Compliance and tax issues could follow audit threshold rise

THE RISE in the audit threshold could lead businesses to run into compliance and taxation issues, practitioners are warning.

Last month, the government pressed ahead with raising the audit exemption threshold to its maximum level.

As a result, companies require at least £10.2m in turnover, a balance sheet total of up to £5.1m and up to 50 employees to qualify for a statutory audit.

Below those levels, companies may opt out of undertaking that audit process – a decision advisers have told Accountancy Age could lead to laxer reporting standards, tax issues and problems in providing assurance for banks and investors.

“I think the challenge is for firms to demonstrate the value of audit to clients,” explained Grant Thornton’s head of audit and assurance Sue Almond.

Without an audit, the quality of financial reporting and subsequent credibility can be adversely impacted when fundraising, or interacting with different providers of finance.

“Various stakeholders and people within the supply chain will often ask for confirmation from particular areas – it’s not always a straight request for an audit, but when people are looking at the credit-worthiness of a business it comes into play.”

Tax ‘validation’

There is a question, too, around how HMRC will deal with the rise in the threshold, given the assurance and validation an auditor’s sign-off provides for company accounts and reports.

“Inevitably there will be companies with many stakeholders that fail to comply with accounting standards, and potentially cover up issues or fail to account correctly for them,” tax partner Duncan Montgomery at UK200Group member firm Whittingham Riddell warned.

“The knock on effect is that companies may pay less tax than is due, which may then lead to more tax enquiries, when HM Revenue & Customs is already under-resourced.”

The prospect of greater numbers of tax enquiries becomes a distinct possibility in this scenario, according to Haslers partner Michael Watts, highlighting the greater certainty an audited set of accounts has – in comparison with the lighter touch of an ‘accountant’s report’.

“In an accountant’s report, the accountants don’t necessarily do any assurance work to see how accurate the figures are,” he said.

“You get two extremes – accountants who just take the client’s books and records and turn them into a statutory set of accounts and not look at them at all, and those who do a lot of work almost similar to an audit and it’s more rigorous.

“If it’s at the lower end, I think there’ll be a lot more errors in accounts which will lead to enquiries and all sorts of issues for clients. There’s more scope for being lax.”