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Audit exemptions to be extended from 1 October

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10th Sep 2012
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The government will press ahead with its plan to align mandatory audit thresholds with accounting thresholds for small companies from 1 October.

In a press release issued on 6 September, the Department of Business Innovation and Skills confirmed that small businesses will not need to subject their accounts to an audit if they meet two out of the three qualifying criteria for small company accounts:

  • Fewer than 50 employees
  • Balance sheet total: no more than £3.26m
  • Turnover below £6.5m.

Subsidiary companies will be let off mandatory audits if their parent companies guarantee their liabilities. Dormant subsidiaries - up to 67,000 in number - will no longer need to prepare and file annual accounts, provided they receive a similar guarantee.

In another related reform, companies that currently prepare their accounts under international standards will be able to change their accounting framework to UK GAAP provided they have not moved to UK GAAP in the previous five years. Parent companies will be able to take advantage of this change provided they are not required under EU law to prepare their consolidated accounts using IFRS.

A statutory instrument will be laid before Parliament to bring the reforms into force from 1 October 2012, with the exemptions applying to accounts for financial years beginning on or after that date (*await confirmation from Statutory Instrument - see comment below).

“Reporting requirements have become increasingly demanding and costly over the years. We listened to business, who made a strong case for reform, and I am delighted that we are now taking this opportunity to make audit more flexible and targeted,” said business secretary Vince Cable.

The BIS claimed that in total nearly 120,000 companies might be able to take advantage of the exemptions, saving them millions of pounds. In its detailed summary of consultation responses, however, the department downgraded its initial estimates of £600m+ savings on annual accountancy costs to £390m.

That is still a significant chunk of income to lose for a hard-pressed audit profession, but initial reactions were muted, as though accountants had already bowed to the inevitability of reform. The ICAEW noted that the BIS statement was the culmination of an 18-month process that will align the UK’s audit requirements with the EU’s unified accounting directives.

The institute was keen that audit should not be characterised as a regulatory burden and was satisfied the government had not done so. Henry Irving, head of ICAEW’s Audit and Assurance Faculty, commented: “ICAEW supports a deregulatory approach to stimulate sustainable growth. However, it is crucial that smaller businesses remain focused on having strong financial controls and appropriate management oversight, as that is critical for business confidence, which – in turn – is vital for growth.

“Audit and other types of third party assurance play a key role in instilling confidence. Being able to produce independent verification of the company’s financial statements can be important for securing finance, for example. Therefore, companies that may be exempt under the new regulation may still choose to have an audit done.”

The latest BIS document includes details of how the exemptions will apply.

As well as exempting companies that fulfil two out of the three small company criteria listed above, subsidiary companies will be allowed to dispense with an audit where they meet the following conditions:

  • The parent group is based in a member country of the European Economic Area (EEA)
  • Shareholders unanimously agree to the exemption
  • Parent company must give a statutory guarantee of all the subsidiary’s outstanding liabilities at the financial year end
  • The subsidiary company’s accounts must be included in the consolidated accounts drawn up by the parent undertaking, which must be prepared in accordance with Directive 83/349/EEC (the Seventh Company Law Directive)
  • The exemption by the subsidiary must be disclosed in the parent company’s consolidated accounts.
  • Documents attesting that these conditions have been met must be filed with Companies House on or before the date that they file the subsidiary’s accounts are filed.

Quoted companies, insurance firms, eMoney issuers, trade unions, employers’ associations MiFID investment firms and pan-European unit trust management companies are not entitled to the exemption.

In response to the points raised during the consultation process, the BIS argued: “We believe the proposed changes will not significantly increase the risk of financial irregularities, and consider the risk level of confusion for investors to be low.

“We believe the risk of misrepresentation will be mitigated by the similarities between the frameworks under the proposals of the FRC, and by existing requirements in company law.

“The scope for tax arbitrage will be addressed by application of the powers of the tax authorities, with HMRC already having powers to manage the risks associated with companies changing accounting frameworks.”

AccountingWEB's regular financial reporting contributor Steve Collings commented: "Many companies will undoubtedly welcome the move to align the audit thresholds to the small companies exemption threshold, but clearly it will be bad news for many audit firms who may stand to lose a significant amount of fee income."

The result could mean redundancies in what is already a difficult time in a very competitive environment – particularly those firms whose only involvement is in audit work, he added.

The risk not acknowledged by the BIS was that deregulation could go “full circle” on this issue if companies no long subject to scrutiny by external auditors become complacent and stumble into scandals that prompt demands for more external scrutiny back.  

"That said, the majority of accountants I have met recently do seem to welcome the change.  Over the last few years we have seen audit thresholds increase which inherently means fewer audits being undertaken by the small/medium-sized firms. But many accountants seemed to embrace those increases and direct their attention on more profitable work," he said.

"I suspect there are many accountants who are quite relieved and may well now be considering de-registering for audit, particularly as auditing is becoming very onerous with standards set higher than ever."

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Replies (45)

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By cwca
11th Sep 2012 00:22

Not so fast

The BIS press release refers to accounting years ending on or after 1st October and this has been picked up by a number of professional news wires.

However the written statement delivered to Parliament and included in Hansard for Thursday 6th September at column WS27 (and which can be viewed at http://www.publications.parliament.uk/pa/cm201213/cmhansrd/cm120906/wmst...) refers to accounting years beginning on or after that date.

I have sent an email to the department for clarification

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Replying to Tim Vane:
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By Paul James
19th Sep 2012 16:56

Update...

Heard any reply to your email to clarify the position?

Thanks (0)
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
11th Sep 2012 10:18

Good spot!

Thanks for picking that anomaly up for us, cwca, and sorry to have been misled (not for the first time) by an official press releaes.

We may have to wait until the statutory instrument appears to confirm the arrangement fully, but I'll try to see if the BIS press department can unravel the mystery.

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By cwca
11th Sep 2012 17:04

As we were

The regulations introducting the changes have now been published (SI 2012 No 2301) and confirm that the changes will apply for accounting years ending on or after 1st October as generally publicised (Regulation 2). Hansard is therefore incorrect.

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Replying to timothyvogel:
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By stevetalbot
12th Sep 2012 13:21

Audit Exemption - draft statutory instrument

Do you have a link to this draft legislation - I can't find it?

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Replying to Ruddles:
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By cwca
14th Sep 2012 11:17

Link to draft legislation; change of year

The draft statutory instrument can be found at the link in my earlier post. For confirmation it can be found online at

http://www.publications.parliament.uk/pa/cm201213/cmhansrd/cm120906/wmst...

Also is it sensible to jump into changing the year end just for this one short term and limited purpose - I would have thought that step should only be made for genuine commercial purposes, and once it's done you are stuck with it for another 5 years. Not to mention the hassle with changing corporation tax accounting periods etc.

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By nigelrmorris
12th Sep 2012 11:44

LLP's

Similar change to LLP's ?

 

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By petew
12th Sep 2012 12:09

Change of year end

As the regulations refer to accounting periods ending on or after 1 October 2012, presumably a company could change their year end from say 30 September to 31 October to avoid the requirement for an audit this year?

 

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Replying to Manchester_man:
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By Abster
12th Sep 2012 12:33

Change of year end

Alternatively you could just extend the date by 1 day to 1st October and still produce accounts to 30 September.

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By miketombs
12th Sep 2012 12:18

Balance sheet total

I also wish they would start using the phrase "total assets" instead of "balance sheet total". Most people would naturally think of the balance sheet total as the figure at the bottom of the balance sheet. The Companies Act specifies it as the total assets.

