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FAA for SMEs responds to the consultation underlining that auditors should not be covered by the Regulation

15 February 2021 – EFAA for SMEs welcomes the Commission’s Proposal for a Regulation on Digital Operational Resilience for the Financial Sector. 

The proposal is timely and particularly relevant. Cyber breaches have become increasingly common threats for businesses in all sectors. The COVID-19 pandemic accelerated the digitalization of many businesses and a shift to remote working. This has significantly increased cybercrime and imposed significant new costs, in time and money, on businesses. Furthermore, financial entities and SMEs appear even more vulnerable to cyberattacks. The proposal is also highly relevant in the context of the EU’s vision, as articulated in the EU Green Deal, to build back the EU economy, as we emerge from the pandemic, based on a bedrock of digital and sustainable transition. 

Accountants help clients build their resilience to cyber-attacks. EFAA for SMEs underlines the key advisory role that small- and medium-sized accountancy practices (SMPs) play in guiding and serving their SME clients. This role often extends to advising them on their digitalization, and thus contributes to the resilience and stability of SMEs. SMPs are key advisors of SMEs and their advice is trusted and respected. 

While we welcome the proposed regulation, we do have some concerns.

Firstly, we believe that the proposed regulation should not cover auditors, at least not all of them. Auditors are quite different from traditional financial entities and provide very different services. For example, they provide services to their clients but have no direct involvement with their activities or processes. They simply provide assurance on a client’s financial statements and other assurance services as required by laws and regulation. Auditors are also already subject to extensive quality control and management requirements. These requirements are subject to internationally established standards which currently are in the process of being made even more robust, as explained here. If the Commission is adamant on including auditors, then we strongly recommend that this be limited to those auditors auditing financial service providers who fall within the scope of DORA. We fail to understand the need to include SMPs that provide voluntary audit to non-financial SMEs.

Secondly, if auditors are to be covered by the proposed regulation, then more work is needed to ensure that the proposed regulation is sufficiently scalable and proportionate. While we recognize the efforts made to bake proportionality into DORA, we are concerned that the proposed regulation may impose a disproportionate burden on smaller financial entities, and consequently on SMPs that perform statutory audits. We urge the Commission  to ensure that the proposed regulation is not too burdensome for these entities. It is important to always keep in mind the “think-small first” principle and the need for “smart regulation”. 

Thirdly, EFAA for SMEs invites the European Commission to recognise the key role which the accountancy profession plays in business and society through the professional services it delivers to SMEs. This role, and the quality of these services, are the result of regulated, high-quality, and continuous professional education and training together with adherence to high ethical standards. Furthermore, we strongly believe that, given the invaluable insights accountants gain into the internal control and cyber risk of their clients as well the they play in helping the digitalisation of clients, accountants and their representatives, in particular EFAA for SMEs, are uniquely placed to contribute to the development of a well-balanced DORA as well as to help build the digital resilience of SMEs. We encourage Member States to actively engage in strengthening education and training with respect to digitalisation and digital resilience and to entrust Professional Accountancy Organisations with achieving these objectives. SME access to high-quality and trusted professional advisors should also be ensured. 

EFAA for SMEs responds to the consultation and stresses the key role small- and medium-sized accountancy practices play in business and society through the professional services they deliver to SMEs

8 February 2021 – EFAA for SMEs welcomes the Commission’s consultation on a Proposal for an Initiative on Sustainable Corporate Governance. This initiative supports the EU Green Deal and the Commission’s COVID-19 Recovery Plan. EFAA for SMEs supports the objective of further embedding sustainability into SMEs’ objectives and management and believes in encouraging businesses to take into account the environmental impact (including on the climate and on biodiversity) of their business decisions as well as social, human, and economic factors.

EFAA for SMEs also agrees that good corporate governance is vital for businesses, as it protects both the future of businesses and the interests of their owners and investors. Good governance is equally relevant and important for organizations of all sizes, irrespective of their legal structure or size. Indeed, some of the most significant gains from good corporate governance are to be had by small- and medium-sized entities (SMEs).

