The removal of audit requirements on microenterprise and non-trading companies has been a reasonable and long-standing proposal of the GRTU and the EU has given a clear signal that it looks favourably at such an initiative aimed at promoting the think-small-first principle. GRTU is therefore taken aback by the fact that the Maltese government decided to rob micro companies of this opportunity without consultation.
The EU has very clearly encouraged member states to diminish the burden related to financial statements, most recently through its Directive 2013/34/EU. The directive specifically stipulates that “the annual financial statements of small undertakings should not be covered by this audit obligation, as an audit can be a significant administrative burden for that category of undertaking”.
According to the latest statistics published by the NSO, Malta has 85,673 microenterprises, out of which it is estimated that 45,708 would require an audit by law. The basic cost of an audit for a standard micro entity is €1,000.
The main ‘philosophical’ justification of an audit is that the managers of companies have to demonstrate the stewardship of the company to the owners of the company. This is done by the audit carried out by an external auditor. In the case of micro firms, however, the distance between owners and management is practically inexistent: in many cases the owners are also the managers. The cost of an audit is therefore harder to justify. The obligatory audit on micro companies does not serve this purpose but is merely a rubberstamp exercise.
In the case of non-trading companies, these are often dormant companies to be potentially reinstated some years down the line to avoid the costs and burdens to set up a new company from scratch. It is even clearer here that the audit is unneccassary.
The obligatory audit on micro companies...is merely a rubberstamp exercise
The UK has been applying this exemption since 1993 and the country has always sought to improve on this and increase the threshold so that more and more companies could benefit from the exemption. There is no reason why a system that has worked well in the UK for over two decades cannot be applied in Malta. The size and threshold of companies to apply within this exemption can be adapted to the make-up of the Maltese business sector.
What is being proposed is not reinventing the wheel but effectively turning the micro companies’ structure similar to that which is already existing in Malta for business partnerships, which are in fact, exempt.
If the audit were to be made voluntary, it is estimated that 40 per cent of these would opt to benefit from the exemption and not audit their financial statements. Making the audit for financial statements voluntary for micros would in practice mean that micro companies alone will cumulatively save a minimum €18 million in accountancy fees. This is a tangible example of how small businesses can be given impetus to re-innovate and reinvest into the economy.
Having a voluntary option still gives micro companies the possibility to have their accounts audited. Studies suggest that over half of the companies exempted still decide, by choice or obligation, to have their audits.
The absolute majority of micro companies are not large enough in terms of turnover and their credit rating is not a priority factor within their enterprise to necessitate an audit. Enterprises that see personal value in having their financial statements audited, or are required to do so as part of the requirements established by banks or other, will still carry out audits on a voluntary manner.
Matthew Agius is the chief operating officer of the GRTU – Malta Chamber of SMEs.