The Debate: The audit threshold

Threshold rise needs study

By David Illingworth

Let me start by saying that I believe the statutory audit should only be retained where there is clear evidence that there is a public interest and where the benefits outweigh the costs.

Our position is not driven by a self-interested desire to preserve what is actually a relatively small part of our practising members’ income.

One of the cornerstones of our response to the concerns raised by the Enron and Worldcom collapses was the need for policy actions to be based on sound analysis of the probable outcomes of implementing any policy change. Too often, we have suffered as a result of unintended consequences.

We believe the government has not adequately assessed the potential consequences of this proposed change, and without further assurances, the case for raising the threshold at this time to £5.6m has not been proven.

It is worth remembering the sums of money we are actually talking about.

The Collis report estimated the typical audit fee for a company with a turnover of £1m at around £1,000.

While this figure excludes the cost of management time, I doubt whether the combined audit fees and management costs are considered to be a major burden by smaller businesses.

There is a danger that the government might be sending mixed messages to business. We are witnessing the passage of some fairly draconian legislation dealing with money laundering, fraud and the proceeds of crime. All place significant whistleblowing requirements on accountants. However a significant rise in the audit exemption threshold would exempt most companies from the need to open themselves up to an independent qualified accountant.

The reality is that there are very many other burdens on smaller businesses where the DTI could more usefully look to act, particularly in the fields of taxation, employment regulations, and health and safety requirements.

We need more evidence that this policy change will actually achieve the intended goals. Until then, the jury must remain out.

  • David Illingworth is president of the Institute of Chartered Accountants in England & Wales.

Higher threshold will save costs
By Claire Ighodaro

In a recent Accountancy Age/Reed Accountancy survey, 52% of financial directors polled thought that raising the audit threshold to £5.6m would prove beneficial to business, compared with 33% who said it would make no difference or prove detrimental.

An argument in favour of this government proposal is a cost saving to business of up to £45m per annum. Government estimates show that an increase in the threshold would allow 66,000 companies to dispense with the need for a statutory audit. Previous experience would indicate that up to 45,000 might take advantage of the exemption, with each saving annual audit fees costing on average £1,000.

Removing annual statutory audit should also save management time. The owner-manager often sees the annual audit as a bureaucratic exercise that brings little benefit to many small companies. Releasing the time devoted to the verification of historical information should allow entrepreneurs to spend more time on financial management and strategic direction.

The proponents of the current audit threshold suggest a loss of protection to users of non-audit accounts, with increased risk of errors, material non-compliance and fraud. However, government-commissioned research showed that 68% of a sample of relevant companies were, in fact, wholly family owned.

Furthermore, minority shareholders continue to be protected, as those with holdings totalling at least 10% can compel a company to have a statutory audit. Major creditors are also in a strong position to request an audit of a company. Protection is afforded in the case of public interest companies.

What also must not be overlooked is the overall regulatory framework and accountancy environment, which is strong in the UK. The value of the services of a qualified accountant should not be underestimated – not only in the preparation of accounts, but also in financial management and strategic advice. The disclosure of the fact that, although not audited, the accounts of a small business were prepared by a suitably qualified accountant governed by an established code of ethics, acts in the public interest.

  • Claire Ighodaro is president of CIMA.

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