Simplifying financial reporting requirements for SMEs could be counterproductive

The over-simplification of financial reporting for the UK’s small businesses could be counterproductive and reduce potential access to finance, according to the Institute of Chartered Accountants in England and Wales (ICAEW).

The ICAEW fears that if SMEs are allowed to submit financial reports with less detail it could potentially harm the UK economy in the longer term.

The Department for Business, Innovation and Skills (BIS) has recently been consulting on its proposals for the implementation of a new EU Accounting Directive, which was completed in June 2013, and has to be transposed into UK law by July 2015.

Within the Directive includes restrictions on disclosure requirements for small company accounts, as well as increasing the accounting thresholds that must be met for a business to be classified as ‘small’.

However, Dr Nigel Sleigh-Johnson, head of the ICAEW’s financial reporting faculty, believes these restrictions could hinder the ability of SMEs obtaining access to finance.

“We strongly support government efforts to remove disproportionate regulatory requirements and to cut ‘red tape’ for small companies,” said Sleigh-Johnson.

“However, we are worried that the proposed deregulation of small company reporting could damage the UK economy.
“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.”

Mr Sleigh-Johnson has also voiced concerns that the proposed changes could actually result in increased costs and efforts for SME directors to prepare their accounts.

“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,” added Sleigh-Johnson.

“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.

“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.”

Date published 11 Nov 2014 | Last updated 11 Nov 2014