BIS' SME audit plans

By John Davies, head of technical, ACCA

Today sees Vince Cable announcing plans to give ‘more than 100,000’ small businesses the chance to choose whether or not they audit their accounts. The department of Business, Innovation, and Skills (BIS) tell us that over half a billion pounds could be saved.

This isn’t the first time that Cable was wandered into SME-audit territory.

There are a couple of points to make regarding these latest proposals.

The current UK exemption criteria amount effectively to gold-plating of the EU’s ‘fourth directive’ - the directive only requires companies do not exceed two out of three tests (turnover, balance sheet and employee numbers) to qualify as small businesses. Currently in the UK, small companies must fulfil both the balance sheet and turnover criteria, rather than ‘any’ two of the three. On this basis, aligning UK exemption criteria to the EU criteria is not unreasonable.

Theoretically though, it will open up the possibility that companies with turnover of much higher than the turnover threshold (£6.5m) will in future be able to opt out of the audit. We have to acknowledge that fast growing companies, and the increasing number of companies which employ very few or no staff, are likely to be able to claim this statutory exemption. In respect of such companies we would expect lenders of finance to remain keen to see audited accounts from them, so this must be taken into account in projecting cost savings.

As regards the potential savings for the SME sector, the FT reports that BIS claims that the average cost of an audit for a small company is £9500. We should wait to see how they come to this figure but on the face of it, it seems like something of an exaggeration.

BIS will also allow companies which are part of a group to be exempted (currently group companies are only exempt if their group as a whole is 'small'), on condition that their parent companies guarantee their debts. The principle of audit exemption for group of companies is already established, so this would be an extension of it, albeit a significant one. But remember, any material guarantee of subsidiary company debts will represent a liability for parent companies so this cannot be presented a win-win situation for them; as for stakeholders in small companies, any guarantee is of course only as good as the solvency of the guarantor.

If subsidiary companies exempt themselves from audit, the audit of the consolidated accounts would also become altogether more difficult, since the group auditor would not be able to use the results of the audit of any of the group companies. This would materially increase the amount of work and time involved in the group audit, and its cost.