Beware of making compliance headache worse

By MATTHEW BELLINGHAM*

Time and time again we are hit with a barrage of publicity on how difficult it is for small businesses to survive in New Zealand due to a heavy compliance burden.

We have Government after Government promising to reduce red tape so businesses can get on with the job of running their operations.

In an environment where small businesses are struggling with the cost of compliance, as well as rising interest rates and insurance premiums, a debate is raging: Should small businesses have to comply with international financial reporting obligations?

The simple answer is no. The suggestion by the chief executive of the Stock Exchange and other leading finance figures calling for across-the-board adoption of international accounting standards offers very little for small business. What it does offer is a compliance headache.

Increasing compliance costs are the last thing that SMEs (small and medium-sized enterprises) need in today's tough competitive environment. What is required are training and education of small business operators so they gain a comprehensive understanding of their business and its drivers.

We are not suggesting that SMEs should not prepare accounts, or that they should be allowed to produce meaningless or inaccurate financial statements. Quite the opposite.

Business owners must understand and use financial statements to make their business decisions.

The simple fact is that SME operators will not reap the benefits of international harmonisation of accounting standards. In most cases SME owners are also the managers, so heavy disclosure requirements will simply add to compliance costs and provide no real benefits.

It is all about finding a happy medium. Two practical improvement options exist:

* Increase the exempt company criteria under the Financial Reporting Act 1993 to catch more entities, thereby relieving them of the compliance burden.



* Increase the differential reporting exemptions. This means certain entities (which meet criteria such as size and close ownership) would not have to comply with all mandatory accounting standards. This is designed to keep the cost/benefit equation of accounting compliance and financial reporting in check.



Financial statements provide the key not only to understanding what makes a business tick but also how to get the most out of it.

Understanding statements can help a business operator to unlock the potential from within, often with amazing results.

* Matthew Bellingham is director of accounting and business advisory firm Hayes Knight.