Is more audit exemption a good idea?

Last week the Government announced a further expansion of the audit exemption rules.  In addition to extending the exemption for some so called “small” companies, it will be available to most subsidiary companies provided the parent company guarantees their liabilities.

Arguably I should be welcoming the relaxation in rules, perhaps more businesses will want internal audit as a result?  In fact internal & external audit have a different focus – one being geared towards the business, the other being focused on the annual accounts; however both are valuable and often not understood.

A former colleague had an interesting definition of small medium and large companies:

  • In a small company everyone knows everyone else
  • In a medium sized company some people know everyone else
  • In a large company no-one knows everyone else

Company legislation can’t be based on this sort of criteria, but it’s the best definition I’ve come across!  I’d argue that many companies qualifying as “small” are of a size where there are many stakeholders and they can be quite complex.

My colleague’s definition is relevant because it is about interaction between people – if you are running a business and don’t know all your staff then you become dependent upon delegation and systems.  Larger “small” businesses can be quite complex and there is scope for problems to become unnoticed and fester; also depending on the culture bad news may be swept under the carpet.

Even if they have their fingers on the pulse of their company’s finances, it is not unknown for directors to massage (or even falsify) their figures.   While an external audit is not aimed to pick up all issues that will be of concern to directors (as it is focused on the accounts) it does provide an independent check, a focus for the business to make sure its accounting is in order and also a publicly available report (albeit addressed to the shareholders), which may help credit ratings.

As of a result of the exemption for subsidiaries, there could be much bigger (and more complex and devolved) businesses that become exempt……it will be interesting to see how many parent companies actually provide guarantees to all and sundry just to avoid an audit!

An annual audit used to go with the territory of having limited liability.   The government’s move will be seen as cutting red tape– although in my view it’s a bit like exempting cars from the MOT – we should be careful what we wish for!


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