D-day for the small company audit

But unless these submissions have any effect on the Department of Trade and Industry’s thinking, the UK’s exemption bar will be placed at a higher level than currently exists in any member state of the European Union.

Even Liechtenstein would have a stricter audit regime.

What would be gained from an increase of this magnitude? The obvious answer, which the DTI apparently considers to be decisive, is that companies would save money. The DTI suggests that the ‘typical’ audit fee for a small company is £1,000 and based on this assumption, forecasts total savings to newly exempt companies of some £66m.

The prospect of saving a four-figure sum may be attractive to a small company with a turnover just above the current exemption level. But a simple correlation between audit exemption and substantial cost savings is simplistic and misleading.

The DTI admits that the total fee charged by an accountant to a small company client will usually include – in addition to the cost of performing the audit – the cost of preparing the accounts and of tax advice and sundry other advice regarding the accounts.

The DTI’s research acknowledges that, of those small companies taking advantage of audit exemption, very few are able to quantify the actual amount they save by doing so.

So who would suffer if the audit requirement for small companies was abolished? The equally obvious answer to this is the company’s shareholders, particularly those not involved in the company’s management.

But very often it is in companies’ commercial interest to have an audit, as the best way to impress finance lenders or to satisfy the Inland Revenue with an audited account.

Some will argue the choice of whether or not to have an audit should rest with the company or its shareholders. But it is important for the credibility of published accounts and the effective regulation of the SME corporate sector that the law sets a standard benchmark of quality.

The audit is central to this. Companies House reports that over 93% of the complaints it receives about the credibility of filed accounts concern audit-exempt companies.

We will also soon see new rules requiring external accountants to report any suspicions that a client is laundering money. Should the DTI carry through its plan to raise the exemption threshold to the EU ceiling, accountants and their clients would be faced with mixed messages from the government.

ACCA has argued that an increase on the proposed scale is unjustifiable.

If the threshold is to be raised, then the quid pro quo should be that shareholders should have a veto on audit exemption. If this were to be introduced, then any independent shareholder, or indeed any director-shareholder faced with a dominant chairman, could insist that the company must be audited.

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