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Mini audit: Do practitioners really want it? By Dan Martin

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29th Sep 2006
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Dan Martin

The Institute of Chartered Accountants in England and Wales (ICAEW) has claimed that its new 'mini audit' service for companies below the £5.6m audit threshold is backed by grass roots practitioners. AccountingWEB business editor Dan Martin asks members whether that is the case.

Grassroots practitioners want it, said the ICAEW when it launched a new 'mini audit' service for firms with a turnover between £1m and £5.6m. Launched as part of an overall consultation on the assurance needs of smaller businesses below the statutory audit threshold, the Institute said the voluntary product would be welcomed by SMEs wanting an independent report on their annual accounts above and beyond a compilation report.

"Today, whilst many companies with a turnover of less than £5.6m can take advantage of provisions in the Companies Act which allow them to be exempted from having an audit, a considerable number of them still voluntarily choose to have an audit carried out by chartered accountants," the ICAEW said. "For those who don't, the only other professional service has been for the chartered accountant to compile a set of accounts on the basis of information and explanations supplied by the directors. Unlike an audit, however, the chartered accountant does not provide an opinion or assurance on the accounts compiled but signs a compilation report stating that the chartered accountant has professionally compiled the accounts."

So called 'mini audits' have always been a contentious issue. Following ex-trade secretary Stephen Byers' suggestion in 1999 that the audit threshold should be raised, many experts have predicted that such a service would be created for firms below the £5.6m threshold. The Institute said it was launching its service following strong on-the-ground support from accounting practitioners but other accountancy organisations expressed belief that this is not the case. A spokesperson for ICAS said there is not a market for the service, while an ACCA official cautioned that sub-audit reports have been previously unsuccessfully attempted.

On AccountingWEB last week, the writer of our very own 'Practitioner's Diary' also expressed scepticism that the practitioner support the Institute talks about actually exists. "I can't think of any clients who are likely to want this. I haven't read anywhere that banks or tax authorities want it," the Practitioner said. "The report appears to be totally worthless, but the work involved seems enormous, not to mention professional liabilities etc."

"The report appears to be totally worthless, but the work involved seems enormous."

AccountingWEB Practitioner's Diary

So who is correct? Do accountants and their SME clients want the service like the Institute claims or is the AccountingWEB Practitioner right in the fact that no large amount of support exists? We put those questions to our members.

Support? What support?

Some members we questioned expressed doubt over the ICAEW's claims that accountants with small business clients support the mini audit service. Geoff Simons, of motorbike and car clutch manufacturer FCC Europe, was one. "If full audits are planned to require the minimum amount of work, it is hard to see how a scaled-down version could provide any meaningful assurance," he said. "What is the ICAEW thinking? Have they really not consulted with the practitioners dealing with smaller clients?"

Jon Gammon, director at chartered accountants Magee Gammon Corporate, dubbed himself another "grass roots practitioner" who doubted the level of support the ICAEW claims really exists. "There will be no demand whatsoever for such a report where the company is owner managed or where the lending institution is already familiar with the approach and quality of the accountants involved," he said.

"What is the ICAEW thinking? Have they really not consulted with the practitioners dealing with smaller clients?"

Geoff Simons, FCC Europe

"Where there are non-working non-family shareholders who really want assurance or where lenders really want assurance they will almost always want an audit," he added. "I can't see why they wouldn't demand an audit when the key audit areas which will not be covered by this "half way house" will almost always be the areas which are material or fundamental. It's no use having "half an audit" - which is basically what is being proposed." Gammon added that he believed that the Institute does not realise that those they will rely upon to promote and sell the report - the practitioners - will "simply not do so" as they already have enough other work programmes and checklists to deal with.

One of more humorous ' but telling comments ' came from Stephen Holloway, director of Basingstoke-based AccountancyShop, who came up with the likely conversation accountants would have with clients when attempting to sell the 'mini audit' service:

  • Accountant: Hello Mr Client, would you be interested in a mini audit?
  • Client: Well, I might be but will it cost me any more?
  • Accountant: Ooohh yes...loads.
  • Client: What benefits will it bring me?
  • Accountant: Well, banks and investors may be more willing to lend you money.
  • Client: (laughing) What, without a personal guarantee?
  • Accountant: No, probably not.
  • Client: So, it's just you who benefits really?
  • Accountant: I'll get my coat shall I?
  • Client: Probably best.
"I cannot imagine any client being prepared to pay for an additonal service."

