How Canada’s SME environment compares globally… not so bad

As countries continue to tailor their audit approaches to address the needs of their SMEs, the IAASB is focused on stakeholder feedback in order to determine its next move on the SME audit.

A recent international conference exploring the challenges facing practitioners that provide assurance services to small and medium entities (SMEs) was eye-opening — despite challenges here, our environment seems to be in a good place.

Practitioners in many other jurisdictions operate in a more challenging regulatory environment that is significantly different from Canada. Here, assurance services are primarily market-driven in the private entity space. Further, review engagements are a well-accepted North American solution to market needs but generally not popular elsewhere.

Differing standards to respond to SME audits

At the International Auditing and Assurance Standards Board (IAASB) SMP working conference in January, participants discussed how various countries have designed different attest and non-attest standards to respond to the needs of SMEs. For example:

  • Denmark has an “extended review” service. This involves performing analysis and inquiry as well as limited procedures to verify selected parts of the financial statements. The report is titled as an auditor’s report. A positive (audit) conclusion is provided, but it is expressed as less than an audit opinion on the financial statements.
  • France has a “presentation” service. This results in a negative (review) conclusion on the consistency and plausibility of the financial statements, but it is expressed as being less than a full audit or review.

These and other “hybrid” examples are totally foreign in Canada but have emerged in jurisdictions where regulatory requirements have traditionally mandated audits for a broad range of SMEs, including micro-entities. The challenges of conducting cost-effective audits for such entities, as well as the increasing prevalence of audit thresholds, are driving the accounting profession in these jurisdictions to look for alternative services.

Review engagements are a relatively new service but they encounter user resistance and are not seen as the solution. Concerns include:

  • The report is seen as negative (explaining what the practitioner has not done on the engagement, versus what the practitioner has done).
  • There is a lack of understanding of the negative form of conclusion in a review engagement report.

In Denmark, reviews are only 2 per cent of all engagements compared to 60 per cent for audits and extended reviews and 20 per cent for compilations. So, in many jurisdictions, the breakdown of assurance services differs from Canada.

SME audits in Canada

Many Canadian practitioners find that auditing standards are difficult to apply on audits of SMEs — a key topic of discussion at the IAASB conference.

For example, in Scandinavia this is such a concerning issue that the Nordic countries are proposing a new set of auditing standards that they believe can drive more efficient audits of SMEs, while still maintaining audit quality. Participants held mixed views, however. The standards are intended for practitioners who are experienced auditors, which could act as a barrier to acceptance. Most, however, continue to believe “an audit is an audit” and were therefore not convinced about having two different sets of standards.

So what is to be done? That is the key question under active consideration by the IAASB. Among other things, the IAASB is looking at whether it can better articulate within the standards it develops when a requirement in a standard is, or is not, relevant to a particular audit. In this respect, participants noted that some SMEs can be complex and some large entities can be quite simple to audit. Accordingly, the issue is not just about size but more about complexity. Read my last blog on IAASB’s considerations and how that will impact developments in Canada.

Coming away from the conference, I was encouraged that the IAASB is listening carefully to practitioners in the smaller markets. It remains to be seen how the IAASB’s thinking will evolve.

Reflecting on the discussions at the conference, it was pleasing to hear one of my colleagues say, “I am so glad I work in the Canadian environment!” I share that sentiment!!

Keep the conversation going

Read the summary of the IAASB’s conference. What was a surprise to you? Do you see examples where practitioners serving SMEs are offering different assurance solutions today?

Post a comment below; or email me directly.

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada