This article was originally published in Tax, Audit & Accountancy March 2019 by ICCI

Legislation on the audit of SMEs in Europe

Up to the introduction of the 2013 Accounting Directive, there had always been a European Union (EU) requirement to have a statutory audit of ‘small undertakings’. However, Member States had been allowed to exempt all or part of their small companies, as defined locally, from a statutory audit, but within the confines of the EU legislation (see below). At the time of the development of the 2013 Accounting Directive, this was known as the ‘opt-out’ Member State option. Nowadays, following the transposition of the 2013 Accounting Directive, companies defined as ‘small undertakings’ are no longer required to have a statutory audit based on the EU legislation. Nevertheless, Member States can impose an audit on all or part of their small undertakings, also referred to as the ‘opt-in’ regime.

This decision to opt-in is usually driven by the conditions of these small companies and the needs of the users of their accounts. Indeed, the size of a country’s economy as well as the size of its individual entities might be taken into consideration. The need for certainty to banks, suppliers, shareholders and especially tax authorities might equally play a role in this decision. For instance, the rumour goes that in Finland, audit exemption thresholds for small entities are so low (see below) because the average frequency of a corporate tax inspection in Finland is every 100 years. Over the last ten years, Finnish audit exemption thresholds were actually doubled, but as overall corporate tax revenues started to decline, it was decided to go back to the lower thresholds. This was due to the consideration that there is a need for an independent eye also on very small companies at least once a year, in this case a statutory audit by an independent, external auditor.

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