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August 2013


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Audits were once the price, or investment, companies paid to for the privilege of limited liability but it all changed when in September 2012 it was announced that many small companies and subsidiary companies would be exempt from the compliance process of the annual audit. Under the new audit exemption rules, if a company meets two of the criteria below, with some exceptions, it no longer has to face the red tape of the annual statutory audit:

  • Has an annual turnover of no more than 6.5 million
  • Has gross assets worth no more than 3.26 million
  • Has 50 or fewer employees on average

In many ways this was perceived to be a relaxing of the audit regulations, and as Vince Cable made the announcement the thinking was that these changes would help save companies across the UK millions every year, freeing them up to expand and grow their businesses, ultimately benefiting the entire UK economy. It would also make it more attractive for sole traders and partnerships to set up a company and gain the protection of limited liability.

Many companies now exempt from compulsory audits have the choice of whether to undergo this process or not. But as Des Petrie, Director, of Hall Morrice explains, "whilst the benefits of the exemption are quite clear - for example less bureaucracy, less time spent on the process and an overall cost saving - there are many reasons why a company should think carefully about whether it opts to audit or not. There are several highly pertinent reasons why a company may consider an audit a wise investment.

"Occasionally banks insist on it". As part of Banks providing finance to a company, there is often a covenant which stipulates that audited accounts are required as part of the ongoing requirements as an audit increases the credibility of the financial statements. An audit indirectly implies that a company is at a certain growth point, with a certain turnover. A bit like being VAT registered, the status and connotations of an audit can send out very positive messages about where your company is and, more importantly, where it's going.

"Creditors often like to see an audit". An audit is after all an independent assessment of a company's finances, so it's a reassuring piece of work to see and a familiar document to evaluate.

"It can help you sell your business". If you are considering selling the company, or part of it, then stopping the auditing process, simply because you can, may not be the best move. Potential investors will appreciate seeing regular annual audits (a bit like a regular service history on a good car!) and a clear outline of what exactly is for sale. Hall Morrice had a recent example of a media company falling out of the audit requirement but chose to continue with the audit compliance process as the benefits outweighed the costs in view of their plan to sell the business in the future"

As with any new tax rule there are many complex nuances. In some cases, regardless of whether you comply with the exemption criteria highlighted above, you will have to undergo an audit.

Des Petrie expands, "A few core examples include:-

"Public companies and those involved in industries such as insurance or financial services must continue to do a compulsory audit.

"If shareholders who own at least 10% of shares (by number or value) request an audit then in these circumstances a company has to comply - shareholders must make the request in writing and it must arrive at least one month before the end of the financial year that the audit is being asked for. But sometimes if it's felt that shareholders would benefit or appreciate an audit, regardless of whether they officially request one, it's possibly worth investing in one. Another example recently is in relation to one of our oil and gas companies which is involved in research and development work. It requested an audit due to the high level of funding from its shareholders; by undertaking an audit this gave the shareholders extra comfort and assurance that the financial statements are free from material misstatement whilst protecting their investment."

And the time to start discussing and debating the issues is now. There are tax implications whether you opt in or out of the audit process so it's worth seeking advice from your accountant on these matters. Company accounts must be filed within nine months of its financial year end so if you do opt for the more lengthy process of an audit, the clock is ticking.

Hall Morrice can offer practical advice and assistance regarding the audit process, as well as a wide range of financial guidance including accounts, business advisory, corporate finance and taxation services.

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

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