Should micro-entities file accounts?

On 19 September 2008, the European Commissioner for the Internal Market and Services, Charlie McCreevy, announced initiatives aimed at simplifying the accounting requirements for small businesses contained in European law. Part of this announcement was a Member State option to exempt micro-entities from the need to file accounts.

In July 2008, the High Level Group of Independent Stakeholders on Administrative Burdens, headed by Edmund Stoiber, presented a report to the Commission on burden reduction for companies. The report claimed that there would be an immediate saving of €5.7bn if small businesses were exempted from the accounting framework and not required to prepare annual accounts. The Commission aims, through this measure, to contribute to the reduction of the administrative burden on SMEs by 25%. Proposals were consequently put forward to McCreevy in July to exempt ‘micro-entities’ from the current accounting rules.

However, ACCA believes, and the European Parliament’s ECON Committee has concurred in its opinion on the subject, that companies need to prepare accounts for shareholders and for tax purposes and that the potential savings achieved would therefore be nominal or none at all.

To put it simply, having a duty to file one’s accounts creates a social contract. This in turn requires all businesses to comport themselves in an ethical and legal manner.

The cost of filing accounts is minimal and account production is the end of a long and necessary bookkeeping process. In addition, suppliers to small companies – which are themselves often SMEs – as well as lenders and investors, have come to rely on the availability of filed accounts to check creditworthiness and solvency.

Exempting micro-entities from the scope of the 4th Company Law Directive does not achieve the stated aim of reducing the administrative burden on SMEs, and this is why it is opposed by leading SME representative organisation UEAPME, and the European Federation of Auditors and Accountants for SMEs, who agree that it is unlikely to generate a net cost reduction for micro-entities.

It does, however, risk having an adverse effect on the quality, reliability, availability and comparability of financial information; it could even lead to the fragmentation of the single market and to a serious setback of the harmonisation process of accounting requirements, caused by the uneven application of the proposed option to exempt micro-entities left to Members States’ choice.

ACCA urges the Commission to withdraw its current proposal and to come back with a comprehensive proposal of revision of the 4th and 7th Company Law Directives in 2010.

I would be very interested in your views on this issue.

Comments

[Fahad]

I strongly agree with ACCA. For SMEs to get exempt from filing accounts can affect the field of taxation as well, as SMEs might not be able to present a true and fair view of their state affairs.
This also might crush many of small accountancy firms to whom micro-entities are the main source of income.
Regarding taxation, if proper accounting records are not kept, HMRC will face difficulties as to the accuracy of tax figures and also in enquiries.
Job markets for the newly-qualified or part-qualified will suffer if the above proposals are accepted, as they mostly get a career start from small accounting firms preparing accounts for micro entities.