BUSINESS RELEVANCE OF ACCOUNTING AND AUDITING AT THE SME LEVEL
Accountants in public practice (referred to as ‘public accountants’ under the Singapore Accountants Act) are widely viewed in Singapore as providers of all-round business support to SMEs. As well as the core, regulated services of preparing financial statements and tax computations, accountants are engaged by many SMEs to advise on and add credibility to firms’ applications for finance from banks and for support from the various SME programmes operated by SPRING. When applying to banks, local SMEs are typically required to provide financial information for the last three years, regardless of whether they are required to prepare and file accounts on the public record. (If the owners of small sole proprietorships do not file their accounts, tax assessments of the individual owners may also be taken into consideration.) Most banks will, however, usually require personal guarantees and collateral from company directors rather than relying on financial reports alone. As in other jurisdictions, this extension of lenders’ due diligence beyond the corporate entity itself operates as a practical restriction on the true value of limited liability to the owners of the business, effectively placing them in much the same position as sole proprietors or partners.
DE-REGULATION OF COMPLIANCE OBLIGATIONS FOR SMES
As outlined above, ad hoc measures have been taken over a number of years to address concerns that regulatory obligations were disproportionate to their benefits at the SME level. Accordingly, over the last decade, reforms have been introduced to allow companies to be set up with a single member, private companies have been allowed to dispense with the requirement to hold AGMs and, of course, exemptions from the requirements to have accounts audited and to file accounts were introduced via the EPC.
The steering committee that was established by the Ministry of Finance in 2007 to review the structure of company law in Singapore issued a comprehensive set of proposals, for comment, in 2011. The committee reviewed, among many other issues, the existing rules governing the public accountability of private companies, especially EPCs.
The committee proposed abolishing the category of EPC completely. It came to this conclusion on two counts. First, it argued that the current provision for EPCs to be totally exempt from filing accounting information on the public record may have the effect of prejudicing third parties that deal with an individual EPC, given that they will not thereby be able to verify its financial position (even though that company will have filed a declaration of solvency as a condition of not having to file accounts). Second, it argued that the criteria that govern the exemption from audit of small EPCs should be expanded. On the strength of feedback from stakeholders it concluded that the exemption criterion, ie a revenue threshold of S$5m, was too low and should be increased. It also concluded that a single criterion, based solely on revenue, was inadequate, in that it did not take account of other elements that might have a bearing on whether or not audit exemption was appropriate.
The committee recommended, therefore, that the EPC category should be abolished. Differential provisions for publication and audit would, in future, be organised by reference to size-based criteria. Private companies would qualify for audit exemption if they were classed as ‘small’ by meeting two out of three criteria, covering revenue, gross assets and employee numbers; the revenue threshold would be raised from the current S$5m to S$10m. As regards the publication of accounts, the committee proposed that ‘small’ companies, as determined via the same formula, would all be obliged to file information on the public record, but they could choose to file a new, reduced range of information as an alternative to the information that they would include in their full accounts prepared under accounting standards.
The government’s final decision on the committee’s recommendations was published in October 2012. It did not agree with the recommendation to abolish the EPC on the ground that to do so would impact negatively on Singapore’s competitiveness. It thus decided to retain the concept of the EPC and the exemption from filing, and consequently to reject the idea of obliging all companies to publish accounting information. It did, however, accept the proposal to extend the parameters for claiming audit exemption.
Accountants in public practice (referred to as ‘public accountants’ under the Singapore Accountants Act) are widely viewed in Singapore as providers of all-round business support to SMEs. As well as the core, regulated services of preparing financial statements and tax computations, accountants are engaged by many SMEs to advise on and add credibility to firms’ applications for finance from banks and for support from the various SME programmes operated by SPRING. When applying to banks, local SMEs are typically required to provide financial information for the last three years, regardless of whether they are required to prepare and file accounts on the public record. (If the owners of small sole proprietorships do not file their accounts, tax assessments of the individual owners may also be taken into consideration.) Most banks will, however, usually require personal guarantees and collateral from company directors rather than relying on financial reports alone. As in other jurisdictions, this extension of lenders’ due diligence beyond the corporate entity itself operates as a practical restriction on the true value of limited liability to the owners of the business, effectively placing them in much the same position as sole proprietors or partners.
DE-REGULATION OF COMPLIANCE OBLIGATIONS FOR SMES
As outlined above, ad hoc measures have been taken over a number of years to address concerns that regulatory obligations were disproportionate to their benefits at the SME level. Accordingly, over the last decade, reforms have been introduced to allow companies to be set up with a single member, private companies have been allowed to dispense with the requirement to hold AGMs and, of course, exemptions from the requirements to have accounts audited and to file accounts were introduced via the EPC.
The steering committee that was established by the Ministry of Finance in 2007 to review the structure of company law in Singapore issued a comprehensive set of proposals, for comment, in 2011. The committee reviewed, among many other issues, the existing rules governing the public accountability of private companies, especially EPCs.
The committee proposed abolishing the category of EPC completely. It came to this conclusion on two counts. First, it argued that the current provision for EPCs to be totally exempt from filing accounting information on the public record may have the effect of prejudicing third parties that deal with an individual EPC, given that they will not thereby be able to verify its financial position (even though that company will have filed a declaration of solvency as a condition of not having to file accounts). Second, it argued that the criteria that govern the exemption from audit of small EPCs should be expanded. On the strength of feedback from stakeholders it concluded that the exemption criterion, ie a revenue threshold of S$5m, was too low and should be increased. It also concluded that a single criterion, based solely on revenue, was inadequate, in that it did not take account of other elements that might have a bearing on whether or not audit exemption was appropriate.
The committee recommended, therefore, that the EPC category should be abolished. Differential provisions for publication and audit would, in future, be organised by reference to size-based criteria. Private companies would qualify for audit exemption if they were classed as ‘small’ by meeting two out of three criteria, covering revenue, gross assets and employee numbers; the revenue threshold would be raised from the current S$5m to S$10m. As regards the publication of accounts, the committee proposed that ‘small’ companies, as determined via the same formula, would all be obliged to file information on the public record, but they could choose to file a new, reduced range of information as an alternative to the information that they would include in their full accounts prepared under accounting standards.
The government’s final decision on the committee’s recommendations was published in October 2012. It did not agree with the recommendation to abolish the EPC on the ground that to do so would impact negatively on Singapore’s competitiveness. It thus decided to retain the concept of the EPC and the exemption from filing, and consequently to reject the idea of obliging all companies to publish accounting information. It did, however, accept the proposal to extend the parameters for claiming audit exemption.