AUDIT WATCHDOG FAILS TO QUASH SME UPROAR

The board had hoped these exemptions would placate the swathe of bodies that responded negatively to its consultation process – many had said the stringent requirements would place unnecessary financial and administrative burdens on small companies.

But it seems the APB’s concessions have not gone far enough and will provide the toughest challenge for chairman Richard Fleck since his appointment at the beginning of 2003.

. The proposals in the new exposure draft will allow auditors of smaller entities to continue providing non-audit services to their clients, even if they cannot meet the controversial ‘knowledgeable management’ criteria set out in the standards.

Companies with a turnover of under ¶£5.6m – the level set for the statutory audit threshold – will be exempt, provided they state their deviations from the code in the audit report.

While the softening of the APB’s stance has been welcomed by some, many within the profession still feel the body has got it badly wrong.

Eric Kench, chairman of the practice society at the ICAEW, believes the huge number of businesses with a turnover between £5.6m and £22.8m should also enjoy the same exemptions as smaller firms.

If not, many of these larger companies will be forced to employ two accounting firms, he claims, increasing costs and risking quality because of poor communication lines between the two firms.

‘This dynamic and growth-oriented sector will be unnecessarily affected by the new requirements, particularly for owner-managed businesses,’ he says.

The APB was already trying to head off these arguments when it unveiled its new proposals.

Executive director Jon Grant says there is something ‘fundamental about the £5.6m threshold’ set by the government, and that it would be hard to justify arbitrarily setting a new level.

The size of the exemption threshold may be the main concern, but there are also worries that SMEs taking up the exemptions will have to submit a modified audit report.

‘We are concerned at the implications this will have for companies, because it creates the impression of the report being of lesser value and reliability’ says Kench. ‘The perceptions of finance providers, for instance, may well become adversely affected.’

Issues are still arising over the limits placed on the activities that a firm can carry out for its audit client, even with the exemptions in place.

‘The new standards will still limit the ability of auditors to act for clients,’ says ACCA president John Brace. ‘In particular, they will no longer be able to represent their clients in front of tax tribunals.’

Brace adds that the APB has treated small business ‘as an afterthought’, focusing on rules designed for the stock exchange and yet still applying them in the high street.

The proposals, if approved as they stand, will run for three years, during which time their impact will be assessed and reviewed.

According to Neil Lerner, chairman of the Consultative Committee of Accounting Bodies’ ethics group, this situation will ‘leave business uncertain as to the future use of its professional advisers’.

The APB’s Grant has already hinted that the exemptions may be withdrawn in the future, as the body still believes the same rules should apply to the audit of all entities, regardless of size.

The APB had hoped its two-month consultation would allow it to wrap up the issue by the time standards are introduced on 15 December.

The level of dissent from within the profession means it will have its work cut out to reach a satisfactory conclusion by then.