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Over-simplification of small company reporting could damage SMEs

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The ICAEW warns that reducing financial reporting requirements for SMEs could potentially damage the UK economy in the longer term.

The Department for Business, Innovation and Skills (BIS) has been consulting on its proposals for the implementation of a new EU Accounting Directive, which was completed in June last year and has to be transposed into UK law by next July 2015.

Key changes introduced by the Directive include restricting the disclosure requirements in small company accounts and increasing the accounting thresholds that must be met for a company to be classified as small.

But this could work against SMEs, as it would likely make it more difficult to access finance, says Dr Nigel Sleigh-Johnson, head of the ICAEW’s financial reporting faculty.

“We strongly support government efforts to remove disproportionate regulatory requirements and to cut ‘red tape’ for small companies. However, we are worried that the proposed deregulation of small company reporting could damage the UK economy,” he says.

“Financial reporting requirements are often regarded as nothing more than a burden on small businesses. But good quality financial reporting equips not only directors but also other users of the financial statements with the key information they need to make well-informed business decisions. Less is not always better.”

Sleigh-Johnson points to the struggle some small businesses face when trying to access finance, saying over-simplification of accounts could, over time, make this even more of a challenge, as without reliable information third parties may be less inclined to part with their money or extend credit.

The proposed changes also have significant implications for the responsibility of directors for ensuring that accounts show a true and fair view.

“Limiting the disclosure requirements to only certain types of information – as required by the Directive – may result in uncertainty for directors and a risk of legal challenge to companies down the line. The proposals, as they stand, create an unacceptable gap between the legal requirements for directors to ensure the accounts are true and fair and the disclosure regime that supports this assessment,” he warns.

“Rather than making things easier for small businesses, we could actually end up increasing the costs and efforts associated with accounts preparation.

“There are limits to what the UK Government can do to address the impact of the EU legislation, but there is some important room for manoeuvre when implementing it in the UK.”

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