Business Finance – Steve Maslin.

The banks’ decision to continue to require audits despite the proposed #4.8m audit threshold underlines the importance of keeping adequate accounts.

The banks’ lukewarm reception to Stephen Byers’ plans to reduce the audit requirement for smaller companies is wholly unsurprising.

Whilst companies and accountants alike may favour a move from a mandatory, to a voluntary auditing requirement for owner-managed businesses, auditing remains an important safeguard, a fact well known to banks and lenders.

If, as Byers told the British Chambers of Commerce conference this year, the audit threshold is raised to #4.8m, in theory many businesses will no longer need an audit of their accounts.

In practice, this will remove an important control over the financial well-being of a company. So banks reluctant to expose themselves to risk are going to want to take steps to protect their investment.

The banks make businesses provide detailed financial forecasts and business plans before agreeing to offer them finance. Should the audit threshold be raised to #4.8m they may require an annual audit as a further fundraising condition or choose to demand a spot health check if a business client causes concern.

At the very least, the banks are likely to look favourably upon a company that takes the voluntary decision to audit their books and may doubt the credibility of a company which chooses this high risk method of cutting red tape.

Problems with raising finance are only one issue for smaller companies who opt to dispense with audit and directors should be aware of the consequences of Byers’ scheme before grasping their newfound freedom.

Companies will still be required to produce true and fair statutory accounts that comply with accounting standards and company law for shareholders and public filing. This may be straightforward for companies with a turnover of #350,000, but not so easy for a company with a turnover of #3.5m.

Auditing forms a major plank of any company’s risk management strategy. It is not a question of finding a mistake in the record-keeping.

An auditor may be able to identify the first signs of a down turn in company performance and advise on how to get out of trouble. It’s up to them to determine if they can afford to do without it.

– Steve Maslin is head of assurance services at Grant Thornton. ?:

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