Changes to audit regulations will open up new opportunities for small firms

Changes to audit regulations will open up new opportunities for small firms

Small and medium-sized companies with revenues above the £5.6m audit
threshold may be turning their backs on voluntary audits, but accountancy firms
are optimistic that they will not miss out on work.

When the audit threshold rose in April 2004 from £1m to £5.6m in annual
turnover, the government predicted that an additional 69,000 companies would
fall under the level at which audits become mandatory, but figures from credit
information agency Graydon show this estimate is out by nearly a third.

For the 2004 financial year, the number of audited accounts filed at
Companies House dropped 89,000 from 2003. And with Graydon predicting that the
average SME audit costs around £4,000, the agency’s study suggests that £360m of
fees are being lost to the UK’s small accountancy firms.

But many commentators believe the slump paints a misleading picture of the
state of the profession, and fails to take into considering new revenue streams
and growing demand for other value add services.

Eric Kench, partner at small firm EA Kench & Co and chairman of the
ICAEW’s practice society, admits that, when the audit exemption first went up,
many firms believed exempt clients would still want to carry on having an audit,
for reassurance purposes.

‘Now, I can only think of one of our clients who decided it would continue
with an audit. Everybody else says if they don’t need one then they’re not going
to have one,’ he says.

But Kench sees it as a positive development for the profession. ‘Smaller
firms are just breathing a huge sigh of relief that they can now give more time
to their clients,’ he adds.

Peter Mitchell,

chairman of the Society of Professional Accountants, agrees that before the
threshold hike, many smaller firms were providing audit services as a loss
leader on top of other accounting services. ‘For most very small, privately owne
d companies, the audit doesn’t produce any tangible benefit, and therefore they
would be pleased to see it go,’ he argues.

For those firms that still regard statutory audits as their bread-and-butter
business, it is not all bad news. For one, there is a strong feeling that a
nucleus of mini-audit specialists will be established to satisfy firms’ demand
for residual audit work.

Besides, there are still compelling reasons for some clients to go down the
audit route. Banks, for instance, usually ask for audited accounts when
businesses approach them with requests for significant extra credit.

‘Banks and other financial lenders are will be more cautious with less
information,’ says Graydon managing director Martin Williams. ‘It would be
prudent for a small business to do an audit just to know where they are.’

But in the long term, it is likely that banks will look to other measures as
a form of assurance as to the financial viability of smaller business entities.
Indeed, the Professional Oversight Board for Accountancy is in the midst of
examining whether an alternative assurance system would meet the requirements of
credit companies.

The DTI may have forced SME advisers to re-evaluate the type of service they
should be offering clients. But the changes have been long in the making and the
future is definitely bright – for those ready to embrace them. The absence of
concern about the Graydon figures suggests they are definitely in the majority.


The rise of the audit threshold and the drive to separate audit from other
services has opened up a huge opportunity for the audit to be seen as a value
added service.

Jonathan Russell, partner at Oxford-based firm Critchleys and new president
of the UK200Group, believes the move is an opportunity for accountants to be
seen as true business advisers. Here, he outlines his thoughts on the
opportunities the shake-up presents.

Proactive advice: ‘Accountants should exploit their knowledge of small
businesses and offer advice on general business strategy. Increasingly we’ll see
accountants as consultants.’

IT consultancy: ‘More accountants are seeing IT consultancy and advice on IT
strategy as a way of making money and getting a hook into businesses.’

Bureau services: ‘We’ll start selling bookkeeping and payroll more as an
outsourced service to clients and extend payroll to full outsourced HR

Mini VC houses: ‘Accountants will charge smaller fees for tax advice or
business consultancy, but increasingly take a stake in the business. Maybe we’ll
go back a time when your accountant would be on your board and be a major

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