Audit exemption was first introduced in 1994 for companies with a turnover of £350,000 and it has been on the Government’s agenda ever since.
In 2000 the turnover threshold was raised to £1 million and with effect for year ends after 30 March 2004 there has been a further increase in the turnover threshold to £5.6million. According to the DTI the increase in the audit threshold will mean an additional 69,000 companies will be exempt from the requirement to carry out an annual statutory audit.
Many of these 69,000 companies will now be considering whether they should continue to have a statutory audit or whether they will file audit exempt accounts. They may also be considering what other form of assurance may be available.
It is clear that many of the companies who can now decide not to have an audit are very different from the companies who have previously been able to make this choice. These companies will have more sophisticated financial systems, may be able to produce their own accounts and will often employ either a financial director or qualified accountant. It is also likely that the level of borrowings and security provided will be different from that which applied to the smaller companies.
If your company is one of those who could now be exempt, or even if you previously qualified but continued to have an audit, you need to think carefully before making the decision to dispense with an audit.
There are many companies that, despite the fact that they are audit exempt, will continue to require an audit. Many older companies are required to appoint auditors under their articles of association, although these can be changed if considered appropriate. Some companies are not entitled to audit exemption. These include public limited companies and many of those involved in financial services. The legislation also provides for members owning 10% or more of the shares of a company to request a statutory audit.
Even if you are able to take advantage of audit exemption there are other factors to consider before you reach a final decision. The most important of these are considered below.
i) Many companies are bound to banking covenants that require audited financial statements. It is important to remember that these conditions often apply to ordinary bank loans and overdrafts.
ii) If your company is growing and in the future may be looking for further funding from, say, a venture capital company then audited accounts may well be essential.
iii) If you are considering a sale some time in the future then potential purchasers may want audited accounts.
iv) If in the near future you expect to exceed the audit exemption limits there may be implications for the auditors report in the year you move from audit exempt accounts to audited ones.
It is clear that many companies will continue to have an audit regardless of the legal requirements because they value the benefits of an audit. These include.
i) Where there are outside shareholders there is additional reassurance that the information presented by the directors is reliable.
ii) To help deter fraud.
iii) Increased confidence that the information included in the financial statements meets statutory requirements.
iv) To help identify issues of relevance to management that might help in running the business and making decisions.
Remember if an audit is not carried out the directors must take responsibility for preparing accounts which give a true and fair view of the state of affairs of the company and of its profit and loss for the financial year. Not something most directors are competent to do.
Clearly it will be right for many companies to take advantage of the exemption if it is applicable to them. Equally clearly this would not be the right decision for many other companies. Think carefully before you make a decision. Why not contact us so that between us we can look at what is right for you and what alternatives could be available if you do opt for exemption.
Clive Jones – Clifford Towers, Chartered Accountants
|
