Government announces changes to audit exemption criteria – how will it affect your business?

THE Department for Business and Innovation Skills (BIS) has announced that the audit exemption for small companies and some subsidiaries will be widened for accounting years ending on or after October 1 2012. Currently, small companies must meet both the turnover and total assets criteria to be eligible for audit exemption in the UK.

However, the new regulations are more relaxed as a ‘small’ company will be exempt from statutory audit if it complies with any two of the following three tests:

·         SMEs must have no more than 50 employees

·         No more than £3.26 million of total assets on their balance sheet

·         Turnover not more than £6.5 million

The Government has also confirmed that it will exempt up to 150,000 subsidiary companies from statutory audit, as long as their parent company guarantees their liabilities.

The Business Secretary, Vince Cable, had said of the new regulations: “Reporting requirements have become increasingly demanding and costly over the years. We listened to business, who made a strong case for reform, and I am delighted that we are now taking this opportunity to make audit more flexible and targeted. Tackling these problems will help save UK companies £millions every year and free them up to expand and grow their business, which ultimately benefits the entire British economy.”

Hall Morrice is aware that the change in audit exemption criteria will be welcomed by many small businesses as the change will allow 36,000 more companies to choose not to be audited in addition to the 150,000 subsidiary companies referred to above. Small businesses that will become eligible for an audit exemption as a result of the criteria change now need to consider whether or not they want to dispense with the statutory audit, or continue for commercial purposes. Businesses should bear in mind that the audit can act as an opportunity to identify areas of weakness, allowing a company to enhance and maximise their business and future success.

The main factors to consider are:

·         Credibility – Adding an audit report to a set of financial statements increases company credibility which can help greatly when dealing with external organisations such as banks and other lenders. Some lenders may in fact require an audit as a condition of lending.

·         Effect on Credit Rating – An audit increases confidence in reported figures. This may be of particular benefit to suppliers and other lenders who routinely carry out credit checks on potential customers. This may affect future credit limits and supplier payment terms.

·         Future Sale of the Business – Where there is a future intention to sell a business, increased assurance would be given to a potential buyer where historic results have been subject to a statutory audit.

·         External Shareholders – Continuing with the statutory audit would give external, non-family shareholders continued confidence in the Financial Statements.

·         Fraud – Fraud continues to be an ever-present part of business life. Whilst an audit cannot guarantee to detect all fraud, it is an important tool in helping its prevention by acting as a deterrent.

·         Other Professional and Taxation Advice – Carrying out a statutory audit enables us to understand a business and provide the company with quality advice in other areas, including ensuring that the company conducts their affairs in the most tax efficient manner.

Derek Petrie, Audit Principal, Hall Morrice, says: “Many companies will benefit from the change in audit exemption criteria in terms of being given the option to choose not to be audited. However, it is worth considering that there are distinct advantages in retaining an audit, even if a company is not required to do so by law.

“The advantages to the company include helping to protect its credibility and credit rating, helping with fraud prevention, and helping to give continued confidence to its external stakeholders and potential purchasers.”

Hall Morrice would expect that accountancy practices will be contacting their clients who may be affected by the changes to the audit exemption criteria, to inform them that their next Financial Statements will no longer require to have a statutory audit. However, at the same time, professionals should be taking the opportunity to discuss with clients whether or not to dispense with the statutory audit, taking into consideration the advantages of retaining the audit.

Hall Morrice, founded in 1976, is one of the Scotland’s leading independent firms of chartered accountants and has offices in both Aberdeen and Fraserburgh. Hall Morrice’s headquarters is based at 6 & 7 Queen’s Terrace in Aberdeen and can be contacted on 01224 647394 or at


Picture Caption: Derek Petrie, Audit Principal of Hall Morrice

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Beverley Tricker

Tricker PR

Office           01224 646491

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Contact: Beverley Tricker
Phone: 441224646491