Audits

More than 100,000 UK businesses could opt out of annual audits as the government announces plans to change qualifying thresholds and reduce auditing and reporting requirements.

The government’s response to the consultation on Audit Exemptions and Change of Accounting Framework confirms plans to allow more companies to make a commercial decision about whether or not to have a statutory audit.

Business secretary Vince Cable said:

‘Reporting requirements have become increasingly demanding and costly over the years. We listened to business, who made a strong case for reform, and I am delighted that we are now taking this opportunity to make audit more flexible and targeted.’

The changes to audit rules are likely to save companies up to £2.4m per year in fees, according to BIS.

Currently, to be eligible for an audit exemption in the UK, small companies must be less than a certain size in terms of balance sheet and turnover. The new regulations will align mandatory audit thresholds with accounting thresholds, meaning SMEs will be able to obtain an exemption if they meet two out of three criteria relating to balance sheet total, turnover and number of employees. This change will allow 36,000 more companies to opt out of an audit.

Under the current thresholds, qualifying SMEs must comply with two of the following criteria: they must have no more than 50 employees; no more than £3.26m on their balance sheet; and less than £6.5m in turnover.

Simon Letts, head of audit quality at Deloitte, says:

‘This is an innovative and welcome initiative offering flexibility to companies. While an audit is a valuable service to provide assurance to shareholders and directors, these benefits may be considerably lower for wholly owned subsidiaries.’

‘Directors of both parent companies and subsidiaries will need to balance their assurance needs, the potential savings in audit fees and the potential exposure under a guarantee.’

The government will also exempt most subsidiary companies from mandatory audit, as long as their parent company guarantees their liabilities. A further 83,000 subsidiary companies fall into this category. In addition, another 67,000 dormant subsidiaries will no longer need to prepare and file annual accounts, provided they receive a similar guarantee.

Following consultation by the Financial Reporting Council (FRC) on changes to UK GAAP, the government has also decided to allow companies that prepare their accounts under International Financial Reporting Standards (IFRS) to move to UK GAAP and take advantage of reduced disclosures.

The regulations are expected to come into force for accounting years ending on or after 1 October 2012.

(Accountancy Live, 6 September 2012)