SINGAPORE continues to have an international reputation as a great place to do business. This is largely due to its trusted regulatory environment, which has driven business confidence and long-term investments, and sound corporate governance that inspires market confidence.

The need for good governance applies to all businesses, including small and medium-sized enterprises (SMEs), which are increasingly aware of the need for audits and professional advice to better cope with their operation environment or help them venture into new spheres. But still, most SMEs depend on their own managers and accountants for business and accounting advice, deterred by what they see as the cost of hiring external professional advisers.

SMEs may not always have the necessary internal resources or expertise to ensure compliance with the Financial and Reporting Standards (FRS) or keep up with changes in them.

Consequently, SMEs are starting to realise the need to supplement such resources from outside. This allows SMEs to benefit from specialist knowledge and to fill up gaps caused by a lack of internal staff or management expertise. Besides ensuring compliance with FRS, recommendations by external auditors on improvements to internal procedures and processes will help SMEs thrive in the highly competitive business environment.

An audit performed on the financial statements of an SME benefits the SME in many ways. For any organisation to prosper, it is essential that proper and reliable financial information and sound corporate governance are in place. An audit helps protect the interest of stakeholders and provides a level of comfort to key decision makers, allowing them to know that the financial information they are using for their business decisions are reliable and comply in all material aspects with the relevant accounting framework. With good corporate governance and sound financial reporting processes, corporate accountability is enhanced, which eventually leads to the creation of wealth for stakeholders.

Audited financial statements prepared in compliance with accounting standards provide more transparency to investors, suppliers and financial institutions on a company's financial position. In some situations, financial institutions or investors may see businesses that have not been subject to external audits as having higher a default risk, hence restricting their access to credit, which may impede expansion.

Other than providing greater transparency on the financial results and positions of a company, auditors may, in the course of an audit, report to the directors on findings associated with structural, operational or control deficiencies. This report will include recommendations for best practices, based on the auditors' broad experience and expertise gathered from audits in various industries.

The benefits for SMEs of having their financial statements audited so that these are properly prepared in compliance with the relevant accounting framework are tremendous. Such financial statements, if used appropriately as the basis for tax computation and tax filing purposes, will minimise the likelihood of the companies filing inappropriate tax returns that could result in unnecessary tax penalties and interest.

It is common for SMEs to be family-managed companies, with key management positions held by family members. Sibling rivalry and conflict of interest are common in family-managed companies where management and control are ineffective. An independent auditor could be engaged to highlight whether financial information and controls are credible and reliable. This could also act as a deterrent against fraud and misappropriation of funds in family-managed set-ups. Recommendations by external auditors, if properly implemented by management, can improve internal controls, leading to a stronger controlled financial structure that reduces the opportunities for fraud.

Consequently, an audit provides a platform, both financial and non-financial, for SMEs to build on to meet future challenges. Having an audit performed on its financial statements will prepare an SME for greater challenges as it grows and develops into a more complex organisation, especially if it is a potential candidate for expansion or a listing.

The advantages of engaging an external auditor to audit financial statements far outweigh the cost of not having one, since auditors play an important role in the success and growth of a company - more so for an SME that is expanding rapidly. An objective assessment by qualified professionals of an entity's accounting and internal control systems will prevent unforeseen problems.

While it could be more cost-effective for most SMEs to engage smaller audit firms, there are benefits in engaging an international accounting firm, as the latter have international networks, sophisticated infrastructure, resources and the business and technical knowledge to meet the needs of fast-expanding SMEs. This is especially relevant for SMEs that are seeking investment opportunities overseas or a possible listing in a foreign jurisdiction. International accounting firms have the network and wide range of services required in these instances. SMEs in these circumstances require timely professional advice to help them appreciate and comply with the legal, financial and regulatory requirements associated with setting up foreign investments or listing overseas.

With the appropriate choice of auditor at the right cost, an audit can therefore add value and promote greater prosperity for an SME. It is definitely an investment worth making as it has the potential to enhance stakeholder value and lift an SME to greater heights.

Cheung Pui Yuen is head of audit in Deloitte Singapore and may be contacted at pucheung@deloitte.com.

Lee Tze Shiong is a director (assurance and advisory services) with Deloitte Singapore and may be contacted at tlee@deloitte.com

This article was first published in The Business Times on November 11, 2008.