Limited audits as a proven tool for SMEs
Recent studies demonstrate the positive relationship between “having a statutory auditor” and “lower insolvency/credit risk”. However, in Switzerland only 20% of companies have their financial statements audited. There is a general audit requirement under the law, according to which small and medium-sized enterprises (SMEs) may also choose to undergo a less comprehensive “limited audit”. Nevertheless, two-thirds of micro-companies (up to ten employees) have opted out, which means that 80% of all corporate entities undergo no audit of their annual financial statements.
Financial reporting is an important corporate management and communication tool. In the segment of public companies and organisations of public interest, annual and group financial statements should give stakeholders insight into the entity’s financial position, results of operations and cash flows. Smaller organisations and SMEs in particular have fewer external stakeholder groups. But reliable and credible financial reporting is just as essential for them, whether for the purpose of profit distributions or as the mandatory basis for the proper taxation of profits.
Lawmakers have taken into account the different requirements and needs of the stakeholder groups and thus implemented a tiered audit obligation. The annual and/or group financial statements of economically significant companies, public companies and groups must undergo an ordinary audit, while SMEs can choose to undergo a limited audit. Micro-companies with fewer than ten full-time equivalents can even forgo an audit of their annual financial statements. This means that ultimately only around 20% of Swiss companies currently have their annual financial statements audited.
Political initiatives entail major risk
There are now political initiatives aimed at significantly raising the opting-out threshold, so that even more companies will no longer be obliged to undergo a limited audit. This trend is highly problematic and poses major risks for the economy as a whole.
SMEs may have fewer external stakeholder groups, but an audit is also very beneficial for these companies. A limited audit is also in the public interest, since studies show that companies whose annual financial statements undergo a limited audit have lower insolvency/credit risk. The presence of a statutory auditor thus increases the quality of a company’s financial management. Lower insolvency rates protect creditors, social insurers and the economy as a whole.
From an SME management perspective, the benefits of a limited audit also derive from the fact that an external party critically evaluates the accounting and valuation decisions made, thereby prompting the management to address the company’s situation and development in a more focused manner.
