Margaret Laidlaw: Audit benefits can outweigh the costs

Margaret Laidlaw, managing partner of Mazars in Scotland
Margaret Laidlaw, managing partner of Mazars in Scotland
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Audit exemption. Sounds hopeful? A hall pass to avoid an annual overhead and additional workload?

Perhaps. But should businesses be leaping at the chance to down audit tools, or is auditing a necessary process that offers a welcome “sense check” and reassures shareholders and clients alike?

With some businesses set to become eligible for audit exemption, taking advantage of the new rules might not actually be in the best interests of all.

The UK government recently announced that small company thresholds are to rise again, in line with an increase in limits set by the EU. Following a consultation suggesting that audit thresholds would be uncoupled from small company thresholds and left unchanged, it now seems the government’s intention is for audit thresholds to also be allowed to increase.

This means that, with effect from accounting periods starting on or after 1 January 2016, an audit will only be required for companies exceeding two of the following three criteria in two consecutive accounting years:

A business with a turnover of more than £10.2 million; gross assets of over £5.1m and/or an average number of employees of more than 50. Tick at least two of these boxes and yes, an audit is required.

These new exemption limits will apply to all private companies other than members of a group containing a fully listed entity (audit exemption will, for the first time be allowed for subsidiaries of unlisted PLCs or Aim-listed companies); banks; insurance companies or charitable entities registered with the Office of the Scottish Charity Regulator or the Charities Commission (these have their own specific thresholds).

Don’t now require an audit? Don’t pop the champagne corks quite yet. Before you take advantage of your new-found audit freedom, it’s vitally important you make sure that you can actually do this. Problems can crop up here, in situations such as:

If your company’s Articles of Association include a requirement for an annual audit of accounts (not an insurmountable problem – Articles can always be amended with shareholder approval)

If your company’s banking agreements include a requirement to produce audited accounts

If an external investor/shareholder is unwilling to allow the company to dispense with the annual audit

However, if your company does meet the criteria for audit exemption, the question remains: should you take advantage of this opportunity to save on overheads – or are there actually very good reasons to keep on auditing? The answer very much depends on your company’s circumstances. For example:

If there are areas of complexity, sensitivity or judgement within the financial accounting process, many finance directors welcome a regular sense check on their work

Similarly, in some sectors (particularly those involving long-term contracts), potential customers will attach credibility to accounts which have been subjected to an external audit and may actually require these as part of the tender process

Having an audit report on your annual financial statements is said to enhance your company’s credit score

If you have a mixture of internal and external shareholders, an audit will help to give external shareholders comfort that the company’s affairs are not being organised or manipulated to the benefit of management

If you’re looking to raise significant finance or sell the business in the medium term, an audit is likely to reduce timescales and due diligence costs associated with the transaction

If a stock exchange listing is part of the company’s strategy, a track record of audited financial statements will be required for the admission documents. Whilst these audits can be carried out retrospectively, this may add significantly to the cost and add further complexity to the listing process

It’s clear that the increase in audit thresholds will be well received by many private firms as a straightforward opportunity to cut down on compliance costs and get rid of an additional process. However for others, careful consideration really is needed as to whether the benefits to the company in terms of an independent review of the numbers and good governance might outweigh the ongoing costs.

Margaret Laidlaw is managing partner of accountancy firm Mazars in Scotland