Small firms in unqualified success story shock

When the government first announced its plans to remove tens of thousands of
companies from the statutory requirement to have an audit, many feared that it
would hurt small firms. Without this bedrock of work, ran the argument, how
would they survive?

Well, survive they have. And many of them should thank the DTI for forcing
their hands and making them think about the type of service small firms of
accountants should be offering clients.

Last week, we revealed that the number of audited accounts filed at Companies
House had dropped by 89,000 since 2003 – almost a third more than the 69,000
SMEs the government had predicted would be affected by the threshold hike to
£5.6m. With the average small business audit costing around £4,000, the
potential lost income from audit fees may top £360m.

But despite what could have been a body blow to small firms, there has barely
been a murmur from the profession.

Why? Because most firms have simply and quietly replaced the lost audit work
with other client services. Some have even increased revenues, moving from low
margin audit work into more lucrative financial advisory services. They are
finally capitalising on what has, for years, been a loss-leader.

This isn’t a story that will stand still – some of the work is likely to come
back, particularly if the economy keeps slowing down. Banks are looking for
maximum security when it comes to lending decisions, and that is likely to
include audits for some small companies.

But it won’t necessarily go back to the same firms. Specialist audit centres
are likely to pop up soon, a little like the shared services centres that are
persuading many corporates to contract out much of their accounting functions.

Looking further ahead, it is likely that banks will back off the requirement
themselves – once they come to terms with the new environment and once the
financial reporting rules for smaller companies are firmed up in the post-IFRS
corporate world.

Finally an admission: this is a phenomenon that may have gone under-reported
so far, but this week we’re putting that right. See our analysis on page 8 for
more – and keep up-to-date with other developments in the small practice market
with our dedicated monthly supplement Best Practice.


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