Audit Regulations: Responsibilities, Changes & Impact

January 2016 was a time of change in the audit sector.  Government amendments to audit regulations and an increase to the exemption threshold have affected individual businesses and the audit sector as a whole.

Audit Exemption Guidelines – As of January 2016

1) Small companies are exempt from external audit obligation if they meet 2 of the following criteria:

• Turnover of up to £10.2m
• Total assets of up to £5.1m
• Have fewer than 50 employees

The exemption levels for requiring an audit have been substantially increased.  Prior to 1 January 2016, small companies were only entitled to audit exemption if their turnover was under £6.5m and total assets under £3.26m.

The increase in the audit threshold will make approximately 11,000 additional small companies exempt (according to the Department for Business, Innovation & Skills, as quoted in the ACCA article ‘Audit Exemption Threshold: What’s The Damage?’).

2) Subsidiary companies of a larger group that meets particular criteria and where the parent company will guarantee all liabilities.

3) Charities with up to £1m gross income (unless both gross assets exceed £3.2m and gross income exceeds £250,000).

There are some organisations that are still required to have an audit even if they fall under the threshold in terms of assets and income.   This includes financial service companies and solicitors.  If a shareholder or a lender requests an audit, the company is also obligated to carry this out.

The impact of the exemption threshold increase on the audit sector

Shrinking market – the change in requirements will have an impact on the number of small companies that are serviced by audit firms.  With a significant number now exempt, the natural expectation is a likely decline in the number of audits carried out for this size of business.

Declining revenue – audit firms may find themselves with a negative impact on their revenue.  With a change in regulations and a decline in numbers, firms will be thinking ahead, amending their revenue and business strategies to align with these changes.

According to Caseware’s report, ‘The Changing Shape of the Audit Market’, which polled 100 companies, 51% of firms believe the new thresholds will affect their revenue.

Shifting market – as a result of the above, the market for audit firms may well shift towards having an even stronger bias for serving larger, complex businesses and organisations.

The effect of the rise in exemption threshold for small companies

Choice instead of obligation – small companies who meet the above criteria are no longer required to have an external audit as a regulatory obligation.  But this isn’t to say that all small companies will choose to forgo the audit and leave their financial statements in the hands only of their internal accountants.

While the natural assumption is to expect a decline in the number of small companies choosing to skip the audit process, it will be interesting to see in due course how companies of this size and type choose to progress.

The benefits of external audit still stand

While it may no longer be a requirement to commit to having an external audit, there are still a number of reasons why a small company may choose to follow this route:

• An external audit by a professional firm can ensure the accuracy of published financial information

• The involvement of a specialist firm can help increase confidence in the quality of financial statements by external stakeholders

• A professional audit can add gravitas to a company’s accounts

• Small companies may wish to use the services of an audit firm to access specialist knowledge and skills from experts in the field

• If preparing to sell the company, an external audit can be beneficial to ensure the maximum sale value is achieved