The development of an SME risk analysis tool for professional accountants

Abstract

The development of Small and Medium Enterprises (SME) evolved to a stage where these types of enterprises comprise staggering portions of the economic activities in the Western World. It is therefore only natural that the development of all supporting services takes full cognizance of this important economic sector. Most recent developments in the fields of accounting and auditing did not accept the fact that there is no standard agency agreement between the Professional Accountant and the client. This caused the eventual development of the SME sector's International Financial Reporting Standards (IFRS) and International Standards for Auditing (ISA) by the International Federation of Accountants (IFAC) to be nothing more than watered down versions standard IRFS and ISA. The unique agency relationship between Professional Accountants and their clients highlights the need to revisit the service level standards of Professional Accountants. Recently, various governments implemented more simplified methods for the SME sector to comply with statutory obligations; such as taxes, the compilation of statistical returns, establishment of legal entities, and employment conditions to name a few. Added to the simplified processes, governments generally accepted the fact that this type of enterprise constitutes a very important national asset in terms of future growth and increased employment potential. This research proposes that Professional Accountants utilise a tool derived from a problem-solving approach, essentially assisting SMEs targeted by any statutory authority. Six case studies have been analysed in order to establish the possibility that an SME may be able to effectively defend itself against any general commercial litigation as well. Once it was established that these investigations indeed occur on a regular basis, the contributions obtained from the current set of international accounting and audit standards have been tested against the backdrop of the investigations and were found to be lacking substantially. The proposed tool developed by this research should be added to the skill set of Professional Accountants to assist their SME clients. Although the science of forensic accounting predominately developed within the past five years, particularly due to the much-published cases of corporate failures not only in South Africa but also in the United States, it will not assist SME clients to counter any action they may face cost effectively. This thesis therefore proposes a tool that will assist the Professional Accountant to concentrate only on the essential elements of the investigation, while still maintaining the level of professionalism expected from established IFRS and ISA. The tool is unique in the sense that, contrary to established norms in forensic investigations, the Professional Accountant and the client are alerted quite early on in the process of what the reasonable outcome of an investigation is going to be. An important limiting factor to the application of this tool is the requirement that the Professional Accountant must be a specialist in IFRS as well and ISA. Secondly, during the first phase of the application of the tool the Professional Accountant is subjected to relatively high risk as a lot of reliance in placed on the input of the client.