However, it is to be noted that currently existing corporate governance frameworks and guidelines have been developed only for large, listed companies. They are thus not designed to meet the needs and capabilities of SMEs. This must be avoided with sustainable corporate governance. An EU framework for sustainable corporate governance cannot consider only the needs and capabilities of larger corporations as its requirements, if applicable to the supply chain without any adaptation, will also directly impact SMEs and potentially create significant problems, insofar as they would impose a disproportionate administrative burden. Furthermore, SMEs are constantly evolving and heterogenous businesses, so any corporate governance framework has to be designed so as to remain adaptable and flexible.

Therefore, EFAA for SMEs underlines the necessity to make sure that any new EU legal framework which is developed for businesses be adapted to the specificities of SMEs. The use of the “think-small first” principle and smart regulation should guide the European Commission in every assessment in this respect.

Member States should also actively engage in strengthening education and training with respect to sustainability and should entrust Professional Accountancy Organisations with achieving these objectives. Access to high-quality and trusted professional advisors should also be ensured. 

EFAA for SMEs highlights the key advisory role that small- and medium-sized accountancy practices (SMPs) play in guiding and serving their SME clients. This role covers not only traditional accountancy and tax matters but extends to the entire range of their SME clients’ activities and business life, including corporate governance, and thus contributes to the development and realisation of a long-term vision. SMPs are the main advisors of SMEs and their advice is trusted and respected. Therefore, the important role the accountancy profession in general, and SMPs in particular, can play in advocating the importance and use of sustainable governance can only be emphasized. EFAA for SMEs invites the European Commission to recognise key role the accountancy profession plays in business and society through the professional services it delivers to SMEs. This role, and the quality of these services, are the result of regulated, high-quality, and continuous professional education and training together with adherence to high ethical standards.

EFAA for SMEs stresses the importance of having internationally recognised sustainability reporting standards designed using the “think small first” principle

29 December 2020 – SMEs collectively account for a majority of private sector economic, social, and environmental impact. Hence, SMEs are crucial to the achievement of the Sustainable Development Goals (SDGs) such as the goal of net zero carbon footprint. Accordingly, it is vital that SMEs report on and made accountable for their ESG impact. This will be greatly facilitated by having internationally recognised sustainability reporting standards. SMEs, however, are severely constrained by access to technical resources and disproportionately impacted by the burden of regulation. It is, therefore, critical that these standards are designed from the bottom up, using the ‘think small first’ principle, such that they are simple and straightforward as well as scalable to suit larger entities. To do this effectively one needs to ensure that SMEs, and the SMPs that typically prepare their financial and non-financial reports, are well represented in the structures established to develop and maintain sustainability reporting standards.

EFAA for SMEs, together with SMEunited, Accountancy Europe and ACCA, asks for action to ensure that SMEs have better access to professional advice on the most appropriate COVID-19 recovery measures

7 December 2020 – The COVID-19 crisis continues to have a huge negative impact on hundreds of thousands of Small and Medium-Sized Entities (SMEs). The European Union (EU) and national governments are already addressing the issue, having set up strong support measures to assist companies including SMEs, that collectively provide two thirds of all jobs in the EU, and account for more than half of Europe’s GDP.

However, these support measures will only be effective if SMEs can actually smoothly access them and are able to use the funding in most efficient ways. There are several challenges to this:

• The current landscape of SME funding and COVID support across the EU is complex. SMEs are busy with immediate crisis management and often do not have the time, capacity or knowledge to identify the sources of funding and support available to them
• The application processes and eligibility requirements to access the funds can be burdensome, complex and prone to mistakes
• SMEs may struggle to identify the best ways to invest the funding to prepare for a resilient and sustainable post-COVID future

Therefore, SMEunited, Accountancy Europe, EFAA for SMEs and ACCA (the Association of Chartered Certified Accountants) recommend the following actions:

