UK Will Reduce Audit Requirements on Small Companies

The UK Government proposes regulations that will align mandatory audit thresholds with accounting thresholds, meaning that small and medium-sized enterprises will be able to obtain an exemption if they meet two of three criteria relating to balance sheet total, turnover and number of employee. This change will allow 36,000 more companies to choose not to have an audit. The Government will also exempt most subsidiary companies from mandatory audit as long as their parent company guarantees their liabilities.

Following consultation by the Financial Reporting Council on changes to UK Generally Accepted Accounting Principles (UK GAAP), the Government has also decided to allow companies that prepare their accounts under IFRS to move to UK GAAP and take advantage of reduced disclosures. The Government will permit companies who currently prepare IFRS accounts to change their accounting framework to UK GAAP for a reason other than a relevant change of circumstances, provided they have not moved to UK GAAP in the previous 5 years. In calculating the 5 year period, no account will be taken of a change due to a relevant change of circumstances. This will permit companies to take advantage of reduced disclosures under UK GAAP. Parent companies will also benefit from this new flexibility with respect to their group accounts, provided they are not required under EU law to prepare their consolidated accounts using IFRS.

The new regulations will also remove EU gold-plating and ensure UK SMEs are not at a disadvantage compared to their European competitors. These changes are part of the Government’s wider drive to reduce unnecessary regulatory burdens. The regulations are expected to come into force for accounting years ending on or after 1 October 2012.

The principle of reducing audit requirements was broadly supported by a majority of respondents including accounting firms of varying size, the majority of accounting bodies, and all industry respondents. Changes which encourage economic growth and reduce costs through the reduction in the audit and regulatory requirements on small businesses were welcomed by accounting firms, user representative bodies and industry respondents alike, with a number of accounting bodies agreeing that the benefit of audit varies with company size.

One large accounting firm commented that a reduction in audit requirements would allow companies to seek assurance that suits their strategic position and needs, and others believed that companies would welcome the opportunity to decide themselves whether to have an audit or not. It was noted that the current restrictions do not promote flexibility and inclusivity.