Imagine this: it is one of those days when nothing is going right, and a client is about to furiously walk out of a meeting room you haven’t reached yet.
There are only two real routes to choose from — the Salik-ridden freeway, or a longer, more congested, but Salik-free road. The Salik is a necessary toll one pays to travel by certain routes to the government, and acting as a compliance cost for the user.
Now, Salik is a mere mandatory Dh4 expense to take the more convenient road forward, but legislative compliance costs in the financial world can be a real capital killer for one’s business, which is why many business owners opt for non-tax economies to start up.
And behold the most economically viable, tax-free and high-tourism economy — the UAE. The lack of tax on profits and income in the region is probably the biggest boon to a businessman’s pockets; and the biggest bane to his financial statements. That is, if he decides to draft any, in the first place.
In the absence of a tax regime, a large number of business do not even see the need to maintain any books of accounts or prepare financial statements on a regular basis. Despite the UAE Commercial Companies Law that clearly states all limited liability companies (LLC) need to appoint an auditor and prepare annual audited financial statements, there is no requirement to submit these audited financial statements to any authorities. Which means, this law is not implemented.
Companies that require finance are required to submit the audited financial statements to banks. But for a majority of small businesses, when loans have skyrocketing interest rates, banks are usually content with loans based on transactions in the company’s bank statement and often rule out audited financial statements.
Imagine going down to a tollgate and being asked if you would like to pay the toll or not — who would really choose to shell out that extra Dh4?
In such a situation, companies in this country do what businesspeople do best: they often forego the auditor as an unnecessary compliance cost. Or, if they are willing to take on audit, they would probably bargain heavily on the cost of hiring a professional with real credentials.
What to a business-person is a compliance cost is the foundation and fodder of the business itself.
Audits are a well-defined and developed practice backed by professional standards, known as the ‘International Stands on Auditing’ (ISA), issued by the International Federation of Accountants (IFAC). In the absence of any prescribed local audit standards, the ISA would be what the auditor bases his audit work upon.
Under these circumstances, when there is undue pressure on audit fees, it is not always necessary that the chosen auditor would perform an audit based on the ISAs. The lack of oversight of auditors has led to a further distrust on auditing firms in the UAE.
Often a cost-cutting measure over audit fee is directly reflected in the quality of a company’s audit — this is hardly sustainable. Now, imagine walking into a doctor’s clinic for the medical test of your child.
There are two ways to get a health certificate — either by paying half-price at the tests for a shoddy certificate that may or may not hold value, or paying the due fees to carry out tests with a final, reliable health certificate. As a parent, one is bound to place a child’s health over a measly bill.
The same goes for an audit for one’s business — to ensure the financial stability and sound functioning of a business, properly audited financial statements are imperative. It is far better to have an expert check your statements, provide sound advice on the risks the business is exposed to, and give the business a legitimate certificate in the process.
With the impending introduction of VAT, documentation and proper accounting will become crucial to enable proper compliance and avoidance of penalties. To ensure the good health of a business’ finances, it would bear well for firms to familiarise themselves with the actual purpose of an audit, and find a suitable auditing firm or unit to help add value to the finances of the company instead of treating audits as a compliance cost alone.
The writer is a Partner at RSM UAE.