ACCA - The global body for professional accountants
The proposal to align UK law with the standard EU exemption criteria for small companies makes sense
—John Davies, head of technical, ACCA

Proposals published today by the Department for Business, Innovation and Skills (BIS) to address the UK's gold plating of European Union's (EU) rules on audit are cautiously welcomed by ACCA.

However, John Davies, head of technical at ACCA, stresses that the actual cost savings to UK businesses may turn out to be lower than BIS believes.

John Davies says: 'The proposal to align UK law with the standard EU exemption criteria for small companies makes sense, even if in practice many of the affected companies are likely to continue to have their accounts audited in order to enhance their financial credibility and to improve their prospects of attracting capital and new business.'

More significant is the proposal to exempt from audit most companies that are part of a group, regardless of their size, on condition that their shareholders agree not to have an audit and their parent company guarantees their debts. Currently, group companies are only exempt if their group as a whole qualifies as 'small'. 

John Davies adds: 'While this proposal might appear to offer material cost savings to groups, it must be borne in mind that any material guarantee of a subsidiary company’s debts would represent a liability for parent companies, and the bigger the guarantee the bigger the financial responsibility it would be. Not only that but the auditor of the group’s consolidated accounts would not in this scenario be able to benefit from audit work already carried out in respect of the exempt subsidiary companies, meaning that the amount of time and work involved in undertaking the group audit would inevitably increase. 

'These factors need to be taken into account in estimating the true extent of the cost savings likely to ensue. As for the alternative assurance being offered to stakeholders in group companies, any guarantee from a parent is of course only as good as the solvency of the guarantor.'

John Davies concludes: 'Businesses are understandably looking to the Government to take meaningful action to reduce statutory burdens where the associated costs clearly exceed the benefits. While the cost of audit may well exceed the benefits in many cases, audit is still widely acknowledged to be a valuable tool for reducing companies’ overall cost of capital and so has the potential to produce benefits which outweigh the costs.'