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Replying to mrme89:
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By Harry04
12th Sep 2012 12:26

what is balance sheet total?

is it the net assets or share capital plus reserves?

thanks

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Replying to Matrix:
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By Stephanie Henshaw
12th Sep 2012 12:31

what is balance sheet total
The Act defines "balance sheet total" as "fixed plus current assets" so it is total assets, not net assets. That has always been the definition but the use of "balance sheet total" often catches people out.

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By petew
12th Sep 2012 12:30

Balance sheet total

Is gross assets, i.e. fixed assets plus current assets.

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By marlin
12th Sep 2012 12:38

Parent company guarantee

Does anyone know how this guarantee should be given? Do we know any details about this?

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By pembo
12th Sep 2012 12:41

at last some common sense getting rid of all those property investment companies at a stroke.Should have been done years ago when the thresholds were increased so much.Anyone got any ideas how you can pursuade golf club committees to agree that an audit is really not necessary and put it forward at the AGM. Tried every argument to no avail.

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By andyrhb
12th Sep 2012 12:41

All subsidiaries or just small subsidiaries?

If a subsidiary exceeds the size thresholds can it still be "let off mandatory audits"?

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By Yuill12
12th Sep 2012 13:31

Second Year Rule

Will this void the second year rule for those companies audited last year?

Thanks (0)
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By Hadfields
12th Sep 2012 15:50

Audit Thresholds

Total Balance Sheet.

So the Company with over 50 employees and a factory at £4.000,000 less a Mortgage of "£2m still has to have an Audit.  How stupid can you get!!

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By petew
12th Sep 2012 15:56

Second year rule?

Never heard of this?

An audit is an audit based on the current year limits and has no baring on previous years.

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By Hadfields
12th Sep 2012 16:14

Audit Standards

Steve Collings refers to the High Standards required regarding Audits.  Has he forgotten that the Banks and Building Societies had "Audits"

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Julia
By julia wigram
12th Sep 2012 16:27

Large group

If the group is large, are audit exemptions still available?

Thanks (0)
Replying to Tornado:
Julia
By julia wigram
17th Sep 2012 09:16

Subsidiary audit exemptions

julia wigram wrote:

If the group is large, are audit exemptions still available?

I did some more research and hope the following summary is helpful re subsidiary exemptions:

New rules for Subs audit exemption

Subsidiaries (normal definition applies) of any size can be exempt if:

Parent is EEA State member (EU+)All members agreeParent guarantee to subSub included in consolidated accountsParent must disclose in its accounts that the sub is not audited (Probably the hardest one to get in practice!)Declaration filed with Registrar of CompaniesAudited parent accounts filed at Registrar of Companies

This is fairly complicated - suggest look at the rules in new s479A/B/C of CA 2006  - http://www.legislation.gov.uk/uksi/2012/2301/regulation/7/made

New rules for dormant subsidiaries

No requirement to prepare accounts  BUT All rules for audit exemption above are also required

Therefore probably easier to rely on audit exemption under s380 (small company dormant) and prepare dormant accounts rather than not prepare.

Thanks (1)
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By Briar
12th Sep 2012 16:47

Audit of Golf Clubs

Hi Pembo,

see http://www.icaew.com/en/members/regulations-standards-and-guidance/audit/audit-regulations-definitions?letter=a. Here, unincorporated bodies are not included. So, one does not have to be a registered auditor to "audit" an unincorporated golf club. As the golf club rules were probably written many years ago, they probably meant independent scrutiny of the accounts by a qualified accountant when using the word "audit" and the members do not now realise the modern meaning. Tell the members that if they change the rules, the "scrutiny" (or in modern parlance, the "independent examination" fee) will be less than the "audit" fee. That's what I did. It worked. And now I don't need to be registered as an auditor (Hurrah!!, no more compliance visits)

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Replying to mrme89:
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By pembo
13th Sep 2012 13:09

problem is

Noted thanks Briar. Tried all of that....problem is that normal market forces don't exist for clubs like this as they know what all the other ones pay and there is as ever some cowboy willing to undercut. Ends up with them being done semi pro bono so the proper saving we would normally pass on is greatly reduced. Got round my problem by passing them to my partner ! Hurrah...only 2 audits to go and no worries.

