by

Jim Cousins
Labour MP for Newcastle Central

Austin Mitchell
Labour MP for Great Grimsby
 

We are pleased to comment on the DTI’s consultation document. We have no objection to our response being made publicly available.

1. We support the proposal that the turnover threshold for small company audits should be raised to £4.2 million. Companies below this limit should not be required to have a statutory  audit.
 
2. We believe that subsidiaries of companies with the group total turnover of £4.2 million should not be exempt. We also believe that the exemption should not be applied to banks, financial services, pensions and other financial businesses.
 
3. The consultation paper also invites comments about the possible ‘asset test’ for audit exemptions. The balance sheet figure for the assets obviously depends upon  the valuation methods chosen. By using suitable valuation methods, the ‘asset test’ can always be defeated. In view of the difficulties, we believe that a single criteria based upon  ‘turnover’ is the most appropriate.
 
4. The government should also consider exempting smaller charities from audits. Currently, people collect money for charitable causes but because of the audit requirements some of this money automatically finds its way into the pockets of accountants. This is inappropriate and defeats the aim of charitable donations. Auditors are not a charity!
 
5. The  consultation document estimates that the raising of the audit threshold can save some businesses around £5,000 per annum. We feel that the actual savings may be even greater. Small businesses bear not only the fee paid to auditors, but also additional costs of housing the auditors, such as the cost of the space, lighting and heating provided to the auditors. In addition, many entrepreneurs also have to give up their valuable revenue earning time to answer routine questions from auditors. The raising of the threshold will reduce the regulatory burdens on small businesses and will enable them to use the savings to generate additional jobs.
 
6. There may also be benefits for society at large. Currently between 10%-20% of all university graduates are making a career in accountancy. This is a huge investment of national resources in economic surveillance. The raising of the small company audit threshold has a potential to release graduate talent for other industries and for more useful social purposes.
 
7. The value of the annual audit has been severely diluted by the 1990 Caparo judgement. As a result, auditors do not owe a ‘duty of care’ to individual shareholders and other stakeholders. In addition, auditors claim that they are not obliged to detect/report fraud. Therefore, the value of audit to banks and creditors is severely reduced.
 
8. In many cases, the directors and shareholders of  small companies are the same parties. The present annual audit hardly offers them any protection. Should shareholders/directors so wish, they are always in a position to demand an audit. So the raising of the threshold does not impair shareholder rights.
 
9. The Inland Revenue deals with thousands of self-assessment tax returns which are  not based upon audits. It also has special powers to investigate individuals and businesses regardless of  whether an audit has been carried out or not. In response to The Revenue’s inquiries  some small businesses may choose to have an audit. But will always be on an ad hoc basis and will not be compulsory for each year. The government may wish to further strengthen the Revenue’s powers for dealing with the provision of misleading accounts.
 
10.  Banks can always impose debt covenants and demand specific audits even if a statutory audit is carried out. The raising of the small company audit threshold does not constrain their rights.
 
11.  In the case of small companies, trade creditors rarely demand a sight of annual audited accounts as a condition for granting credit. Instead, the decision is often based on reputation and past payment record.
 
12.  Press reports show that many accountants also support the raising of the threshold to £4.2 million. In a recent survey conducted by the ICAEW, around two-thirds of the respondents supported raising the threshold to £4.2 million or more. However, some accountants and their trade associations (e.g. ACCA) continue to oppose reform. Much of the opposition is from accountancy firms that have shunned the application of external audits to their own affairs. Even without external audits, they obviously manage to secure trade credit and bank loans.
 
13.  The raising of the small company threshold is also likely to generate savings for accountants as many would have to pay lower licensing fees to the RSBs. Many may be exempt altogether and will be free to develop their advisory and other capacities.