME. I am going to address a number of facts this morning. I personally would be raising as well as those you would officially see in any other IAS statements. The first factor is perhaps should that be an audit if it is an SME. I am not going to address this one it is too politically difficult. The second is, this is very important to assist profession, the audit of an SME different not only in quantity, but also in quality. When we look at the long list, audit statements of practice and the international audit practice statements we have to find that they are all gone to be appropriate when we denote it, and finally, when I revised I found it, I speak all much about the small-medium audit practice as I speak about a small medium enterprise. So, what are going to be our special problems? Lets think about it first of all from outside as the auditors. We are going to have problem in the first two-three things I am going to speak about is independence. Normally, a small-medium enterprise audit would be done by small and medium practice. There is always going to be a problem how far we can go before we lose the client. In a small enterprise, they are going to have the outsource services Those services would traditionally come at least in many of the Anglo Saxon originally professions from the audit and accounting offices. The client has probably come to us, because he is a friend and we were in the university together. They are going to be special ties between the owner manager and the auditor.
The small practice is going to, perhaps have to be more careful about ensuring its on technical ability to provide the audits quality as the client rose from a small to a medium and hopefully to a large enterprise. This would be especially true of staff made him SPA in a regular basis, staff may not.
Tending goes because of lack of CPE with the staff whether it is going to be sufficient technical knowledge in some small practices. I would say that would be. Some of these small-medium enterprises may affect the quiet large for small practice.
Is there going to be sufficient staff to be out perform the audit. In the small practice, I apologize for keeping on the small practice, there may be a problem not just for internal control in the client, but internal control in the practice. An audit carried out by staff, one member staff, supervised and completed by the powered member. How often will the powered member make notes? Will special audit queries be documented? Particularly, when it is a small office, and a young small office, is the powered member be able to have sufficient knowledge, to determine whether he should accept the audit at the firs place. That is the risk. It is going to be too high. The fee may not be worth the risk he has to take.
I am sure most of our statements have quality control inside the office. This is always going to be a problem particularly for the small offices. The audit program has to be different form the large enterprise. There is no point in feeding out hundreds of pieces of paper for noted program. It is not relevant. How many ever seen a staff produced page after page of documents? The question is, we know that will be useful, questionnaire of tens of pages with nonrelevant questions and inappropriate answers. It is not going to help us as a tool. The lecture of engagement, we are going to have to depend extensively on the management of the small enterprise for information. The lecture of engagement has to reflect that and 1005 refers that. Small companies may make it impractical that is because of the fee level, perhaps difficulty of finding the addresses even to go out and get the third party verification of balances. Returning to small practice, what does he do if suddenly a small enterprise comes a little larger, with brunches in other town, perhaps other countries. Some association with other accountants is going to be needed.
Startups are going to need special technical knowledge. Are we going to be there to provide it?
High-tech is high-investment from outside. Have we got the technical knowledge in the office for that. Yesterday when we take on any small or medium enterprise, when the internal control may not be sufficient, should we bother ? I am the auditor. Once he is taking the assignment, it is going to be very difficult to produce qualified audit report.
The Going Concern report is going to be particularly difficult for a small enterprise. Giving a negative report may take the possibility of funding. No bank is going to finance a company which is not a going concern enterprise. Suddenly, a small enterprise may be setting up. Is the office going to be able to code with the time pressure to produce statements? Are we going to be able to code with valuations in this short period of time? We are going to have special considerations when the sell comes up for audits. Are audit papers going to be available to other practices, for large practices. They all are going to come to us for due diligent statements and questions which have to be completely documented in inside audit papers. When we find the problem of small enterprises, what are we going to do if the fee level in the budgeted time does not allow us to look in to it fully? Fee levels are always going to be a problem.
Audit insurance in a small enterprise is going to be more difficult to sell as in a large enterprise. Large enterprise are outside investors. Small enterprise what added value is the owner manager going to get from the work we do. If we are not giving answer for recourses, the audit risk of cutting corners, and not completing the work on time and efficiently has to be in our minds. Finally we have to watch out for potential claims from the third parties. Although the balance sheet and profit and loss account may not be published, it is going to be available. Banks are going to see it extensively. Our audit report may mean that we have as potential problem. We have to ensure sufficient Professional Indemnity Insurance.
What problems are we going to have because of the size of the company? As we have said lack of internal controls, there may be one or two people. It is the same point. It is just the different size of the same point.
We have all seen clients with entrepreneurs, charismatic figures, dominating the staff. What is the point of doing that? This is why I want it. The company itself may have insufficient staff to perform all the necessary administrative tasks. What will I do? I will just go outsource for some of them. Inside the company, same way as in a small practice may have a problem of documentation on the audit for the company itself. It is going to have some sort of problem with documentation and shortcut would be the easy way to deal with that.