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By Supertorben
12th Sep 2012 17:24

What about extending the accounting period from 31st March to 31st October? - Would that be ok?

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Replying to teuchter:
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By sluglet
13th Sep 2012 10:54

Traing Course Yesterday

Supertorben wrote:

What about extending the accounting period from 31st March to 31st October? - Would that be ok?

Totally by chance I was on a training course yesterday afternoon and this came up. 31-Mar year end can only be extended to 30-Sep BUT you are allowed to do accounts up to +-7 days of year end. So it is permitted to extend y/e from 31-Mar to 30-Sep and then do accs to say 05-Oct and take advantage of the change. 

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Replying to SteveRA:
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By Supertorben
13th Sep 2012 14:45

Excuse my ignorance, but just to clarify the situation -  form AA01 is filed with a date of 30th September,

but the accounts are prepared with a date of , say, 1st October and filed at Companies House with

that date on them? If this is so I expect there will be hundreds of company y/e extensions.

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Replying to Portia Nina Levin:
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By sluglet
14th Sep 2012 12:23

Probably not as useful as one might think

Supertorben wrote:

Excuse my ignorance, but just to clarify the situation -  form AA01 is filed with a date of 30th September,

but the accounts are prepared with a date of , say, 1st October and filed at Companies House with

that date on them? If this is so I expect there will be hundreds of company y/e extensions.

Lots of companies do accounts for 52/53 week periods so Companies Act allows +- 7 days either side of date on AA01 so Companies House "shouldn't" have any problems with AA01 & accounts having slightly differing dates. In practice how many companies will extend year end to avoid audit is not clear. I suspect a lot of 31-Mar audits have already been done. Of those not done I suspect a lot already have time clocked up on them for planning, stocktake attendance, etc plus there could be costs to clients if they have to do stocktakes again at 1-Oct and you have to remember that once you've changed the year end you're stuck with it for the next five years. 

In essence I don't think there are many companies out there with 31-Mar yr ends in a position to take advantage of this this year but certainly worth thinking about for clients with say 30-Sep yr end. 

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Replying to Portia Nina Levin:
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By jonbryce
14th Sep 2012 12:48

Yes, that is correct

You can file accounts to a date 7 days either side of the date on AA01.  Tesco for example prepares accounts to the last Saturday in February.

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By paulwakefield1
12th Sep 2012 18:09

Subsidiaries exempt from audit

Seems to me to be of limited use as I can't imagine auditors being happy to sign off the parent company accounts unless the subsidiaries are all immaterial. Taken to its logical conclusion you could have a massive group with a pure holding company with only the latter being audited so long as it is not listed. Could be an interesting qualification! And how much worth would the necessary guarantees be?

But I haven't read the legislation in depth yet so I may have missed the point.

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By North East Accountant
13th Sep 2012 11:35

Good Idea

Why not implement for all accounts signed off after 1st October 2012?

If its a good idea bring it straight in no messing.

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Replying to ArsalanShah:
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By amb.hentons
14th Sep 2012 10:32

Signing off date

North East Accountant wrote:

Why not implement for all accounts signed off after 1st October 2012?

If its a good idea bring it straight in no messing.

So, you have done the site visit and the review work. Signing one day later to aviod the need for an audit opinion - will the client stll pay for this unnecessary work now?

They tried the signing off date rule in the past - caused issued for accountants doing work and not getting paid for it.

 

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By Supertorben
13th Sep 2012 13:06

Many thanks, Sluglet.

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By AWilson3339
14th Sep 2012 10:41

Plc

Unlisted Plc parent with a number of small subsidiaries, will the subs still need auditing?

