Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Mixed reception for audit proposals

by
16th Mar 2011
Save content
Have you found this content useful? Use the button above to save it to your profile.

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.

Abbreviated Accounts
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.

Those for the proposals cite the problems posed by onerous auditing and accounting standards. Clearly these standards have become long-winded, arduous and hard to work with in certain areas, but the annual audit, whilst having to be conducted in accordance with the ISAs, is designed to help clients. It’s not a tick-box exercise and it does not have to be a hindrance.

I started my career in industry and was on the other side of the fence to auditors who used to come in on an annual basis. We were glad to see the back of them! When I started in practice I decided not to be like my auditors, but to make it an exercise that benefits the client rather than producing a file for regulators. Audits and the files are not for regulatory benefit, they are for clients’ and the audit firm’s benefit and should reflect that as well as complying with standards.

The audit can be turned around into a beneficial and cost-effective exercise, if you know how to do that. It is not uncommon, however, to meet auditors who despise auditing with a passion and would raise a glass to Vince Cable for getting rid of the audit requirement.

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.

Audit fees will drop dramatically if the threshold is raised to £25m, but some professionals have flagged up the potential for “assurance assignments”. Some banks are reportedly accepting these scaled down audit-like engagements in place of the annual external audit. Yet few of delegates I meet on courses have heard of them, let alone implemented them, so I am dubious about whether they will fill the workload gap.

Many accountants take the view that banks (and indeed Companies House) do not know audited accounts from unaudited accounts. Yet one £3m-turnover company I heard about seeking finance for a long-term restructuring process could not get its financial statements accepted by the bank. The practitioner concerned was not a statutory auditor and had to engage one to ensure the client could get the finance it needed.

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.

The argument for smaller practitioners is that the auditing standards in their current form are too vast and not fit for purpose. If the majority of practitioners agreed this was the case, surely it would be possible to have a scaled-down version of the auditing standards (ie a “FRSSE equivalent” of the ISAs) that would adapt auditing more to the size of clients we deal with on a day-to-day basis.

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).

Tags:

Replies (13)

Please login or register to join the discussion.

avatar
By User deleted
18th Mar 2011 11:10

I have always thought ...

... that there should be some sort of statutory assurance report for any company with turnover between the VAT threshold and the audit requirement, just to focus on the financial aspect, and not all the other bits that go with an audit (going concern review, compliance with legislation etc etc) to be signed off by regulated firms, and the files for which are subject to monitoring. We did have this for a brief period and I never understood why it was relaxed.

Thanks (0)
7om
By Tom 7000
18th Mar 2011 11:25

No half measures

 

Compulsory Audits should just be for plcs

If you run your own business, even if its turning over £50m, why should you pay for something you dont want.

It says above ''Audits and the files are not for regulatory benefit'' beg to differ in my opinion there are 2 halfs to an audit

a) The part you make sure the numbers are right..which is what the client wants

b) The days and days you spend filling in regulatory checklists..which is what the regulators want and the client doesnt care about

As an auditor you have do both prperly and if you dont want to or can't be bothered, you dont have to do it, go and work on something else.

 

The opinion from the coal face...

Thanks (0)
avatar
By Ayesha Bham
18th Mar 2011 11:41

Half measures
I agree about the audits not being aimed at smaller companies but I can also agree with some clients wanting an audit. We were told on a seminar that auditors should not be producing audit work purely for the Institute regulators but for the benefit of clients and the firm itself which I agree whole heartedly with and so did one Inspector who came to visit us last year.
I for one don't see these proposals coming in as too many politicians have tried this before and it's never happened. I say we should simplify as much as possible and make audits fit for purpose which will please everybody.

Thanks (0)
By jstuckey
18th Mar 2011 11:59

Abbreviated accounts

If Vince Cable's proposals to scrap the abbreviated accounts what will take their place?   Would he remove the requirement to fill accounts at all or will he require full statutory accounts to be filed.   This is an increased disclosure requirement which will cost money not save it

As other comments have said, I get my abbreviated accounts by clicking the "Abbreviated" button my accounts production package.   Alternatively,  just complete the downloadable version from Companies house

Thanks (0)
avatar
By chris@boxwell
18th Mar 2011 12:03

I'm confused :(

Eligible companies don't 'have' to file abbreviated accounts, but they might chose to do so. Conversely they 'have' to have full accounts for the members and HMRC. Accordingly the abbreviated accounts are not a compulsory burden but an optional extra. 

Has Mr Cable given up on his campaign to make the banks lend? Seems like it, but he's been noticeably quiet for a while! lol So this worthless sop to 'small businesses' is presumably him easing back into things? Shame really, I thought he could have made something of the banking situation.

 

   

 

Thanks (0)
avatar
By Ayesha Bham
18th Mar 2011 12:08

Filing
Companies do have to file accounts that's why they have the ability for limited liability. Surely these proposals go against this concept as if they're not going to be publically available then how can this be in line with company law?
The old adage "if it ain't broke don't fix it" springs to mind.

Thanks (0)
avatar
By steven glicher
18th Mar 2011 12:09

Consolidated Accounts

Why not tackle the most ridiculous change in recent times of medium sized groups having to prepare group accounts. This is the biggest waste of time and money for the client with absolutely no benefit to any one. The sooner this is got rid of, the better.

Thanks (0)
Me!
By nigelburge
18th Mar 2011 12:56

Why not..................

................ just abolish Vince Cable.

I am sure THAT would save a vast amount of money. :-) 

Thanks (0)
avatar
By Roland195
18th Mar 2011 13:03

Lets be serious

Other than being forced to by statute, the requisite number of shareholders or the bank, who on Earth is going to choose to be audited (and pay for it)?

I still don't really accept that for the majority of SMEs that require an audit there is anything that can be done in practice to make it a worth while experience for them especially considering the costs, not just in terms of the audit fee but time management time spent answering questions and so on. 

 

  

 

 

Thanks (0)
avatar
By adoggett
18th Mar 2011 13:13

Audit Exemption USA subsidiary

I have had an enquiry this week from a US company based in 'the valley'.. to set up a subsidiary company in the Uk, to take a number of employees in the UK.. I have discussed the amount of the audit fee, for the work to be done on a small company.. and suggested it could be cheaper elsewhere in the EEA. A Doggett FCA

Thanks (0)
avatar
By Michaelr205
18th Mar 2011 14:54

Audit requirement

In some respects I am a purist, if a company has the reight to claim Limited Liability then it has the obligation to file financial statements in the correct format, available for public view and the public has the right to know that the accounts are, in fact, "true and fair". I know the report of the auditors was to the shareholders but the company gains from Limited Liability, let it pay its obligations. Anything else is just window dressing

Thanks (0)
avatar
By euphonium
18th Mar 2011 17:49

Consolidated Accounts for medium sized companies

 Agree totally and completely with this statement. But its the numpties that put forward these proposals in the first place that we should be replacing.

Thanks (0)
avatar
By dbowleracca
18th Mar 2011 20:41

I think they are setting themselves up for a fall ...
An audit I'd a great way to add value to a clients business by taking an active role in understanding their internal controls and systems, an thoroughly reviewing their financial information.

It isn't as big a burden as the constant increases in employment legislation.

If they do increase the threshold I am certain you will get more tax and corporate fraud.

Thanks (0)