Simpler reporting: Are auditors doomed?
Demand for audit update courses is falling, notes financial reporting lecturer and AccountingWEB correspondent Steve Collings. With proposals on the table that will have a profound effect on auditors, he assesses what impact the reforms might have on the profession - and its clients.
Everywhere you turn phrases such as “the audit model needs to evolve”, “audit is costly” and, most commonly, “auditors are to blame” seem to be on the lips of commentators.
The constant backlash the auditing profession faces is annoying because, believe it or not, there are some good audit firms out there. With support from Europe, the Department of Business, Innovation and Skills (BIS) brought forward proposals to align the audit thresholds with the small companies test to save 36,000 businesses the need of having to undergo an audit. The government estimates this move would save businesses more £600m a year.
The responses to the proposals are very mixed – polarised might be a more accurate way of putting it. Many practitioners welcome the auditing proposals with open arms, while other firms and sole practitioners who deal with audit clients are worried about the impact the proposals may have.
Not so long ago there were very few auditing standards around and the audit was less rigorous. When I first started out in practice an unqualified auditor’s report was merely half a page long – these days it spans practically a full side of A4 and the Auditing Practices Board is still tinkering with it.
In recent years fewer delegates have been coming to auditing standards update courses, probably for two reasons. First, many audit clients were lifted out of the audit requirement when the thresholds zoomed up from £1m turnover to £5.6m, and then £6.5m from 2008. Second, many ex-auditors became increasingly fed up with the demanding audit compliance regime. Some of the new requirements in the Clarity ISAs are slightly over the top for smaller audit clients, prompting many audit firms to resign from their audits - particularly among smaller firms that had only a few audit clients.
Reasons for the audit
Banks and financiers - particularly for clients who factor or ‘invoice discount’ their sales ledger - require audited financial statements. The amounts owed to the finance company on the factoring/discounting account are often significant, particularly in these difficult times.
Some companies might also be required to have an audit simply because their articles of association demand one - though many changed their articles to be eligible for audit exemption. Other companies choose to have a voluntary audit because they view the audit as a seal of approval – which, to all intents and purposes, an audit is designed to be.
HMRC also feels more comfortable if financial statements are subject to external scrutiny, as the figures from which the profit (or loss) was derived is more reliable than a set of unaudited financial statements.
Aligning the audit requirement
Aligning the UK’s audit exemption thresholds with the small companies test will undoubtedly cut costs for some businesses, but not to the extent the government is estimating. But many practitioners are asking is how aligning the audit threshold with the small companies test will affect auditors themselves?
Practitioners who struggle to make audit pay may welcome the initiative as it will allow them to devote the extra time to other activities such as marketing.
But there are specialists who work purely in audit including firms that only offer audit services, mainly to practitioners without practising certificates who want to act for clients within the audit limits. One practitioner told me he would lose approximately 40 audit clients and around £25,000 in fees if these proposals were introduced. “Where will I get another job at my time of life?” he asked.
As they stand, the BIS proposals simply don’t make any sense at all in terms of the information the accounts would present and how they would be used for the purposes of tax. The proposals don’t conform with the principles that have guided the accountancy profession for hundreds of years and would result in information being produced which is both unreliable and irrelevant – particularly for the purposes of tax.
All businesses, large and small, are required to provide some form of adequate financial information. Anyone can produce a receipts and payments account, but how useful would this information be to a business? How will a business be able to know if its gross profit margins have deteriorated given that sales won’t have to be adjusted for closing debtors and purchases won’t have to be adjusted for closing creditors? And if it doesn’t have to adjust for creditors, how will a business be able to keep a track of its expenditure levels?
The profession must still produce financial statements for companies of all sizes that fulfil the true and fair view requirement that has been in companies legislation for years, and that means doing so on an accruals basis.
Time for a rethink
The proposal to align the audit thresholds with the small companies’ test thresholds will reduce costs for businesses, but the savings estimated by government appear to be very much on the overly-optimistic side. No regard has been given to smaller clients who choose to have their accounts audited, or those clients where audit exemption is not an option because of financing requirements. The proposals for the financial reporting regime need to be substantially rethought and drafted by individuals who have knowledge of how the accountancy profession works.
Steve Collings is the audit and technical partner at Leavitt Walmsley Associates and the author of ‘The Interpretation and Application of International Standards on Auditing’ (Wiley March 2011) and ‘The AccountingWEB Guide to IFRS’ (Sift Media May 2011).