Relaxed Audit Thresholds: Opportunities and Dangers
As we expected, the Department of Business Innovation and Skills recently announced (06/09/12) that it will be pressing ahead with its relaxation of the Audit Thresholds, in an effort to cut “red tape” and boost business.
For many, this will be welcome, and straightforward. In broad terms, limited companies and limited liability partnerships qualifying as SMALL under the Companies Act 2006 will no longer require a statutory audit. Hence, those smaller entities previously caught on the audit hook only because their Gross Assets exceeded £3.26m, or only because their Turnover exceeded £6.50m, will now be exempt from statutory audit.
Similarly, small GROUPS will also be exempt from statutory audit, provided that they satisfy the size criteria. DORMANT subsidiaries will no longer be required to file individual accounts at all.
Most radically, ANY subsidiary, regardless of SIZE, will now be EXEMPT from statutory audit, provided it is eligible, and certain conditions are fulfilled.
This will sound compelling to many Directors, but with opportunity comes danger. The new regulations bring new responsibilities and new complexities; meanwhile the time-honoured advantages of statutory audit remain undiminished. Just as with earlier relaxations of the Audit Thresholds, any decision to take advantage of the exemptions needs to be taken with care.
- Where a subsidiary does not prepare audited financial statements, its parent must guarantee its “liabilities” under CA06 s479C, and must file that guarantee at Companies House. Note that “liabilities” have not been defined in the regulations, and will be open to interpretation by the courts.
- Although a subsidiary may not have to prepare audited financial statements, the group financial statements of which it forms part will still have to be audited. This includes the financial information of the “unaudited” subsidiary. Hence, in practical terms, the subsidiary still needs to be “audited”, and any savings in time and fees may be disappointing.
- Other statutory audit obligations, for instance, under the Charities Acts, remain.
- An audit requirement may stem from lenders or donors; for instance, may attach to a Bank Loan Covenant, or a Government Grant Condition.
At HSJ, we see statutory audit as an opportunity for the Directors and Managers of a business to engage with external professionals whose critical eye is experienced at identifying actual or potential weaknesses within the accounting systems of an entity. Over the medium to long term, the statutory audit function can be harnessed by the Directors to assist them in strengthening their accounting systems, and enhancing the reliability of the financial information which they generate; information which the Directors need to make key strategic decisions affecting the future of their business.
Moreover, we believe that statutory audit enhances the value of your financial statements for external users – customers, suppliers, lenders, among them – adding credibility to your business.
The relaxed regulations come into force for accounting periods ending on or after 1st October 2012. If you are uncertain as to whether your organisation will qualify for the new audit exemptions, or should you be unsure of the relative merits of claiming the exemptions, or should you wish to discuss your audit or assurance requirements generally, then please do not hesitate to get in touch with us – without obligation.
No part of this article constitutes advice, and no responsibility will be accepted by HSJ for your acting or refraining to act as a consequence of reading this article. You should always seek appropriate up-to-date professional advice before acting.
Appendix: The “Small Entity” Parameters
LTD’s and LLP’s falling below two of the three parameters will normally qualify as “small” and be exempt from statutory audit:-
Turnover – less than £6.50m
Gross Assets – less than £3.26m
Employees – less than 50
For Groups, there are additionally “gross” parameters applicable to group data prior to consolidation adjustments. Groups may meet either the parameters above or those below in qualifying as “small”:-
Turnover – less than £7.80m
Gross Assets – less than £3.90m
Employees – less than 50