Our Head of Business Advisory Manager, Dan Wilson is discussing both sides of the argument on whether increasing the audit thresholds will be beneficial to companies.
“The increase in the small company threshold has thrown up debate about whether the audit threshold should follow suit, whether you think it should will depend on who you are!”
The first thing people will say is that accountants and audit firms will argue for it to stay as it is, turkeys voting for Christmas and all that! But there is another argument, with the effect this drop in fee income is likely to have. If audit revenue fees decrease, firms will naturally have less ability and also less inclination to invest their resources in this area. This can mean a reduction in the quality of staff working on audits, as they have less experience with less audits to work on and investment in systems and processes will also reduce, meaning the overall standard of audits could stagnate. This will be an issue for the quality of financial information produced by the larger companies who will still need to require an audit, placing less value on them.
Having an audit does strengthen the internal controls of a company. Effective controls and systems are more likely to be implemented by management and followed by staff if everyone is aware the auditors will be in at the end of the year checking these systems. The confidence an audit gives to shareholders not involved day to day, is that the accounts are correct, the systems are in place and that directors are working in their best interests is important, even though the cost may slightly lower their dividend! This cost may well be outweighed anyway by the effectiveness the detailed systems have on the company as a whole and its efficiency.
“Of course, no matter what the threshold is, if 10% of shareholders request an audit due to any concerns they may have, then an audit is what they get.”
There is also a risk that management may take the opportunity to try and manipulate the figures knowing they will not be audited, to help them meet covenants for example, which will have less chance of been detected without an audit. Especially given that many of the firms likely to be affected by the increase in threshold are owner managed, i.e. they are both the directors and shareholders of a company.
The other side of the argument for these owner managed companies is that there are no external shareholders who would be interested in reviewing a set of accounts, knowing that they have been externally and independently verified. This means there would be few stakeholders requiring an audited set, creating a cost that is not needed. A cost that could be used elsewhere to increase marketing spend or invest in a new employee to help growth for example.
Audits can also be seen as a distraction from the day to day operations of a company, with key personnel and management time needed to supply information and deal with queries from the auditors throughout the audit.<
“An increase in threshold, would not necessarily mean companies would do away with any kind of detailed independent check.”
Other reports, such as an independent review, could be chosen or firms could choose certain parts of their business that are of concern to be audited, without a need for a full audit. This would provide more choice to companies as to what they want audited.
An audited set of accounts is a useful tool to provide when seeking finance from lenders, with the added confidence provided by the auditor’s report, providing it is unmodified of course! The cost of borrowing may just be sneaked up when an application is being reviewed based on unaudited accounts. Of course, many companies below the threshold currently have an audit without a legal requirement to do so and many of the companies affected may still choose to have an audit if the threshold is increased, realising the benefits are more than just complying with statute.
An audit will become more of a choice for companies, and those that choose not to may find themselves still having to do so anyway if certain stakeholders require one, even if the law doesn’t.