PracticeConsultingIt’s a case of audit or nothing

It's a case of audit or nothing

The ICAEW council withdrew support for a statutory, regulated independent professional review to replace audit for companies in the turnover range £1m to £4.8m, should the audit threshold be raised to £4.8m.

The IPR offers a lesser form of assurance than audit. This comes from analytical review of accounts (probably prepared by the reviewer) and assurances from directors. Unlike audit, there is no independent verification of material items.

The IPR surfaced in 1999 during the DTI consultation on the audit threshold – which was raised to £1m in May last year.

The IPR crept into the March 2000 Company Law Review proposals and the Auditing Practices Board issued 30 pages of draft guidance. Despite mixed responses and no majority support, the APB set up tests to assess savings, but results are not yet available.

Nevertheless, it popped up in the final stage of the Company Law proposals, both as a statutory requirement and a regulated one.

The view no-one should take a position on the IPR until research is completed is not valid as no research can compensate for a concept which is fundamentally flawed. Directors’ assurances are only as good as their own honesty.

The value of audit assurance comes from independent verification and without this, assurance is valueless.

The IPR may bring short term benefits to qualified practitioners by replacing their audit monopoly with another one, but in the long term, when accounts trailing the baggage of legal and regulatory respectability are found deficient, the public will be confused. Expectations won’t be met. Reputations will suffer.

Recent ICAEW-funded research shows directors of small companies value audit as an independent verification of their results, not just for banks, but for directors themselves to agree on dividends and remuneration. Furthermore, companies with average turnovers of £1.3m or more would retain the audit if the threshold was raised.

If the threshold changes, voluntary audits will continue in response to market needs.

It is too early to assess whether problems have arisen from raising the threshold to £1m, but an unquantified risk is no excuse for the blanket imposition of IPR as piggy-in-the-middle with its costs, questionable assurance and its very own expectations gap. It’s audit or nothing.

  • Stella Fearnley, a reader in accounting at Portsmouth Business School.

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