• The European Commission and national governments should fully and at early stage involve experts from SME associations and the accountancy profession in discussions, planning and design of SME support schemes to ensure their efficiency. This includes them also being involved in identifying sectors and business types most in need, and to act as a contact between SMEs in distress and the public authorities
• Governments should ensure that SMEs are able to access professional advice as it is already the case in certain EU member states, such as in Ireland where the Covid-19 Business Financial Planning Grant programme provides entrepreneurs with 100% funding of up to €5,000 to access an approved financial consultant’s advice, or Finland where the national innovation support vouchers also cover professional advice.
• Include these provisions in National Recovery and Resilience plans under the EU’s Recovery and Resilience Facility and Budget for 2021
• An overall simplification and, where relevant, harmonisation of the support application requirements and procedures across different EU and national support funds, including a better coordination between all involved stakeholders to make procedures as seamless as possible.

Users of SME Financial Statements Advised to Be Alert to Differences

12 October 2020 – There are significant variations between jurisdictions in Europe when it comes to the accounting treatment of intangibles by small and medium-sized enterprises (SMEs) and consequently users of SME financial statements need to be alert to the lack of comparability of information on intangibles. This is the key finding of a survey conducted by EFAA of its member organisation spanning 11 countries, ‘The Financial Reporting of Intangibles by SMEs in Europe’.

Intangible assets are often, and increasingly, the primary drivers of the value of a company. This is true for all size of entity including SMEs. However, intangibles are often excluded from the balance sheet. The European Central Bank (ECB) in its ECB Economic Bulletin, Issue 7/2018 observes that, although the percentage of intangible assets that are reported in company’s financial statements is gradually increasing, particularly in the service sector, the underreporting of intangible assets could mean that real output is also being understated. There is a growing debate as to whether and, if so, how the value of intangibles should be disclosed in the financial reports of these companies.

While there is significant European Union (EU) regulation governing how publicly accountable companies report intangible assets in their financial statements, the accounting directive has no explicit regulations for SME companies except for the accounting for goodwill. Therefore, the way in which SMEs report on intangibles is primarily governed by local regulation (Local GAAP). Not surprisingly there appears to be more variation in the accounting treatment of intangibles by SMEs in Europe.

All jurisdictions surveyed agreed on the capitalisation and amortisation of purchased intangibles. There were, however, significant variations across jurisdictions for the development costs of new products and services and some variation in the treatment of other internally generated intangibles.

One of the primary authors Robin Jarvis, EFAA Special Advisor and Professor of Accounting and Finance at Brunel University, said: “Against a background of the growing importance of intangibles, for regulators and legislators there is clearly scope for improving comparability between European company accounts by increasing the harmonisation of the treatment of intangibles by SMEs. There is also room for improving the narrative reporting of these matters and the revision of the non-financial reporting directive offers an opportunity to do so.”

Collaboration Agreement

5 October 2020 – The European Union Intellectual Property Office (EUIPO) and the European Federation of Accountants and Auditors for small and medium-sized enterprises (EFAA), have signed an agreement of collaboration to provide support to SMEs.

Both organisations play an essential and complementary role in their shared vision to empower SMEs within the EU. Intellectual property (IP) rights have long been recognised as drivers of innovation and growth, providing holders a competitive advantage in a global market. Business owners turn to their trusted accountants when they need advice about running their businesses and therefore they can guide their SME clients on intellectual property matters at the right stage of the business lifecycle.

EFAA represents 13 Professional Accountancy Organisations throughout Europe representing over 350,000 accountants, auditors and tax advisors. The members of these organisations provide professional accountancy services primarily to European SMEs. They also help entrepreneurs gain access to finance and they provide valued business advice allowing them to grow their businesses sustainably.

The EUIPO, under its Strategic Plan 2025 and in line with its SME Programme, has recently launched its ‘Ideas Powered for business‘ hub with made to measure information for SMEs as well as the possibility to sign up for free personalised legal advice on their intellectual property questions.

This collaboration will allow the EUIPO, with the help of EFAA, to reach out to small- and-medium-size accountancy practices, and through them to SMEs, and inform on the importance of IP. The agreement covers activities such as promoting the protection and the benefits of IP among SMEs and start-ups, participation in events and dedicated joint webinars aimed to highlight the importance of IP in SMEs business journey.