The government has confirmed that audit exemption limits for companies are to increase for periods commencing on or after 1 January 2016. Let's take a look at the changes and some of the implications for the firms acting for affected clients.
What's changing, and when?
Last year, the Government made changes to company law that, amongst other things, increased the small companies accounting exemption thresholds. However, due to the way that the smallcompanies audit exemption rules are written, this had the knock-on effect of also increasing audit exemption thresholds for financial years beginning on or after 1 January 2016. Unlike the other changes to company law, though, amendments that would have an impact on whether a company can claim audit exemption cannot be adopted early.
Last month (January 2016), following a consultation on whether increasing audit exemption limits was actually the right thing to do, the Government finally confirmed that yes, it thought increased limits were the way to go.
Could this change again in the future?
The Government has indicated that it will keep changes to audit exemption thresholds under review and respond quickly to evidence that further change is required. We're unlikely to see anything other than light-touch application of EU requirements this side of 23 June though!
These changes will also apply to the LLPs regime once relevant legislation is in place (expected by summer 2016).
Will some exempt companies continue to be audited?
Many small companies choose to be audited, even under the existing regime. The Government estimates that over half of the 7,400 companies that become exempt under the new rules will continue to have an audit. Whilst I'm not sure on the basis for their estimate, the profile of these newly exempt companies being larger, may lead to more of them deciding that an audit is the right way to give credence to their financial information.
What if the client no longer needs (or wants) an audit
I don't shop in Waitrose. I tell a lie...I do, but only for certain bits on special occasions like Christmas, or if it's my birthday. Other times, such as the weekly shop or my wife's birthday (she'll never read this, so I'm safe), we shop somewhere like Tesco, or Aldi. Waitrose is nice, but it's expensive. Waitrose is premium - Aldi can often give me what I need for less.
An audit is a premium assurance service which is reflected in the evidence, documentation, quality control and compliance requirements. It is the Waitrose of the assurance world.
For some, this change in exemption rules will mean dropping the audit and heading for straight accounts compilation. For others, the client might look to compilation and cherry-pick the bits of the premium service that they benefit from in the form of agreed-upon-procedures (a bit like I do on my birthday). There are then other types of assurance engagement that might offer a more proportionate response to an entity's assurance needs. Without particularly wanting to label a review engagement as the 'Aldi of the assurance world'; it is often more than capable of satisfying the assurance appetite of users of small entity accounts, without the premium price.
Implications for audit practices
For some practices, this jump in thresholds may spell the end of a long and illustrious association with signing audit reports. The number of audits on the books may no longer represent an equitable investment and finding suitably experienced audit teams may become more difficult. Though registered auditor / Responsible Individual status may still be required for some other engagements.
For audit exempt clients that do not 'feel' the benefit of, or want to pay for, the premium assurance service, the forthcoming changes represent an opportunity (for the client and auditor) to realign the service needs of the client with the services provided. This change may provide a welcome opportunity for experienced auditors to use their assurance experiences in specialist areas or look to diversify the services offered to their clients.
To find out more about providing review engagements to audit exempt clients, click here.