6 September 2012
The Government's latest plan to align mandatory audit thresholds with accounting thresholds and thereby remove the reporting 'burden' for small businesses could spectacularly backfire, according to a leading business organisation, the Institute of Credit Management.
ICM Chief Executive Philip King says that the plans by Vince Cable to increase the number of smaller businesses who are exempt from a formal audit will not achieve the result the Business Secretary is looking for, and could starve the economic engine of fuel:
"By exempting a further 36,000 companies from needing an audit, the Business Secretary has in effect created 36,000 more companies who will struggle to get credit because they are unable to provide the assurance to potential suppliers and customers that they are financially viable and trustworthy partners to do business with," he says.
"Far from freeing them up to expand and grow their businesses, the Business Secretary is perversely putting a potential brake on any real growth."
Vince Cable's announcement came with the Government's response to the consultation on Audit Exemptions and Change of Accounting Framework, confirming plans to allow more companies to make a commercial decision about whether or not to have a statutory audit. Mr Cable believes that tackling the reporting requirements will help save UK companies millions of pounds every year and free them up to expand and grow their business.
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 choose not to have an audit.
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 will benefit. In addition, another 67,000 dormant subsidiaries will no longer need to prepare and file annual accounts, provided they receive a similar guarantee.
Philip King says that the purpose of an audit is not just to promote a company's financial viability: "A 'small' business by the Government's definition could be a firm with a turnover of £6.5 million, with £3.26 million on its balance sheet and 50 employees.
"I would suggest that is big enough to warrant an audit that will not only identify accounting errors, but also such things as process failures or even fraud that could cause its downfall, and might otherwise go unnoticed by employees. How does that support the idea of business growth?"
Following consultation by the Financial Reporting Council (FRC) on changes to UK Generally Accepted Accounting Principles (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 new regulations will remove EU gold-plating and ensure UK SMEs are not at a disadvantage compared to their European competitors.
"Mr Cable says that these changes are part of the Government's wider drive to reduce unnecessary burdens and make the UK one of the best places in the world to start, finance and grow a business," Philip concludes. "But in reality, they could achieve the exact opposite.
"Credit is the fuel that drives the economic engine, but it requires more not less financial information to be disclosed. The Business Secretary may just have starved that engine of the vital fuel that it needs."
The regulations are expected to come into force for accounting years ending on or after 1 October 2012.
To read the BIS press release click here