21 October 2015 by John Burns
Smaller companies may have rejoiced when they saw that according to the new Companies Act 2014 they might be able to save the cost of an annual audit, subject to meeting certain (not too onerous) conditions. However saving an audit fee might cost a company far more in the longer term.
The new Act states that companies seeking an audit exemption must meet two out of three thresholds:
Banks may not like it
What are the implications for a small company that was previously the subject of an audit but which avails of that audit exemption? There is a serious issue for companies with borrowings from a financial institution, where providing audited accounts annually to that institution were part of the security arrangements issue. It is unlikely banks will be happy to pass on the annual audit. For companies who may need to seek emergency or rapid funding, not having an audited set of accounts is also very likely to slow down that process considerably. This could prove very costly indeed.
A look inside the company’s engine
Companies availing of an audit exemption must make sure that they have the support of their shareholders in doing so and boards of directors should reflect hard on seeking an audit exemption. Audits give assurance on how the business is being run and managed. Management therefore have an opportunity and a responsibility to address issues raised by the auditors in their audit as these are unbiased expert recommendations.
Unbiased expert advice
The outcome of an audit can facilitate the provision of advice that can have real payback for the company as it should cover such key areas as internal controls and risk management. Auditors are experts in analysing deficiencies with internal controls and assisting with solutions. Generally, audited accounts give credibility to a company – essential if a corporate transaction takes place in future years as they will be required as part of the due diligence process. Audits can reassure employees, shareholders and customers as they have been reviewed by an independent unbiased expert.
Credit rating could be affected
A company’s credit rating could be affected by not having an audit. Suppliers may be reluctant to offer appropriate credit limits and therefore trading companies that rely in part on credit rating agencies’ assessment of the company will look more favourably on companies that have an audit. All in all not having an audit could prove to be penny wise but pound foolish.
Finally certain charities that are registered as a Company Limited by Guarantee can claim exemption from audit. With the recent focus on the financial activities of some charities, however, an audit is an important independent check and reassurance for contributors.