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."
You might also be interested in
AccountingWEB’s interim Editor in Chief has been with the site since 1999 and returned to the editorial hot seat in March 2020 to lead the hunt for a long-term successor... Send a DM if you're interested! When not tending to the needs of AccountingWEB members and geeking out on their technology habits, he devotes much of his time to his oddball...