Stephen Byers is not just one of the most ambitious members of Tony Blair’s cabinet, he is also one of its cleverest. Which is why his plan to exempt all companies with a turnover of less than £4m from the statutory audit requirement is so out of character. Although it is being presented as part of a war on red tape, the move is actually a spectacular case of ducking the question.
Byers and his advisers seem to have asked themselves whether it is fair that SMEs should be compelled to pay for an audit many regard as irrelevant. Owner-managed businesses have argued vociferously that they should not. But their clamour masks the real question that business and the profession alike need answered: Why have audits at all?
Ministers are said to think the statutory audit has little value for businesses with no external shareholders. Citing the infamous Caparo case, they point to the fact that auditors owe no duty of care to third parties.
Factual as it may be, it is hardly a New Labour argument.
The statutory audit’s failure to address the interests of all stakeholders in a business has been the main cause of the ‘expectation gap’ between what most people think auditors should do and their limited real remit. Easing red tape is commendable.
But the real task is to close the expectation gap. That means asking, not ducking, some very tough questions.