Increase in audit threshold – to have, or not to have an audit?

Two of the key criteria used to determine whether a company’s accounts must legally be subjected to a financial audit have been changed by an EU Directive, leaving some businesses to consider the benefits of voluntarily continuing with an annual financial audit.

The financial audit thresholds for accounting periods commencing after January 1 2016 are increasing to £10.2m turnover (previously £6.5m), £5.1m gross assets (previously £3.26m), and 50 employees.

To require an audit, two out of the three criteria need to be reached for two consecutive years. Groups of companies are considered ‘in aggregate’ when establishing the group’s audit status.

Some companies who fall out of audit when applying the new increased limits may still be committed to audit by condition of their funding arrangements or by the terms of their constitution, but the majority will have a decision to make.

Many directors may naturally take the view that they will not have an audit to save on the cost and hassle for finance staff and themselves. These companies should consider the bigger picture – despite the audit no longer being a requirement, the results will be of interest to stakeholders.

There are significant benefits to having an audit which should not be disregarded. This applies not only to those that may ‘fall out’ of the requirements due to the increased thresholds but also to companies that were below the previous thresholds.

Primarily, this includes assurance that the performance and position of the company being reported is materially correct and adds credibility to the published financial information for stakeholders. Particular stakeholders who will take an interest include funders, investors, customers, suppliers, potential acquirers, and of course the shareholders.

A ‘value added audit’ can assist in identifying deficiencies in key internal control mechanisms across a business that can, through recommended improvements, help reduce risk and improve performance.

In recent years, funding has been a challenge for many SMEs but an audited set of financial statements is likely to carry much more weight if it is required in the future.

I know from experience and discussions with clients how important their credit rating is and what difficulties they can have with suppliers, funders and potential funders when this is negatively impacted. Credit ratings can be improved when accounts are audited and it can have a negative effect when companies fall out of audit. A reduction in credit rating can lead to issues with suppliers which in turn can cause business disruption, cost and delays.

The companies now falling below the revised audit thresholds are likely to be of a size that may be attractive to a potential acquirer. Depending on the directors and owner’s plans, it may also be beneficial to continue with an audit, as audited accounts will be perceived more favourably by prospective purchasers and may also give the impression of a more sophisticated target.

There are other benefits in staying in audit, but the points set out above are a good starting point before making the often-unconsidered decision to automatically ‘fall out’.

If you require any further information or want to consider the appropriateness of an audit for your organisation then do not hesitate to contact Jimmy King on 01254 688 100 or email j.king@pierce.co.uk