The benefit (the dated audit report) and most of the cost occur after the year end and in the following period, so why are audit fees accrued in the actual accounts subject to the report?
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Perhaps, but he isn't wrong.
The benefit [1] of an audit is gained at a point (or period) in time which will inevitably be after the year end.
If the benefit is in (say) March 2020, then it does not follow that the cost that comes with the audit should be put into December 2019. Accounting standards love the accruals principal. That the benefit should match the cost.
Except when it comes to accountancy and audit fees. But that's just because I genuinely think most accountants and auditors really can't think for themselves.
The reasons given for accrual usually range from:
1. Because we did it last year [2]
2. Because we want the P&L charge to match our fee quote for the year [3]
3. Because it is a legal obligation [4]
[1] If you presuppose audits DON'T have a benefit (and I certainly would find it hard to argue they do) then I'd agree you could pretty much accrue whenever you like.
[2] Not a good reason
[3] Also not a good reason, though I agree it 'looks' neat.
[4] The 'best' argument I've heard but don't say this too loud because there are a raft of other legal costs where the benefit is received post year end which we DON'T accrue.
But few people agree with me (though I have met a few who do). But I've yet to hear a good reason that doesn't then cause problems with other costs. Mostly accountants just shout 'BECAUSE IT IS!' and hope it all goes away.
It isn't the first item in the accounts that is often a load of old b*llocks, so why not is the real reason.
But what does that mean?
You don't pay it in the year under audit, so what does that mean?
On the last day of the accounting period you have an obligation to pay in future to have an audit done for the year just ended.
But going off on a tangent, when a business ceases to trade and de-registers for VAT the post-registration VAT on drawing up the cessation accounts is allowed, on the basis that it relates to a period when the business was still registered. I’m not saying that the VAT treatment should determine the accounting treatment, just observing.
It’s an interesting question, though -I’d argue that at the balance sheet date the company has incurred a legal obligation in respect of which future benefits will arise. My problem is that such benefits are not necessarily economic benefits.
Very good question. I see the validity in an argument that the cost is not strictly a valid provision, and I've been at tax training seminars where speakers have told stories of HMRC having a go at these accruals.
Generally though, it is customary to accrue these costs and the accrual is accepted accounting practice. Perhaps an exception to the rule?
Because it has been the practice since time immemorial. Plus, we looked at last year's file and that's what they did then.
A good and thought-provoking question.
The FRC Statement of Principles defines a liability as the obligation to transfer economic benefits as the result of past transactions or events (para 4.23). It goes on to say that the notion of an obligation implies that the entity is not free to avoid the outflow of resources (4.25).
A company is not free to avoid audit if its size makes audit mandatory. The obligation exists at year end and therefore it's a liability at year end.
That’s a good point. I was focussing on the nature of the benefit received, rather than the obligation to transfer out an economic benefit.
If the size criteria were taken away and all companies had to have an audit, then the obligation becomes one not dependent as a result of past transactions or events. In which case the obligation arises immediately after the year end.
I thought it was worth "a monkeys" because there are some very elaborate standards out there, and if we are getting this wrong on audit fees it does not do the profession any credit.
Also surely the benefit of an audit is knowing whether or not the accounts show a true and fair view, which cannot be known until after the year end. This benefit is prima facie for the directors, but others are interested.
Thanks for all the comments.
As I corrected myself, the issue is not whether audits confer any benefit - it’s about whether the entity has an obligation to pass on economic benefits (ie pay for something). I can’t be bothered to argue the point, because I really couldn’t give a monkey’s, but I’m not convinced that the obligation would arise after the balance sheet date. In pretty much every case, regardless if the reason for the audit requirement, I’d say that at the latest the obligation arises on the balance sheet date.
The past event creating the obligation is incorporation. The Companies Act imposes the requirements for periodic statements and, subject to size criteria, for audit.
Hence the obligation exists on day 1 of each accounting period - not immediately following each period.
Whilst you're right that the benefit of an audit derives from the audit opinion, the beneficiaries are the shareholders, not the directors. Shareholders are the only people who are entitled to rely on an audit opinion. Although other parties do rely on audited financial statements, they have no recourse to the auditors.
Nevertheless, as previously noted, existence or timing of benefit is not relevant for recognising a liability.
I suppose that it might depend on what you mean by “choose” and on who made the choice. And companies do of course have an obligation to prepare financial statements. It would seem rather odd - although perhaps strictly correct - to accrue the cost of the accounts prep but not that of the voluntary audit.
I suppose the real question ought to be - who gives a monkey’s? Particularly if the treatment is in accordance with established practice and consistent from one year to the next.