Following business secretary Vince Cable’s announcement that he planned to remove many companies from the UK statutory audit regime, Steve Collings took soundings from practitioners and other interested parties.
Vince Cable grabbed a bundle of headlines with his pledge to save 42,000 small firms up to £40m per year by reducing “red tape” – by which he meant the need to produce statutory, audited accounts. Leaving aside the accuracy of his savings estimate, Cable missed the mark somewhat in the way he presented the audit exemption proposals.
Mark Lee pointed out that what most people think of as “small businesses” are already exempt from the obligatory independent audit. The exemption proposal would only affect those companies with a turnover above £6.5m. Unless small companies voluntarily require an audit (as some companies do) or are forced by their financiers or other interested investors to do so, many small companies would not necessarily benefit from a share of the forecast £40m savings.
The second aspect of the government’s plan would remove the need for “small” companies to file abbreviated accounts at Companies House. In an Any Answers thread Towards Excellence asked about the likely outcome of this idea.
The proposal has been on the agenda for a while and is still at the consultation stage. But practitioners I spoke to did not see the benefit of this exemption, and I am inclined to agree with them. If HMRC requires full financial statements to be prepared for tax purposes (which they will continue to do so), the costs to a small company of filing abbreviated financial statements is minimal. Let’s face it, it’s not “expensive” to the client, nor the accountant, to prepare the abbreviated accounts and file them, particularly where reputable accounts production software is in place.
Audit exemption for medium-sized entities
Removing the need for an audit from medium-sized entities is probably the focus of most controversy. The Institute of Credit Management strongly opposes the idea, saying that many smaller firms in the UK will suffer reduced credit ratings as a result. Most of the accountancy bodies took a strong stance against the proposal, raising concerns about the ability of small and medium-sized entities securing finance, particularly in light of the stringent processes now in place at banks. Many companies are required to have an audit by their investors despite the fact that they might otherwise qualify for exemption, so they won’t benefit from the proposals.
Auditors I have spoken to are concerned about the impact these proposals would have on their practice. One said her practice would lose 25% in fees if these proposals are introduced and wondered if Vince Cable had thought about the impact this would have on the auditing profession. The practitioner concerned said she would have to make two of her four audit staff redundant.
What I think
Many practitioners – particularly in smaller firms – would like to see the back of audits. In some of these cases, it has to be said, the practitioner has made no effort at all to try and do an audit, but instead put together an accounts preparation file hoping this will suffice. Often they will then blame the standards for being too long-winded.
Over burdensome auditing standards, complex legislation and overly-complex accounting standards (the ASB have admitted the current FRS/SSAPs/UITFs have become overly-complex) are the primary reason for practitioners having had enough of auditing. However, an audit is not necessarily a bad thing if you can execute it profitably and sensitively in a way that improves the client’s business and operations. If the client can see the benefit (as mine do), then how can it be dismissed as red tape?
Whatever happens with these proposals, the duty of care we owe to clients will still be just as important. Lots of auditors coped when the thresholds went from £350,000 to £1m and firms will do the same if these proposals are implemented.
Over to you...
Steve Collings is the audit and technical partner at Leavitt Walmlsey Associates and the author of ‘The Interpretation and Application of International Standards on Auditing’ (Wiley March 2011).