Is €1,169 too big a price to pay for transparency?
5 Mar 09
A European Commission plan to allow member states the option of allowing “micro-entities” – effectively companies with a turnover of less than €1m (about £923,300) – to be removed from the accounting requirements of EU law is a concern
If this directive was to be enacted and the UK Government decided to take advantage of this option then it would mean that many small companies would no longer be obliged to prepare accounts.
The measure has been proposed as an attempt to reduce “red tape” but I wonder how much thinking has gone into this. Annually, the EU says this would save businesses €1,169 (£1,080) – their best estimate of the existing accounting burden imposed by EU law. But what are they losing?
For a start, potentially crucial information for the business itself. The need to prepare accounts imposes a discipline on the management of an entity. These accounts are used by the owners to assess the business performance and financial position. It allows them to make decisions, such as, do I have sufficient funds to pay a dividend?
Furthermore, I believe that transparency is at risk. How can a lender make a judgement on the quality of a business when they don’t have access to properly prepared accounts? How can suppliers have confidence that they will be paid? Additionally, a company’s accounting profit, subject to certain tax adjustments, is used as the basis for a company’s corporation tax assessment.
This also creates the conditions within which fraud and financial chicanery can flourish. At a time when business confidence is not exactly sky high, this proposal is unwise.