The UN is not the place at which you expect to go as an accountant. But I assure you, it is interested in the subject of accountancy. And so it was to Geneva that I went this week for the 23rd annual meting of the UN Intergovernmental Working Group of Experts on International Standards in Accounting and Reporting. My primary concern in attending was to discuss issues on corporate responsibility and corporate governance reporting on behalf of the Publish What You pay coalition, but as I’ve also written much on that I’m going to comment instead on the session on the future of SME (small and medium sized entities) accounting. Discussion here was of direct relevance to accountants all over the world, and to standards of accounting to be used by more than 90% of the businesses that pay tax worldwide.
The conference heard from the International Accounting Standards Board on its proposed new IFRS on SME accounting. The exposure draft of this is to be published in the next couple of months and is likely to in force by 2008/9. The IASB hopes that this standard might be adopted worldwide.
This standard is going to be hopelessly inappropriate for most UK small businesses. The reason is simple. It assumes that the reporting requirements of all companies that are not quoted are the same, whatever their size. The result is a standard that will be over 200 pages long. Worse, it is not designed for the needs of small businesses; it is simply a cut down version of the standards used by larger companies. And given that it was created by a team that appears dominated by the Big 4 they have assumed that the normal SME has at least 50 employees. That represents well under 10% of SMEs, showing how absurd this approach is.
The UN has, perhaps unknown to the vast majority of accountants, been developing its own ideas on this issue. In somewhat more enlightened fashion than the IASB it has started by looking at what the real accounting needs of SMEs are. As a result it, perhaps unsurprisingly, identified that there is no one rule that can fit all non-quoted companies. They have two categories of unquoted companies (level 1 being quoted ones):
Level 2. This level would apply to significant business enterprises that do not issue public securities and in which there is no significant public interest (by which the UN usually means privately owned banks).
Level 3. This level would apply to the smallest entities that are often owner-managed and have few employees.
In reality the UN recognises that the new IFRS for SMEs will probably suit the needs of Level 2 companies (although it must not use fair value accounting principles in the opinion of just about everyone at the meeting, from all over the world).
The big discussion was about level 3 companies. The UN’s declared approach to these companies is to be found here. The approach proposed is simple accruals-based accounting, based on that set out in international accounting standards, but closely linked to cash transactions, the importance of recording which as a basis for preparing reports is explicitly noted in the standard.
This approach, in a standard no more than 20 pages long, is in marked contract to that of the IASB. Paul Pactar who is leading the IASB project was at the meeting but he appeared to simply refuse to hear comments made about the fact that his proposed standard will be irrelevant to most developing countries, not least because few will have enough skilled people who could actually use it. He also failed to note the comments I made, strongly supported by the Italian delegation, that this standard will also be wholly inappropriate for most micro-entities in the developed world.
I have to add that it was disappointing to note the Institute of Chartered Accountants in England and Wales did not support this view, but asked the UN to do nothing until the IASB standard was in place. That will, of course be too late. It was embarrassing to hear my own institute fail to represent its member’s interests in this way. In doing so it also, I think failed to support the interests of micro-businesses.
And it’s also true that the UN did not at first hear the message from the delegates about the need for it to continue to develop and publicise its standard, and the call that it should actively engage with the IASB to promote this alternative. The result was an overnight meeting between delegates from Kenya, Italy, Russia and the UK which then led to discussions with others including Bangladesh and Pakistan. The result was that I and four others intervened strongly to get an amendment to the resolution the conference passed to call for an appropriate accounting standard for very small entities which reflects the reality of what accountants around the world are doing, and which they can reasonably sell to their clients as usable at reasonable cost. We got our way (if not with that wording). The UN committee has agreed to be ‚Äòbold’ in this respect. It will adopt this call and promote this issue further, and put its views to the IASB, amongst others.
So why do I think this important? I think there are the following reasons:
1. Business is vital to the prosperity of people, the world over, and small business provides more jobs for more people around the world than large business combined;
2. All businesses can fail if they do not understand the financial implications of what they are doing. This requires training and reporting, but on the other hand for most micro-businesses the degree of training and reporting required is not excessive. If, however, it is available the rate of small business failures will be cut and that has to be good for any economy because it eliminates all sorts of waste;
3. If it costs too much to prepare accounts people will not do so. They will instead do nothing, and so join the informal economy, and tax will not be paid. If, however, they do report tax might be paid. It is better that tax be paid than for accountants to get rich preparing unnecessarily complicated accounts.
4. If accounting is consistent there is comparability. This encourages enhanced business performance, better opportunity for access to capital, and most importantly it provides a basis for transparent reporting. Once comparable accounts are available it is possible to require them to be registered for inspection, with basic quality control checks being undertaken before doing so. This is consistent with our call for all incorporated entities around the world to file their accounts on public record. I did during the sessions draw attention to his obvious deficit, the remedy of which is much more important than the adoption of a complex IFRS for SME entities;
5. Comparability is a necessary pre-condition to effective tax audit, which ahs to be part of proper regulation of any effective tax system.
I could go on. I hope you get a feel for my concerns. We have spent much time talking about the needs of large enterprises to account when considering tax and development. I have a strong suspicion that those with concern for this issue should now be looking to add a concern for accounting for micro-entities to this agenda.
It could be exciting. But writing this at Geneva airport after a very long day and with the prospect of a long journey home before getting to my bed, I’ll settle for it simply being interesting.