THE AUDIT IS DEAD - LONG LIVE THE AUDITOR

Over the last few years the annual audit has become an increasing burden for businesses. The Government, as part of its drive towards deregulation, has now reduced this burden for many smaller companies. Or has it?



Who do the exemptions apply to?

From 11 August 1994, small companies with a turnover of œ90,000 or less, and total assets of not more than œ1.4 million, are exempt from the need for a statutory audit of their annual accounts.

From the same date, medium-sized small companies, those with a turnover of between œ90,000 and œ350,000 and total assets of not more than œ1.4 million are also exempt, provided that the directors ensure that an 'independent report' is prepared by a suitably qualified accountant.

This report, addressed to the shareholders of the company, states whether in the opinion of the reporting accountant:

n the accounts agree with the accounting records;

n the accounts have been drawn up in a manner consistent with statutory accounting requirements; and

n the company was eligible for exemption from a full audit.



Exceptions

The company is not entitled to take advantage of the audit exemptions, regardless of size, if at any time during the year it was:

n a public company (not necessarily listed);

n a parent company or subsidiary undertaking;

n a banking or insurance company;

n a company enrolled with the Insurance Brokers Registration Council;

n an authorised person or appointed representative under the Financial Services Act 1986;

n a 'special register body' or an employer's association under the Trade Union and Labour Relations Act (Consolidation) 1992.



Can shareholders object?

Holders of more than 10% or more in aggregate of the issued capital (or 10% of the members of a company without share capital) can request an audit of the company's financial statements. The shareholders must notify the company in writing no later than one month before the end of the financial year in question. Shareholders continue to have the right to receive copies of the financial statements, even if they are not audited.



The true effects

The changes have been widely welcomed. However, the lack of an audit is likely to make less difference than many directors might expect. Directors will continue to be responsible for ensuring that the company keeps accounting records which comply with the requirements of the Companies Act, and for preparing and filing accounts which give a true and fair view (which therefore must continue to meet the requirements of accounting standards, as well as company law).

For the first time they will also have to include a specific acknowledgement of these responsibilities at the foot of the balance sheet, together with a confirmation that the company was eligible for exemption for the year in question.

Few companies are likely to have the resources or expertise to carry out these functions by themselves.



Conclusions

The abolition of the audit for small companies is likely to have less impact than might be expected because the need to provide accurate and reliable accounts remains.

Moreover, companies may still require an audit because:

n the shareholders want one;

n the bank or creditors ask for one;

n the size criteria are not met consistently, leading to a qualified audit report on opening unaudited figures;

n the Articles of Association require an audit, though the Articles may be amended by special resolution;

n the discipline of an audit is beneficial to the smooth running of the business

n the cost saving of not having an audit will not be significant where the majority of the auditors' fees in the past have related to accounting and other assistance, which will continue to be needed in the future.

The Government may have taken away the statutory need for an audit for many smaller companies, but, as before, the auditor still has a major role to play in assisting companies with their financial accounting and annual figures.