The evolving landscape of tax regulation in the UAE, marked by stricter requirements and increased scrutiny, has made audited financial statements indispensable for businesses of all sizes.
Small and medium-sized enterprises (SMEs) in particular face mounting pressure to comply with Federal Tax Authority documentation standards. At the same time, auditors are encountering heightened risks as they strive to ensure both their clients’ compliance and their own professional integrity.
Many SMEs operate with limited resources and often lack the in-house expertise necessary to manage complex tax documentation requirements. Without a dedicated accountant, these businesses are prone to missing critical filing deadlines or submitting incomplete records. Such lapses not only increase the risk of non-compliance but can also result in significant penalties and legal complications.
Auditors are now central to clients’ compliance, but this role comes with substantial risks
Auditors exposed
Consider the example of an SME in the retail sector that outsources its accounting. If the external accountant fails to provide timely updates on regulatory changes, the SME may inadvertently overlook new reporting requirements. This oversight can lead to underreporting income or missing documentation, mistakes that attract the attention of tax authorities and could result in hefty fines.
Auditors are now central to ensuring their clients’ compliance, but this role comes with substantial risks. Errors in documentation, misunderstandings of evolving regulations, or oversights due to incomplete information can expose auditors to penalties and even litigation. There is also the risk of reputational damage should a client fail to meet regulatory standards – which comes with the possibility of the loss of future business or regulatory sanctions.
The risk is compounded when an auditor’s SME clients don’t have detailed knowledge of tax rules, which makes it more difficult for auditors to rely on the information provided. When this happens, auditors may spend extra time and resources verifying data but still face risks if something is missed.
Ethical concerns
It’s not unusual for SMEs to ask the same firm to provide both audit and tax compliance services – but this raises both ethical and practical concerns. This dual service offering introduces a self-review threat – a conflict of interest where the auditor is effectively reviewing their own work. If an audit firm prepares the tax returns for an SME and then audits those same returns, their objectivity and independence may be compromised.
Stricter tax regulations have undeniably raised the stakes for both SMEs and auditors
Large firms with robust quality control standards often manage this conflict effectively by separating teams or instituting rigorous internal review processes, or even by not getting involved in providing multiple services. But smaller firms, constrained by limited staff and resources, may struggle to implement similar safeguards. This increases the risk of oversight, ethical breaches and regulatory non-compliance.
Vigilance required
So, what can be done to manage risk in this new environment? I have some suggestions:
- Firms should clearly delineate responsibilities between audit and tax teams to minimise the risk of self-review threats.
- Both SMEs and auditors should invest in continuous education to stay updated on regulatory changes.
- Comprehensive and well-organised records can help SMEs avoid compliance pitfalls and help their auditors to perform effective reviews.
- Smaller firms can engage external reviewers to assess audit quality and compliance, mitigating internal resource constraints.
Stricter tax regulations have undeniably raised the stakes for both SMEs and auditors. While larger firms may have the infrastructure to manage these risks, smaller entities must be especially vigilant to avoid conflicts of interest and ensure compliance. Effective collaboration, clear segregation of duties and a commitment to ongoing education are essential for navigating this challenging regulatory environment.
