Accountancy Age analysis: No respite from audit headache for Byers

With trade secretary Stephen Byers under the cosh over Rover and BMW, releasing some positive news on red tape last week was a good way for the government to show it was doing something for business.

Feeling the heat on Radio Four’s Today programme over what he did and didn’t know about the German company’s intentions, Byers – whose image as the consummate politician is looking somewhat tarnished of late – pulled a piece of good news out of his hat by trailing a rise in the statutory audit threshold for companies.

Later he filled in the details. A hike from £350,000 to £1m in July will be followed by a rise to £4.8m once the company law review is completed next year. The first step will allow an extra 150,000 companies to take advantage of exemption, Byers told the British Chambers of Commerce conference in Westminster. That would produce annual savings for business of about £180m while a subsequent rise to £4.8m would benefit an additional 75,000 businesses.

For what is an important constituency – SMEs and their advisors – it was a popular move. English ICA vice president Michael Groom described the current statutory audit regime as an ‘unnecessary burden for smaller companies’.

For small practices, many of which undertake audit work for small and medium-sized businesses, the news is perhaps not so encouraging. They stand to lose out on traditional fee income.

CIMA believes raising the threshold is an opportunity for accountants to offer more worthwhile services that add value to small businesses.

‘Raising the audit threshold is an opportunity for accountants. It’s not a threat. They will be able to offer more worthwhile services that add value to small businesses,’ says CIMA technical services director Tony Dart.

‘If auditors are wise, they will adapt positively to meet that need and not sit complaining about loss of traditional business.’

The AIMS Partnership, a nationwide group of accountancy business advisers, also applauds the decision to raise the threshold.

‘Smaller and independent businesses often feel that an expensive part of the service (the audit) is seen as having little or no value to the business,’ says head of sales and marketing Louise Berwin.

‘Providing clients with the services they value will no longer be clouded by this. One of the main concerns of clients is that they have the right information always to hand should they need it.

‘Our experience tells us that when the threshold increased to £350,000 the absence of audit had no adverse effect on our clients in terms of their dealings with the Revenue, lenders and so on and we don’t foresee any problems with the threshold being increased.’

This is a view echoed loudly by the people who own and run such businesses. David Franklin, an owner-manager in the air freshener business, welcomes the announcement.

‘It will reduce our accountancy bills and any reduction in cost to our business is welcomed. We also welcome any measures of future reduction. I think with this measure our business will just make the exemption threshold from the annual audit,’ he says.

Dart says the benefits will be felt more widely than just within the air freshener industry. ‘Many business people see the bureaucracy imposed on them as a lead weight holding them back; and they count audit as being part of that weight. What small businesses need and want is help in increasing the viability of their businesses. What they seek is the pure gold of services that create wealth for them.

‘Few small business owners are interested in independent reports on past performance. They expect clear, justified recommendations as to the best future course of action to adopt. That is the value they seek, not certification about what they themselves have decided and done.’

Mitchell agrees. ‘Small private businesses will be able to drop out of the auditing net as they will no longer be required to undergo annual audits. It was imposed on small businesses as a bureaucratic exercise causing cost rather than benefit,’ he adds.

But the government has yet to convince everybody.

The Federation of Small Business is one organisation that is not shouting its support for the higher threshold from the rooftops.

‘This isn’t new – Byers was talking last June about whether to go for £1m or £4.8m. When the government feels that it is under pressure, it makes an announcement to show that it is cutting through red tape,’ says a spokesman.

‘Hopefully by July we will see some decision. Further delay will mean members will again be facing uncertainty over whether they should take on extra staff and invest in new areas or comply with new regulations. But, it is good to know that the issue is back on the agenda.’

It should stay firmly on the agenda for another a year. With the Company Law Review set to report its findings next year, Byers has said he won’t raise the threshold to £4.8m until he hears its recommendations on audit, as well as many other legal issues for companies.

As English ICA audit faculty chairman Gerry Acher says: ‘There are so many other areas of red tape that need tackling and audit is the most minor of them.’

It is clear that even if the audit threshold goes up to its full height of £4.8m, business will still find it has to undertake an Independent Professional Review at the very least.

Byers’ announcement may have eased the pressure on him over the future of Rover. But, for smaller – perhaps more viable businesses – it is just a first step in hacking through the jungle of red tape.

NEW AUDIT THRESHOLD WILL BE A BREATH OF FRESH AIR FOR SMALL BUSINESSES

Raising the audit threshold means only one thing to small businessmen – cost savings.

The announcement that the audit threshold was being raised to £1m and could go up to the European level of £4.8m could only have been good news for small businesses, who see the audit as little more than a costly burden.

And for owner-managers like David Franklin, whose company makes cardboard air fresheners, every penny counts.’We welcome the announcement being an SME. It will reduce our accountancy bills and any reduction in cost is welcomed,’ he explains.

‘We also welcome any measures of future reduction. I think with this measure our business will just make the exemption threshold from the annual audit.’

The annual audit does not bring Franklin any profit, and he sees no good reason why he should be made to have one. ‘We have to judge how we spend our money,’ he argues. ‘Every £50 or £100 we spend we have to weigh against what profit it will bring.’ Franklin confesses to being no fan of Tony Blair’s government. But he does express unequivocal support for any move to exempt small businesses like his from the requirement to have an annual audit. ‘If raising the threshold saves me £1,500 a year, then I am all for it,’ he says.

COMPANY LAW REVIEW

Before upping the audit threshold to £4.8m, Stephen Byers wants to wait for the findings of the Company Law Review steering group.

As the secretary of state points out: ‘The independent Company Law Review is considering whether, for companies with a turnover of between #1m and #4.8m, the audit should be replaced by a lighter, less costly form of assurance. I shall take their final recommendations into account before proposing what, if any, statutory requirement should replace the full audit for companies in that size range.’

The steering group, whose proposals were published in March, is looking at updating the whole area of company law – from corporate governance to new financial reporting requirements for business. But crucially for SMEs and Byers alike, it is considering whether the audit should be replaced by a lighter, less costly form of assurance – the Independent Professional Review.

In its ‘Developing the Framework ‘consultation document published last month, the group set out what form it expected that review to take. It was a wordy take on what should be a simple procedure.

‘The objective of an IPR would be to enable the reviewer to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, nothing has come to the reviewer’s attention that causes the reviewer to believe that the financial statements were not prepared, in all material respects, in accordance with the relevant financial reporting framework.’

The review is due to produce its final recommendations next year. By then let’s hope that ‘lighter, less costly form of assurance’ is set out more clearly.

Text of Byer’s audit threshold rise announcement