 

 

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By Mallock
14th Sep 2012 11:04

Tired of Audit

I'm seriously tired of all the work that goes in to maintaining audit registration and look forward to the day when audits are restricted to AIM companies or PLC's.

For once I would be pleased to follow the lead of the USA.

On the Golf Club issue I have persuaded two to remove the need for audit on the basis that if they strengthen their systems of control they can review and monitor the risk areas themselves more regularly and save the audit fee - I explained that their regular checks were much more likely to find something wrong than my sample. They now have many fewer cash/bar differences than they did when under audit.

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By David Gordon FCCA
14th Sep 2012 14:23

odd organisations audit
I have "Done" Parochial church council, sikh temple, synagogue, club, and charity "Audits". My experience is these organsations need practical audits more than anybody else. Especially if there is a bar on the premises. What you may do is, rather than an "Official" statutory audit, agree a list of formal checks to be done.

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Replying to nogammonsinanundoubledgame:
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By jonbryce
14th Sep 2012 20:27

Charity audits
Bear in mind that the audit thresholds for charities is much lower than for companies, and they have not changed.

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By RJ&Co
14th Sep 2012 16:54

Ironically.............

The change now brings into reality what a lot of people (including some accountants) thought the rules already were, due to the confusing "double negative" terminology used.  The fact is the that new rules mean you can pass just two out of the three tests to forgo an audit, whereas  before you needed to pass all three, a situation which was much misunderstood.  Even now I suspect some people are reading this thread and saying to themselves "So whats changed?  The thresholds seem to be the same as they were.........."

Richard Joseph

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By Piglett
17th Sep 2012 08:33

Dormant company exemption

What's confusing me is the exemption from dormant companies filing accounts. Reading the BIS document it seems that they will have to be included in consolidated accounts to benefit, so presumably small groups with dormant subs are faced with the choice of either preparing consolidated accounts or continuing to file the dormants.

Or am I reading this wrong?

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By User deleted
17th Sep 2012 21:30

OK, so ...

... small UK subsidiary of large US parent will still need an audit?

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Replying to andybailey:
Julia
By julia wigram
19th Sep 2012 12:03

Large group

Old Greying Accountant wrote:

... small UK subsidiary of large US parent will still need an audit?

Yes  :-(

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By MBK
18th Sep 2012 13:34

So - just to be clear about how to get out of an audit....

It can be done for any current year end from 31st March 2012 or later (if you would now qualify for exemption under the new test) by:-

1: Extend the year end by changing the accounting refernce date to 30th September (if it isn't already)

2: Have a board meeting and resolve to make up the 2012 accounts to 1st October for this year only.

.. er, that's it.

This is because the SI refers to "financial year". A financial year is defined by CA 2006 S390 as starting on the day after the last day of the previous financial year and ending on the next ARD or a date determined by the directors being within seven days either side of the ARD.

So there is actually no need to extend the ARD to 1st October at all.

Does anybody disagree?

 

 

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By jon_griffey
20th Sep 2012 11:22

Practicalities

 

The BIG BIG problem I foresee is making sure that the parent includes the required wording in its accounts.  We act for say a UK subsidiary with a 31 Dec 2012 year end.  Large parent company is based in say France and agrees to audit exemption.  Large listed group so tight timescales.  On that  basis we don't attend the stock take, issue bank letters etc and prepare audit exempt accounts and get them signed off.  Some weeks or months later the group audit is done by group auditors and group accounts/audit gets signed off.  Guess what?  The required wording did not appear in the group accounts and so we are not entitled to audit exemption.  We have to go back to the client and say that we now need an audit and of course we did not attend the stock take etc and so may need to qualify........

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Julia
By julia wigram
21st Sep 2012 15:14

re Practicalities sub exemption

@ Jon

I agree entirely - it is our main concern with the subsidiary exemptions.  I think we will need to specifically cover it in our engagement letters in these cases - & in letter of representation from management on the non-audited accounts.

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By User deleted
24th Sep 2012 19:20

... 

.

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