IT IS PREMATURE to speculate as to the extent of the impact of Vince Cable’s proposed relaxation of the statutory audit requirement for SMEs, removing the requirement for statutory audit from approximately 32,000 medium-sized companies. Whatever the outcome, here are three good reasons why SMEs shouldn’t rush to cancel the audit:
Availability of the audit report to lenders
At present, third parties, including lenders, have access to audited accounts at Companies House. If an SME opts out of audit, its lender may request an audit in any case. Non-statutory “special-purpose” audits of this kind, performed primarily so that a lender can rely on the report, raise liability issues for auditors. The auditor will want either to agree terms of engagement with the lender – a time-consuming and expensive negotiation process – or potentially withhold the report from them, rendering the exercise useless! An awkward resolution is for auditors to risk unlimited liability to lenders, agreeing to release special-purpose reports without terms of engagement. However, auditors are understandably reluctant to accept the risk of the lending decision for lower return than the lender.
The net result of avoiding the annual audit could be that it becomes difficult and expensive for SMEs to secure the credit they need, costing them much more than audit fees saved.
Maintenance of track record
When a company does not have a regular audit of GAAP financial statements, it can come as a shock to management, investors and third parties to see results restated for, for example, share-based payment charges, fair value of financial instruments and cumulative audit differences. While companies may argue that their management accounts are adequate, it can be difficult for an auditor to reach a “true and fair” opinion over them. For a listing, disposal or trade sale, there is no substitute for audited GAAP financial statements.
Analysis, insight and recommendations
Auditors are required by auditing standards to understand the business, and by ethical standards to demonstrate their independence. The best auditors maintain the scepticism necessary to challenge the accounts, systems and controls, while bringing experience to specific areas of concern. Where auditors and management plan effectively, the auditors can provide high quality independent opinions and valuable analysis, insight and recommendations.
In times of economic uncertainty, companies that want to demonstrate consistent track records of accurate accounts and reliable controls, as well as benefit from a productive relationship with experienced professional advisers are, in my opinion, better off having an annual audit. This is not to say that the size thresholds for audit ought never to be revisited. Regulation and legislation should continue to evolve; but an audit remains a good thing for many companies, regardless of size.
Helen R Brennan is a senior manager in audit quality and risk management at KPMG
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