PracticeAccounting FirmsAudit cool on reform

Audit cool on reform

Cable’s plans to raise audit thresholds for small businesses may cut red tape – but harm the economy

A MAJOR OVERHAUL of audit for the UK’s smaller companies, or political posturing? Huge change for the UK’s audit community, or steady as she goes?

Business minister Vince Cable’s grand proclamation to reduce SME red tape by cutting out unnecessary accounts filing and auditing raised these questions, and more.

Cable wants to raise audit thresholds for both small and medium-sized businesses, including the removal of the abbreviated accounts filing made by around two million micro businesses a year.

He explained that the moves would free the UK’s SME community from red tape.

But rather than receiving a warm round of applause, the accounting and finance comm­unities have reacted very coolly.

Their concerns are varied, but revolve around one thing: the real, compared to the perceived, value of audited accounts.

Financial data, they argue, isn’t collected and signed off purely for compliance purp­oses, as is often suggested. The information is often used to help understand the current financial position of a business, and analysed alongside other indicators to help assess its future performance.

Both lenders and other trade suppliers rely on information about a company’s financial risk profile to decide whether to do business
with them.

Without this the economy would grind to a halt.

“I fear that coaxing them into cutting corners on internal financial management and becoming less financially transparent may have negative repercussions,” said Martin Williams, external affairs spokesman for credit information firm Graydon.

“Access to credit and finance are crucial to the growth of many SMEs – doors may close in their faces if these proposals go ahead,” he added.
What is the likelihood that Cable’s plans will be pushed through?

Bringing about exemptions for the smallest businesses and a wedge of medium-sized companies is certainly not around the corner.

Both reforms would require agreement from the EU, which appears far off.

The micro exemption has resistance from other EU members, while the ACCA points out that a rise in the audit threshold has yet to even be discussed in Brussels.

Yet the direction of intent is there – fewer statutory audits.

SME accounting firms have struggled to deal with a disproportionate red tape that befalls those providing the full range of auditing, tax and accounting services to clients.

And it seems counter-intuitive to suggest that raising audit thresholds would do anything but cause firms to lose out on work. But previous evidence shows that the firms can not only survive, but thrive as thresholds rise.

For many businesses the requirement for assurance from their accountant will continue, mainly to secure access to capital, but some of the red tape burden is cut for both parties. Anecdotal evidence suggests that clients freed from audit have retained their advisers to undertake more strategic services.

This does create a dilemma for accountancy’s representative bodies. They appreciate these small firms can move on without having to provide statutory audits; but the institutes still want to promote audit as an important service.

ICAS suggests the climbing audit thresholds are already reaching a tipping point. Any higher, and large local companies would find themselves in a position where they don’t have to produce audited accounts, increasing the risk of fraud and mismanagement.

“There’s more danger to society the higher [the thresholds rise],” said David Wood, ICAS executive director, technical policy. “We need audit’s transparency.”

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