Today the Department for Business, Innovation and Skills has announced a formal consultation on increasing audit exemptions, removing some of the gold plating that previous governments have applied to EU directives in this area. In a nutshell, the proposals are:-
To extend audit exemptions for SMEs by aligning the mandatory audit thresholds with EU small company thresholds. Currently in the UK, SMEs have to meet both turnover and balance sheet thresholds to be exempt from audit. In future, to be classified as small for accounting purposes, businesses will have to meet two out of three criteria (turnover, balance sheet and headcount).
To exempt subsidiary companies from the statutory audit where they fulfil a rigorous set of conditions including a commitment from the parent company to guarantee its debts.
In considering these proposals, what is important to me is that we continue to reinforce the message that effective financial management is crucial for any business. Strong financial controls and appropriate management oversight are important components for any company seeking to grow and build their business, no matter what their size. That’s what chartered accountants tell their clients and that’s the message I continue to press home to ministers.
Audit is critical in this. It plays a vital role in the oversight and governance of companies. This is as true for many smaller businesses as it is for larger multi-nationals. It provides investors, shareholders and management with trusted independent verification of an organisation’s financial statements and gives some insight into how well it is being run.
In my view, many SMEs and subsidiaries will continue to choose to have an audit, even though they may qualify for exemption, because it provides confidence and peace of mind. It can be important to have audited accounts when pitching for contracts or seeking finance. For those who choose not to have an audit, we should absolutely continue to encourage them to seek third party assurance on their financial statements. This is a service an ICAEW Chartered Accountant can provide.
We need to look carefully at the detail of the proposals and ICAEW’s Audit and Assurance Faculty will be responding to the consultation in due course. To help us shape our response, we will be consulting members and would like to know what you think. If you’re in business and as a result of these proposals are now eligible for audit exemption, will you take it? If you’re in practice and have clients who may now be exempt from audit, how do you think this will impact on you and your business?
I look forward to hearing your thoughts.