Patricia Arnold, Patricia J Arnold & Co

Patricia Arnold, from Hexham-based Patricia J Arnold & Co, believed the mini audit is a "thoroughly silly idea". "We prepare statutory accounts for our small company clients with a view not only to assisting them in complying with the requirements of the Companies Act but also to submitting them to the Revenue," he said. "Clearly standard accountancy review procedures and basic checking are done in the same way as they are for unincorporated businesses. I cannot imagine any client being prepared to pay for an additonal service."

More questions than answers

Accountant Mark Gauden questioned where the 'mini audit' is a job created or retention scheme. He said several questions are raised by it which clients would be concerned about if the service is pitched to them. Many would likely ask what are the extra costs and benefits compared to just an account preparation? Equally, clients would want to know what are the cost savings and potential disadvantages compared to a full audit?

Gauden pointed out potential examples of target clients for the ICAEW's service:

"(i) Flat management companies ' far too small to bear the burden of full audit costs, but nevertheless perhaps wanting some "reassurance" that the accounts are correct and free from fraud.
(ii) Family businesses where for historical reasons there have become shareholders who are not involved in the day to day running of the business, and hearing about the Wickes, Enrons, Transbus, etc. plc cases might have concerns about proper financial management of the business that they part own."

But he added: "I suppose those responsible for inventing this cut-down audit might try and persuade the banking industry to insist on mini audits, "no audit, no finance provision". However if the banking industry as a whole was led down this line then a reference to the Competition Commission might be necessary."

Audits for all?

Prue Stopford, director at accountants Robinson Stopford, expressed concern that such proposals mean accountants will return to the previous situation where all limited companies will have to be audited. "I can see where this will lead," she said. "Give it a few years and we'll be auditing all limited companies again."

"I can see where this will lead. Give it a few years and we'll be auditing all limited companies again."

Prue Stopford, Robinson Stopford

David Lindsay, from Lindsay & Co, also raised the prospect of audits for all but in contrast to Stopford said this may not necessarily be a bad thing.

"In the "old days" before registered auditors and lots of accounting standards all accounts had to be "audited"," he said. "I am sure that by and large the overall quality of the work was as good. We did not have to spend a lot of time ticking this box and that box. I think a return to the what we did then for say all companies up to a £500K turnover would be in the general interest."

Lindsay concluded at the end of the day, accountants need to not just obey orders but provide a useful, cost-effective service to clients. "I remember at a training lecture the other year when we were told about new accounting standards and disclosures, and I asked what were we achieving," he said. "The lecturer was shocked. He thought we should just follow orders and not question anything. Our input must be seen to be positive and of help to those we claim to serve."

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Replies (7)

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By dan06
02nd Oct 2006 10:09

Member features
Jerome, for member features we post a question on Tuesday or Wednesday each week and invite members to comment. On Friday we publish a article including a selection of the comments received and remove the original question and comments posting. Members are welcome to comment on the member article.

Dan Martin
Business Editor
AccountingWEB

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By User deleted
02nd Oct 2006 09:50

Mini Audits
As no explanation has been given for the deletion of the previous comments page, I take the liberty of showing below the commens posted thereon by myself and David Lindsay. It my view that the currrent political atmosphere of aiming for supremacy rather then service (to the public) may lead to the downfall of the accoutancy profession.
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Jerome N. Lobo , 27 September 2006 @ 17:28 PM [Edit] [Remove]
ICAEW Mini Audit
I am not sure what the ICAEW is up to. When the threshold for audit was increased from £1.1m to £5.6m, the ICAEW seemed to support the move. On the other hand ACCA were not so supportive, partly due to the fact that ACCA regulated practices did more of the small companies audit and stood to loose most.

