More small companies and subsidiaries would be taken out of the mandatory audit requirement; and switching from IFRS to GAAP would be made easier
The Department for Business, Innovation and Skills (BIS) today announced a consultation on “Audit Exemptions and Change of Accounting Framework” (the Consultation). The Consultation document can be read here and the accompanying press release is here.
Widening the small company exemption from audit
At present, companies are classified as “small” if they meet two out of three criteria set out in section 382 of the Companies Act 2006:
- No more than 50 employees.
- A balance sheet total no more than £3.26 million.
- No more than £6.5 million in turnover.
To obtain an exemption from audit in the UK, small companies must fulfil both the balance sheet and the turnover criteria (section 477 of the 2006 Act). That is a “gold-plating” of requirements under the relevant EU Directive. So in the Consultation, BIS is proposing that UK small companies would be eligible for the exemption from statutory audit by meeting any two of three criteria.
BIS estimates that this will take 36,000 companies out of the mandatory audit regime and save an estimated £206 million per year (on the basis of average audit fees of £9,500). The effect of the change would be to align the small company audit criteria with the small company accounting criteria. Similar changes will be applied to the audit requirements for Limited Liability Partnerships. It is proposed that these changes will apply for accounting years ending on or after 1 October 2012.
Small companies would remain able to chose to have an audit if they wish. As to concerns about removing more companies from the quality check provided by an audit, the Consultation document states that:
“The Government’s view is that extending the audit exemption to encompass more companies will not cause significant deterioration of the quality of financial information. This view is supported by informal stakeholder discussions. It is also worth noting that the main creditors of small companies are HMRC and banks….
…In the past some commentators have suggested that lack of an audit would prevent companies from raising finance. However, we do not believe alignment of the criteria for a small company for audit purposes with those for accounting purposes will prevent companies from raising finance, since these companies will remain free to opt for a voluntary audit, should they wish or should this be demanded by the market. There is no reason why the Government should impose the regulatory burden of mandating audits for those companies. In addition it should be noted that the providers of finance are in a position to require a company to provide current financial information before deciding to do business with them.”
Subsidiaries: Exemption from mandatory audit where conditions fulfilled
In the Consultation, BIS is also proposing that it will introduce legislation in 2012 to exempt subsidiary companies from mandatory statutory audit where the subsidiary fulfils seven criteria – principal amongst which being that the parent company is registered in the EU and has declared that it guarantees the debts of the subsidiary, that the subsidiary shareholders have unanimously agreed to dispense with an audit and that the subsidiary is not in the banking or finance sector. The full criteria are set out on page 5 of the Consultation document.
BIS estimates that the change to the audit exemption for subsidiaries would save £406 million per year.
More flexibility to change from IFRS to GAAP
BIS is also seeking views in the Consultation on various options to allow companies who currently prepare accounts under IFRS more flexibility to change their accounting framework to UK GAAP. This will permit subsidiaries to take advantage of the reduced disclosures under UK GAAP. It is proposed that these changes will apply for accounting years ending on or after 1 October 2012.
The Consultation will close on 29 December 2011.
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