Accounting Standards for SMEs

At least 35 countries around the world have indicated they will use international accounting rules for smaller businesses within three years. This number is from a straw poll conducted during a meeting of standards setters in September 2009. The International Accounting Standards Board (IASB) issued what is commonly referred to as IFRS for SMEs in July 2009. IFRS for SMEs is a result of the IASB’s seven-year project to produce a consistent set of accounting rules for small and medium-sized entities. SMEs make up 99% of the world’s unlisted companies.

The countries, many from developing and emerging economies, have indicated they will either require or permit the use of the international financial reporting standards (IFRS) for small and medium-sized businesses (SMEs) by 2013.

Now the AICPA, the Financial Accounting Foundation (FAF), and the National Association of State Boards of Accountancy (NASBA) have formed a “Blue-Ribbon Panel” to address accounting standards for private companies. According to the U.S. Census Bureau, there are 29 million privately held companies in the U.S. Many are small- and medium-sized organizations that report to a narrower range of financial statement users, such as lenders, venture capitalists, and insurers.

The chairman of the panel has been picked and the rest of the panel is supposed to be selected this month.

So here’s the question. Do you think a different set of accounting standards is needed for small-and medium-sized organizations?

Tell us how you think by adding a comment.

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In the Year 2010....

Wasn't that the title of a song? Oh, I remember. It was "in the year 2525." Anyway, the year 2010 will be the beginning of a breath-taking trip into the future for accountants and auditors. In some ways, I feel like it's "backing into the future." Accounting standards are returning to a "principles based" set of rules, the way it was before we had the rules! Practiitoners and standards-setters are recognizing that risk drives the performance of all levels of accounting and auditing services, the common sense rule some of us "ancients" used back in the dark ages. Could it be we have come full circle and once again we're using our common sense to guide our work? If this is so, we need to make some changes to the ways we do things. Read on.

In the mid-1980s when the expectation-gap pronouncements nearly consumed us, common sense was covered up with all kinds of empirical studies, frameworks and formula approaches to their application. It took us a while to wade through the mire but most of us were able to recover our ability to think and reason. And then along came the flood tide of risk assessment standards in 2006, the beginning of accounting and auditing convergence projects and globalization of everything dear to us. I can still hear the sounds of CPA practiitioners gasping for air as they struggle not to go down for the third time!

You've probably heard the story of the man than went to the doctor with pain in his shoulder. As he extended his arm in a semi-circle over his head he complained, "This really makes my shoulder hurt." The doctor replied, "Well, don't do that anymore!" We've got to follow that doctor's advice and find ways to stop doing the things that are hurting our accounting and auditing practices! Here are some things that are causing CPA firms pain:

• Accounting standards overload--We are responsible for complying with accounting rules that no one wants, not our clients nor the users of their financial statements!
• Practice aids and forms dependency--Some CPA firms' staff personnel have been caught in the tsunami of auditing standards of the latter years and have grabbed the nearest practice aid to stay affloat. There is no time to understand, only paddle!
• Fear of peer review--Intended as a way to help CPA firms improve the quality of their practices, in some states it has become adversarial and punitive in its purpose. Afraid of the power of a peer reviewer, we may protest but meekly but crawl back into our cage when the lion roars.

The doctor said, "Don't do that anymore!" We need to begin planning ways to avoid the application of cumbersome GAAP rules. We've got to train our staff personnel to know when, and when not, to use standard practice aids from major publishers. We must train our people to know the requirements of auditing standards so they can do the minimum amount of work in each engagement's circumstances. Once again, firms of all sizes must begin to create proprietary auditing practice aids that meet the needs of their client engagements and challenge the peer reviewer to prove them wrong!

It's time to stick our heads out the window and shout, "We're mad as hell and we're not going to take it anymore!" I mean right now! Post your "shout" on this blog and tell the standard-setters why you are fed up!

Can an Auditor Use the Prior Period's Control Risk Assessment?

The risk assessment standards opened a door that was unexpected. Auditors were given permission, almost encouraged, to consider the affects of the prior period’s control risk assessment on the current period’s control risk assessment. Focusing on the performance of tests of controls, the standards indicated that if there was no significant change in policies, procedures or personnel, the prior year’s control risk assessment could be used in the current period.

To reach such a conclusion, the auditor must at least make inquiries of client management personnel. In fact, common sense would tell us that the best way to do this is by reviewing the prior year’s internal control documentation with client personnel. Often the reason for using flowcharts, this review should include a systems walk-though procedure with a handful of each type of transaction, probably at least 5. Once the flowchart (or an ICQ or memo) has been updated and the walk-through procedure documented with no significant change, the prior year’s control risk assessment can be use to develop cost-beneficial audit strategies and audit plans.

If there are significant risks of material misstatement found in updating internal control documentation, the prior year’s assessment can not be used to mitigate such misstatements. In this case, further substantive tests would be necessary to mitigate such risks and the control risk assessment may be higher than the prior year.

Being able to use the prior period's control risk assessment in the current period is an opportunity for HUGE time savings! This is another example of ways an auditor can comply with existing professional standards and, at the same time, increase small audits' profitability.