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Who needs an audit?.

The government has recently announced changes to reporting and auditing requirements. As a result many more companies and LLPs will not require a mandatory audit. The changes have been marketed by the government as saving businesses millions in reporting and accountancy fees, however there are a number of factors that directors and partners need to consider.

Author

Richard McNeilly

The key changes

The key changes to the reporting and auditing requirements are as follows.

  • Small companies and groups. The new audit thresholds (see below) will be aligned with small company accounting thresholds. Going forward, companies and LLPs who don’t meet two out of three criteria relating to balance sheet size, turnover and number of employees will be able to choose whether to have an audit.

  • Qualifying parent companies and their subsidiaries. There is an option to not have subsidiaries audited if the parent instead provides a statutory guarantee over the subsidiaries’ liabilities.

  • Dormant subsidiaries. Will now not be required to file annual accounts if the parent provides a statutory guarantee.
    These changes come into effect for accounting periods ending on or after 1 October 2012.

Caution is required

The changes to reporting and auditing requirements will at first sound compelling to many directors and partners. But with the opportunity to perhaps cut costs, comes danger.

The new regulations bring new responsibilities and complexities; meanwhile the advantages of an audit remain undiminished. Any decision to take advantage of an audit exemption needs to be taken with care. Before making the decision directors and partners should think about the following:

  • Does your memorandum and articles of association or partnership agreement require an audit?

  • Are you regulated by a professional body that requires an audit?

  • Do your bank loans or overdraft include finance covenants requiring an audit?

  • How will suppliers and customers react to non audited accounts?

  • How will business owners gain comfort that they are not being defrauded by management?

  • What will be the impact on credit ratings?

  • What will be the impact on the value of the company or LLP if you want to sell the business?

  • Where a subsidiary does not prepare audited financial statements, its parent must guarantee its “liabilities” and must file that guarantee at Companies House. The parent also needs to file consolidated accounts at Companies House. Note “liabilities” has not been defined and so is open to interpretation by the courts.

What are the new audit thresholds?

The new thresholds, applicable for accounting periods ending on or after 1 October 2012, are as follows.
A company or LLP will require a mandatory audit if it meets two out of the following three thresholds:

  • Turnover of £6.5 million

  • Gross assets of £3.26 million

  • 50 employees

Companies within a group will require a mandatory audit if the size of the group meets two out of the following three thresholds:

  • Aggregate turnover of £6.5 million net or £7.8 million gross

  • Aggregate gross assets of £3.26 million net or £3.9 million gross

  • Aggregate number of employees of 50

Conclusion and next steps

Small and medium sized businesses should remain focused on strong financial controls and management oversight.

Audit and assurance and independent verification is important in instilling confidence in a business’s financial position. As a result many businesses will still benefit and may still choose to have audits.

Directors, partners and business owners should consider very carefully whether an audit is required or desirable for their business.
Magma’s audit and assurance team can advise directors, partners and business owners on their options and provide guidance.