Now the ICAEW has come out with a "mini audit" for companies in the £1.1m to £5.6m band. I would assume this would be under the ICAEW "brand"! What next one may ask, an ICAEW sponsored "mini/alternative Companies Act" ? Any company accounts' audit should be solely under the auspices of the relevant legislation (ie Companies Act). Does one get the impression the ICAEW is trying to make up for lost ground, ie the recent merger plans which seem to have gone awol!

Jerome N. Lobo
Jerome Lobo & Co
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DAVID LINDSAY , 28 September 2006 @ 11:41 AM
"mini audit"
I was actually talking about this with Jerome last night.
Larger companies tend to have better records. Small companies' records often have records that are not so good. In the "old days" before registered auditors and lots of accounting standards (I was young then) as I remember, all accounts had to be "audited". I am sure that by and large the overall quality of the work was as good. We did not have to spend a lot of time ticking this box and that box. I think a return to the what we did then for say all companies up to a £500K turnover would be in the general interest.
A compilation report would just be a waste of space.
Whatever we do it must be seen to be meaningful and not just obeying orders. I remember at a training lecture the other year when we were told about new accounting standards and disclosures, and I asked what were we achieving. The lecturer was shocked. He thought we should just follow orders and not question anything.
Our imput must be seen to be positive and of help to those we claim to serve.


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By acountancy.lindsayandco.n
29th Sep 2006 18:17

mini audits
When you reproduced an edited version of my views on mini audits, you unfortunately took out the bit where I suggested that smaller companies are more likely to have records that are not as good as larger organisations. I think in particular those with a turnover of less than £100K are most susceptible to have weaknesses, although I gave a figure up to £500K. By taking out the reason for my comment you removed the whole basis for saying that mini audits may not be such a bad thing.

Although I have retained my registered auditor status, I no longer have any audit clients, and don't want any, but have kept the registration for other reasons. It is possible I may now need to keep it for mini audits.

Of course probably like me, most readers just prepare accounts for tax purposes, and it would be useful for there to be an integrated system so all the work we do is with taxation in mind. This would of course mean a major change to the companies act and to the FRSSE but why not. There's a thought for the end of the week!!

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By PhillipIRosslee
30th Sep 2006 10:13

No Real Benefit
I am a big 4 trained accountant and auditor. I deal with small firms now almost exclusively and find that most owners of these businesses pay far too much to their accountants who do little more than prepare a set of financial statements which are mostly historic and of little use apart from to the tax authorities. Recently a large accounting firm sent one of my clients a £3,000 bill for advising on a PAYE and NIC matter and this was for only two hours work was involved.

Most business owners want accountants who know and understand their respective industry and are able to provide information and advice which is of strategic benefit and useful to the long term of their business. In fact business owners need accountants who provide information and advice which enables them to be proactive. Accountants in the profession are also unable to assess and advise on sales and marketing matters which are the lifeblood of any business. Most accountants do not understand and are unable to advise on the specifics of the markets their clients are involved in. They are also unable to advise on the supply side to business owners. On IT matters they also do not do their homework properly and advocate the use of accounting software which most small business owners find to complex to use for monitoring their day to day operations.

By addressing the above areas accountants involved with SME's will assist in making a real contribution to their clients.

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By User deleted
30th Sep 2006 15:28

Min Audit - Comments
Why, may I ask, were the previous comments on Mini-audit (URL: https://www.accountingweb.co.uk/item/160050/448)
deleted? I see that the page is no longer accessable.

I did make the point then that any mini-audit outside the scope of the current Comapnies Act would create more problems than it would solve. I see that no mention has been made in the subsequent post of my comments then made.

Jerome N. Lobo
Jerome Lobo & co

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By evansjez
29th Sep 2006 16:13

Watchdog or bloodhound
I seem to recall when I trained that auditors were watchdogs not bloodhounds so I fail to see how the mini audit is likely to save money on fraud.

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By User deleted
29th Sep 2006 16:39

Mini-audit
Why would any company want to pay £60-£120 per hour to a bunch of people who have very little detailed knowledge of the daily workings of the company, and so highly unlikely to locate any fraud or theft?

There are other companies around who can be hired to look for fraud, who are experts at it and charge far more reasonable amounts.

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