Audit exemption thresholds set for change

Audit and Technical Partner
Leavitt Walmsley Associates Ltd
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As most accountants will be aware, the small companies’ regime has been subject to rather a lot of change over the last few months due, in large part, to the transposition of the EU Accounting Directive into company law. 

The main change that has been brought about by the EU Accounting Directive is an increase in the size thresholds which determine whether a company is a micro-entity, small, medium or large (including groups). The revised sized thresholds with effect for accounting periods commencing on or after 1 January 2016 are as follows:

                Turnover Balance Sheet Total Average no. of employees
Micro-entity Not more than £632,000 Not more than £316,000 Not more than 10
Small company Not more than £10.2 million Not more than £5.1 million Not more than 50
Small group Not more than £10.2 million net ORNot more than £12.2 million gross Not more than £5.1 million net ORNot more than £6.1 million gross Not more than 50
Medium-sized company Not more than £36 million Not more than £18 million Not more than 250
Medium-sized group Not more than £36 million net ORNot more than £43.2 million gross Not more than £18 million net ORNot more than £21.6 million gross Not more than 250
Large company £36 million or more £18 million or more 250 or more
Large group £36 million net or more OR£43.2 million gross or more £18 million net or more OR£21.6 million gross or more 250 or more

The question then arose as to whether audit exemption thresholds would be increased as a result of the above revised size thresholds. The Government confirmed that they did not intend to decouple the links between the audit exemption threshold and the thresholds which determine the size of a small company. However, some stakeholders expressed concern that allowing a company with a turnover of £10.2m to take advantage of audit exemption was too excessive and would allow such larger businesses more scope for unorthodox practices, such as criminal activity. A consultation was undertaken by the Government who sought views as to whether the audit exemption limit should be increased to the maximum permitted by the Audit Regulation and Directive.

Concerns were also raised by the audit profession that increasing audit exemption limits to the maximum allowed under the Audit Regulation and Directive would increase instances of poor financial reporting. Stakeholders suggested that audit exemption limits should remain as they are or raised to some intermediate level lower than the revised thresholds which determine a small company for financial reporting purposes. Conversely, others argued that the thresholds for audit exemption should rise citing the erosion of the value of the audit exemption thresholds due to inflationary effects as well as the increased regulation this would place on small companies.

On 26 January 2016, the Government rejected the concerns raised by the audit profession, preferring to keep the framework as simple as possible. The Government said that having two levels of regulation (one for audit exemption and one for the definition of a small company) would introduce unnecessary complexity into company law and cause confusion for users.

Increased audit limits

The Government has said that all companies should continue to be able to have an audit (i.e. the audit option will remain open for small companies). Companies will not, however, be required to have an audit for financial years which start on or after 1 January 2016 (essentially 31 December 2016 year-ends) if, at the balance sheet date, two out of the following three criteria can be met for (generally) two consecutive financial years:

  • Turnover < £10.2 million
  • Balance sheet total (fixed assets plus current assets) <£5.1 million
  • Number of employees < 50

To take advantage of the above, the company must also not be excluded from accessing the audit exemption due to the nature of their business.

Raising the audit exemption thresholds to match those of the small company thresholds is estimated to remove 7,400 companies from the mandatory requirement to have an audit. However, the Government have estimated that some 4,400 companies will choose to continue to have an external audit and the remaining 3,000 companies will seek alternative routes to ensure that their company’s internal systems are robust, such as assurance reviews or oversight of accounts preparation.

The ICAEW Chief Executive, Michael Izza, said: ‘We are disappointed government has decided to go down this route. We have consistently said over the last four years that audit promotes sound financial practice and protects against mismanagement, fraud and tax evasion.

‘There are many reasons why companies have an audit – to give shareholders confidence, satisfy tender requirements, and ensure reliable financial reporting. Even though a number of businesses are now potentially exempt we expect many will continue to choose to have an audit.’

BIS acknowledge that the value of audit and auditors still have an important role to play in supporting small businesses and providing assurance to owners and lenders.

Will many small companies continue to have an audit? Will they seek alternatives such as assurance reviews? Only time will tell.

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By redboam
28th Jan 2016 11:21

You can say that again.

"..small companies’ regime has been subject to rather a lot of change over the last few months"

Seven categories with what look like arbitrary conditions attached. Do people really feel comfortable with making a living by creating nonsense like this?

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By deg2yq
29th Jan 2016 14:54

happy days
I have been planning for this for 4 years now. So happy

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By deg2yq
29th Jan 2016 14:56

ICAEW
is bit stuffed now given that's what most of their practice guys do, welcome to the real world snooty

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28th Jan 2016 23:18

threshold up
As a small practitioner with clients approaching the current threshold.. (and no audit licence) I am pleased with this increase.

Also gives a marketing angle for some clients of larger regionals.

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By Andp
29th Jan 2016 12:35

When I was cutting my teeth , the turnover threshold was around  £300k !? Anyone else remember them days ?

Every accountant studying for a qualification  , IMO should still  be examined in Audit and have practical experience of the discipline.

The increasing of thresholds could be to a student's detriment !?

The valuable skills I learnt probing directors for answers and explanation , spending days in the dungeon looking for that £20 purchase invoice in cob webbed covered filing cabinets ,

actually gave me a great footing and increased confidence when the need arose to ask awkward questions to the client.

 

 

 

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