Accountancy bodies fear that EU-wide standards will increase costs for Irish SMEs, writes Gabrielle Monaghan

Spectacular corporate collapses such as WorldCom, Parmalat, and Enron illustrated starkly how unnervingly easy it was for multibillion euro companies to cook the books. The spate of scandals on both sides of the Atlantic led regulators to order a spring clean of corporate governance and a tightening of auditing and accounting standards.

However, while the introduction this year of international standards on auditing may help put the shareholders of large listed companies at ease, they could place an unnecessary burden on the smaller entities, such as a garage or corner shop, that will also have to comply with the new rules.

Irish accountancy bodies are concerned that the application of the new standards will increase auditing costs for small companies and curb their ability to compete with British rivals, at a time when small firms are already struggling with higher insurance, wage and utility bills.

The new rules "will bring unnecessary red tape to small company audits," said Aidan Clifford, technical manager at the Association of Chartered Certified Accountants in Ireland (ACCA), part of the world's largest accountancy body.

"The higher audit costs will probably come out of small businesses' annual profits. At end of the day, the costs will be passed on to the customer."

One in three Irish accountants said they would increase audit fees by at least 10 per cent this year, a recent survey carried out by ACCA showed. One in seven accountants plan to raise fees by more than 20 per cent.

Not one respondent to the survey said they would charge the same in 2006 as last year. Auditors typically charge small companies about 1 per cent of their revenue.

Current rules dictate that a company with revenue of more than €1.5 million must be audited. The comparable turnover threshold in the UK is €7.3 million.

While a European Union directive requires some five million companies in the region to implement the new standards within two years, the UK's auditing practices board, which is also responsible for standards in Ireland, decided to introduce the rules early, according to Aidan Lambe, director of representation and technical policy at the Institute of Chartered Accountants in Ireland (ICAI).

The international standards on auditing require auditors to have a more formal knowledge of the client's business and its risk, including the risk of fraud.

The ICAI, which is the largest accounting organisation in Ireland, has raised the issue with the Government's Small Business Forum.

"Under the old standards, it was possible to delegate a lot of work to low-level staff and there was not as much risk analysis," Clifford said.

"If you were auditing a garage, you just had to understand how that business worked. Now you have to understand the business of all the garages in town, including their risks and profit margins. This is appropriate for Bank of Ireland, but for small companies, it trebles the amount of planning work that has to be done before an audit even takes place.

"In the past, it was the responsibility of the director to detect fraud; now an auditor has to think like a fraudster and actively look for it," Clifford added. "There is also a lot of unnecessary paperwork."

Small Irish firms need to spend more time growing and developing their businesses instead of filling out compliance and regulation forms, a poll of accountants carried out by the Institute of Certified Public Accountants (CPA) in September showed.

About 84 per cent of those polled would like to see an increase in the audit exemption threshold to an average €4 million from €1.5 million. There are about 2,700 auditors resident in Ireland, Clifford estimated.

ACCA, which has about 105,000 members worldwide, hopes that the Minister charged with overseeing the new rules, Micheál Martin, will increase the exemption threshold to at least €3.6 million.

The ICAI would like to see the threshold raised to €3-€4 million if the Minister is not prepared to increase it to the planned EU minimum of €7.3 million on a phased basis, or the application of other external controls on companies.

"We now have a scenario here on this island whereby a company based in Newry with a turnover of up to €7.3 million doesn't have to be audited, while down the road in Dundalk, a company with similar turnover levels will face increased costs because of the audit regime in the Republic," said Lambe.

Companies that will be difficult to audit under the new rules include those that manage apartment blocks or small housing estates, according to the ACCA. That is because many of these management companies are limited by guarantee and therefore cannot avail of an audit exemption.

The need to conduct an audit on an apartment block will add an average €40 to each resident's annual service charge, the ACCA estimated. Performing an audit on such companies increases the audit and accounting costs by an average of 33 per cent more than the cost of an audit-exempt company.

The introduction of the new auditing rules is just one of the factors that will make 2006 an important year for accountancy firms: the Consolidated Companies Bill is due to be published, and 2006 is the first full year in which listed Irish companies will have to release results using the international financial reporting standards.