Audits too burdensome

Rosalea Hamilton, Contributor

The Seventh Schedule (s.4) of the Companies Act (2004) offers small companies an exemption from providing audited accounts that are required under the act. Small companies, however, are required to "present accounts in accordance with accounting principles that are appropriate to its circumstances ..." (s.5). The requirement to use accounting standards "appropriate" to the circumstances of small businesses provides the "accountability" that the Gleaner editorial correctly noted is needed, consistent with international standards where audit exemptions are permissible. This should be the standard used by all government agencies and not the burdensome standard of audits.

The key objective of an audit is the professional validation of accounts for the protection of external shareholders and other stakeholders. The shareholders of many small companies are often the company's management and/or directors, which reduces the need for an audit. Most small businesses in Jamaica are not companies but own-account businesses or sole proprietors with limited capacity to bear the administrative and financial burden of audits, which typically cost about $100,000. The audit exemption is likely to have the effect of preserving jobs, businesses and incomes for business owners in their old age.

Other countries do it

Jamaica is not alone in providing audit exemptions for small businesses. Legislators in many countries, including the United Kingdom (UK), Singapore and South Africa, have provided small businesses (defined variously in each country) audit exemptions. Since 1994, the European Union (EU) Fourth Directive permitted all EU countries to dispense with the requirement for small companies to undergo a statutory audit. In the US, there is no statutory audit requirement for companies other than listed companies. But in 2009, despite protests from regulators, the Obama administration provided an exemption from audits for small public companies having to comply with a provision of the Sarbanes-Oxley law.

Findings of a study by Freedman & Goodwin (1993) of 126 companies in the UK with a turnover of under £1m, titled 'The Statutory Audit and the Micro Company - An Empirical Investigation', are instructive. They concluded:

"... For many owners of micro companies, the statutory audit fee is an additional cost which appears to bring little benefit, either to themselves or others, and which bites into small profits and scarce management time."

Exemption for development

In Jamaica, an audit exemption is but one of several measures used to provide a supportive, 'pro-business' environment, especially for small businesses in light of their significance for national development. Recall that Govern-ment has traditionally provided benefits to big businesses, including foreign companies, to create jobs and build industry, including accelerated depreciated, tax benefits, export and investment promotion among other incentives.

The objective of the audit exemption is not to encourage or pander to the inherent weaknesses of many small businesses, but rather to facilitate their development. Government is providing important development assistance, mainly through the Jamaica Business Development Corporation.

Over the last three years, the Institute of Law and Economics, in collaboration with the University of Technology, Jamaica (UTech), and The MSME Alliance, have been actively pursuing an Enterprise-Wide Risk Management and Financing Programme (ERMFP). It is aimed at assisting micro, small and medium-size enterprises (MSMEs) to improve not only their record-keeping and accounting practices, but also other important business competencies required to gain access to financing and to become globally competitive.

Micro craft traders and producers in Trelawny are currently involved in a Business Entrepreneurial Empowerment Programme (BEEP) that will equip them with basic entrepreneurial skills, including keeping proper accounts. These craft trader/producers, as well as other MSMEs, must be given a chance to formalise and develop their business so that they are not only able to absorb the high cost of audit compliance but can grow to become globally competitive and profitable.

Rosalea Hamilton, PhD, is president of The MSME Alliance.