Audit exemption: reduced red tape or false economy?

RED TAPE is, and has always, been a bug bear for small businesses.

So when the government’s much trumpeted revised statutory audit exemptions criteria (two out of three of the following – turnover of less than £6.5m, gross assets of less than £3.26m and employ less than 50 employees) came into force last year, there were I am sure many finance directors breathing a sigh of relief.

After all, the business will save money and time.

But just because your business satisfies the above criteria does this mean it should automatically prepare audit exempt accounts?

In my view, and based on conversations with at least 50 small businesses in the past couple of months, owners of such businesses should consider the pros and cons of having a statutory audit before dispensing, with the service purely to achieve a cost saving.

Those running the business should take a considered look at the way the entity is financed and at the business’s lifecycle. An obvious business consideration is one where the owners are planning to sell the business in the near future. While any acquirer will always carry out their own due diligence the starting point for much of the accounting and taxation due diligence is the audited financial statements and supporting audit files. I am sure that any acquirer and the acquirer’s advisers carrying out the due diligence assignment will have greater comfort when the starting point for such work is audited financial statements.

Also other users of financial statements such as customers, suppliers and credit agencies all react poorly to change and I do not believe any will react favourably when a business moves from an audit to unaudited regime. This could lead to a reduced credit rating for the business or suppliers finding it harder to insure your debt – which could have a significant impact on the trading capabilities of the business.

In short the adverse consequences could outweigh the cost of continuing with an annual audit.

Of course audits are not just solely about compliance. Audits can be very helpful tools to businesses in assessing and identifying problem areas and helping the business develop and adapt its systems and controls as it grows. They can also prevent instances of fraud or, at the very least, act as a deterrent to this.

Then there’s the issue of whether a business can take advantage of the new rules? Take the case of property investment entities which will often have associated bank funding and one of the conditions could be to provide audited accounts within a set timeframe. Unless an amendment to the agreement can be approved regardless of the size of the business they will still need to continue to have a statutory audit in order to comply with their banking conditions. Given the banks are still scrutinising existing and new loans, its best, in my view, not to make any changes until the normal renewal date.

In addition, entities will need to review their constitutional documents such as LLP Members Agreements. This would ensure that unaudited accounts are permitted to be prepared for the members and shareholders. In some cases it may be mandatory for accounts to be audited as there are outside members and shareholders wishing to protect their interest. Although these documents can usually be amended where there is a small number of shareholders and members involved, it will require the appropriate levels of consent to be obtained and documented. This would need to be actioned prior to just simply dispensing with a statutory audit.

Notwithstanding the above issues there are still a large number of businesses for which the availability of audit exemption and the associated cost saving is a sensible move. For example many family owned property investment businesses are now audit exempt and previously the audit served little benefit. The associated cost saving and having the administrative burden removed from them must be a positive move.

Audit exemption can be helpful but I would urge all businesses to look at all factors before they leap into the audit exempt world. It is likely that any adverse consequences of doing so will be much more detrimental to the business than the benefit of the short term cost saving.

Richard Churchill is a partner at accountancy firm Shelley Stock Hutter