RSS feedsMoves are afoot to plug an apparent gap in the audit market, created by the increased audit threshold to companies with a turnover of more than £5.6m. But has a gap really been created, or is this just an example of accountants creating a need that small businesses did not realise they had?
This month, the ICAEW will launch a new assurance service that does not go as far as a full-blown statutory audit, but does cover more ground than an accounts compilation report. Until now, a compilation report has been the only realistic alternative for those companies that fell out of the audit regime when the threshold was increased.
This, of course, has had an impact on the business of those accountancy firms that previously audited such companies and, in part, explains the drop in the number of audit-registered firms at the ICAEW. This year, the figure dropped to less than 5,000.
The government has justified the move to increase the threshold as part of its drive to reduce business red tape, but there is a flip side. There may have been additional bureaucracy of a formal audit, but at least a company could use this third-party endorsement when seeking to raise funds or improve its credit rating. And this is where ICAEW’s new product comes in.
Michelle Fisher, a partner at London-based firm Sobell Rhodes, has been the driving force behind the institute’s new service. ‘When the audit threshold went up, it became apparent there was a gap in the market,’ she says.
‘There were a number of £1m-plus companies asking, “Can’t you offer us a mini audit?” but there wasn’t anything we could offer other than a voluntary statutory audit or compilation audit.’
Fisher chaired the institute’s committee that was tasked with looking at possible products that could satisfy this demand.
The result is a service that will be able to offer a certain level of assurance over a company’s accounts, but would not issue an opinion on whether the accounts were a “true and fair” view. But this would be a step up from the compilation report that does not offer any form of formal assurance.
Fisher stresses the new assurance service would not offer the same levels of assurance of an audit, but says reports could be tailored to particular stakeholders, such as banks or credit managers. Indeed, the institute has embarked on a consultation process to ascertain whether stakeholders – which also include Companies House and HM Revenue & Customs – would welcome this new service.
According to Fisher, there have been positive results. ‘One sole practitioner has been using this service based on an earlier draft and said takeup has been remarkably positive,’ she says.
And part of the institute’s drive has been to create a single approach. ‘There may be numerous varieties of report, but our role has been to create something consistent,’ Fisher says.
This consistent approach is currently being rolled out and Fisher says practitioners will be talking to their clients about the service during year-end discussions.
‘It is a voluntary product,’ says Fisher. ‘It will be useful for SMEs and we think there will be a big takeup. It is a grass roots product to help small practitioners.’
Of course, we have been here before – there was the ill-fated independent professional review that was mooted when the audit threshold was set to be raised to £4.8m in 2001. This was ditched amid some acrimony. But this would have been a mandatory report – at least the institute’s proposal has the added benefit of being voluntary.
VOLUNTARY AUDIT
The move to create a mini audit has been met with some scepticism by the other accountancy institutes.
James Barbour, at ICAS is not convinced there is a market for the service. ‘It’s difficult enough to explain the difference between audit and non-audit to clients,’ he says.ACCA is similarly lukewarm. ‘Sub-audit reports have been tried before and have not been successful,’ says a spokesperson.
In the past, even the ICAEW has been against similar schemes. In 2001, the institute’s council debated whether it should support an independent professional review for those companies that fell below the then £1m audit threshold. It decided not to support such a move.
Since then the threshold has increased, and this has removed a sizeable chunk of small companies from the auditors’ grasp. The government had anticipated that 69,000 companies would no longer require an audit, but credit information agency Graydon suggests the figure is more like 89,000. However, a number of companies still elected to have a full audit.
But the goal posts have now moved. While it is still possible to have a voluntary audit, the introduction of international standards in audit is likely to increase costs. According to Michael Sheppard, partner at accounting firm Wylie & Bisset, the introduction of ISAs are likely to increase audit costs by 20%. So, this could perhaps be the catalyst that creates the demand for the ICAEW’s new mini audit.
For more details, go to www.icaew.co.uk/assuranceservice
