Further threshold rises to stir up audit community

When the government raised the bar for compulsory audits in 2004, it was
hailed by many as a huge step in cutting red tape for small companies, but a
potential nightmare for smaller auditors.

Increasing the audit exemption threshold from £1m annual turnover to £5.6m
meant that a huge number of SMEs would no longer be forced to obtain a sign off
on their finances from external accountants. Initial estimates by the Department
of Trade and Industry put the figure at 69,000 companies, but research later
showed that nearly 90,000 had been able to take advantage of this opportunity.

The news that the UK will have the option, under the European Union’s fourth
and seventh company law directives, to once again increase this limit by a
further 20% could, therefore, be expected to send further shockwaves around the
audit community.

But the situation has not been as bleak as might have been expected for the
auditors, many in the profession in fact welcome this increase.

While an estimated £360m in audit fees were lost as the exemptions were
snapped up by companies, the accounting firms still managed to make money. Many
used the opportunity to switch their focus with clients to more lucrative
services, and ones that clients could see much greater value in having. That
rare situation where both sides benefit seems to have happened.

Peter Mitchell, chairman of the Society of Professional Accountants welcomed
the move, saying that the body was keen to ‘eliminate unnecessary audit’.

There are some concerns over another increase. A source close to the Brussels
debate said that it may be more prudent to wait and see how the initial
threshold change panned out before allowing states to raise it again. Some
called for an impact assessment to be carried out first.

This may only be an option, but given the government’s drive to reduce red
tape, including the shock abandonment of the operating and financial review, it
would be surprising if it did not take up the offer.

Smaller companies may still need to undertake audits from time to time, in
order to satisfy banks and other creditors that the business is on a solid
footing and worth lending money to. But there could be an alternative solution
around the corner. All eyes are on the Financial Reporting Council and whether
it can come up with an alternative assurance scheme for SMEs.

Related reading