A small company is going to be looking for capital to expand. It is always going to be there looking for new sources. The first you grow the more capital, you need more until you reach platter. You have got to put further capital into the company.
Because we have few people involved, as we already said, we have a particularly difficult problem. That is a potential for fraud. Dominant entrepreneur and charismatic figure do what they want. There may be special factors that mainly distorts the result. The client may not want to bring those to our attention. The client may want to hide them from us.
Small business is particularly a new business with unsophisticated operations. Owner manager may find it difficult to distinguish between their own money or the company’s money, or the enterprise’s money. We have to make sure that the company reflects only its own activities and not the personal whims of the owner manager. Because of the company or the enterprise is going to be small, we have to go outsource, particularly bookkeeping services perhaps. The bookkeeper is going to have a limited time to produce information. The bookkeeper may not even be on sides. He may have no feel for the business at all. The owner manager has particular responsibilities to third parties, the banks, investors, customers, suppliers and certainly staff. He may not understand these. He may not know fire regulations and he may not know fully all of the legal laws.
The company may not have adequate risk management. How many small enterprises we found that have not got any insurance at all. How likely it is going to be an ongoing business If the company burns down uninsured. Managers know everything. He has got it written down on back of an envelope. We do not need to ask him.
Now about the ... control. I've always been there, he is a friend of mine. He wouldn't cheat me. How am I doing? Must be well. I've got plenty of money in the bank. It's not good, the overdraft is out.
Why should I have meetings? A owner-manager, maybe, has got one colleagues, may be two colleagues They discuss things first in the morning as they are at the post. I don't need to document any meetings. Well, auditors have got to find some documentation about where the company is going and what the problems have been. There may he special regulations that the government will bring in which will affect our small enterprise. Has he got even the business license to operate? As auditors, are we going to have to make perhaps too much reliance on management representation? How for can we rely what we are told by the owner manager? In the other hand, there are some positive points. Auditers, certainly in countries, but not Spain, Italy, France, would be providing answer resources. We are only going to know real time what are the witnesses in strengths in the company. We can see it on a day to day basis. In fact, more than that, we don't have to wait for the here I noted, we can whistle blowing area. We see problems of cash flow. We see problems of loan budgetary management. We can take steps before we get to the stage of the final audit on qualifying report. More than that, we don't have to rely on the ....., gather all of this information. We can prepare a file in an ongoing bases during the whole of the year.
Small company and a medium sized company, we are going to have no problems with the inventory now exist, we are going to to see it, see it in one room. We are not going to have to go around to whole different number of size and one whether the inventories following us around one step ahead of us. There is going to be no cut-off problem. We can see it.
Audit of a large company will be pushed. I don't deal with that. Someone else deals with that. As a small company, we are going to be able to avoid this excuse from the staff. We know exactly to whom to address the question. We know finally where the back ends with the owner manager. 1005 particularly brings this point to hand and perhaps the most relevant for those who are looking for professional basis.
We can actually look and easily do analytical analyses of the balance sheet and the profit- loss account. There are probably a few products involved. We can also see our owner manager, he is driving around in the mercedes, withdrawing $1000 a month as a salary, living in a 5 bedroom house.
I am going to have the problem for the small office about computer programs. Buying large and small enterprises, it is not going to go off and buy that program. They are going to buy something off the shelf. We will probably recognize it. We may even be advised to take that program. The audit is not going to take months. If it takes weeks, it is a long time probably. Any of the questions raised on the first day, we will still remember, but at the end of the second week or the end of the third week, they are still going to be around. The note will be clear, because we will remember why we make the note. Small company probably has not got any time pressure to produce the balance sheet except statuary pressure which may be ten months of the year end, eleven months or even a year of the year end. So the auditors complete out work in small enterprise easily during the whole of the period. Indeed, there are some countries that except small enterprises completely from audit.
I have produced have a list of relevant ISAs. Some of which I've referred extensively, some of I have not. There has been no way in twenty minutes that I can provide you with all of the material you need for an audit of an SME. I hope I've raised some questions. I think and I hope that you would agree that in fact, an audit of an SME and a large enterprise have the same purpose, Assurance to a third party, whether it's an investor owner, at least legally separate from the company, or the creditors or banks. Both types of audits require a high level of knowledge and competence. The techniques of each audit may be different. And on the personal notes, I wonder whether, in fact, small and medium enterprises' audits are specialization. And if they are specialization, should they be in a small practice? In fact, we see in large practices, that they have seen this and set up their own sections to deal with small and medium size enterprises.