Regulatory Issues for Industrial and Provident Societies
Comments from ACCA
October 2004
ACCA is pleased to comment on the above consultation. Our comments are restricted to one of the matters covered by section 4 of the paper, viz audit thresholds for non-charitable societies.
In the light of recent changes to the Companies Act and current proposals for amendment to charity law, it is understandable that the level of the audit and assurance thresholds for industrial and provident societies is also being reviewed. There is some sense in bringing a degree of correspondence to the audit and assurance regimes which apply to entities of different kinds.
But we do not agree that any change to the thresholds in the Industrial and Provident Societies Act should be made purely for the purpose of achieving harmonisation. Audit and assurance requirements exist in order to
provide stakeholders of the entity concerned with comfort that the entity's financial affairs are being conducted in line with legal requirements and technical standards, as well as with the provisions of the entity's own constitution. Any decision to change the arrangements for any particular type of entity should be made in the light of the implications for the particular entity under consideration and its stakeholders, as has recently been done in the case of charities.
The consultative document proposes that the audit threshold for non-charitable societies be increased from £350,000 (turnover) and £1.4 million (asset total) to £5.6 million (turnover) and £2.8 million (asset total). There is no mention of what might happen to the existing provision for the accountant's report. Assuming that this would be continued, the assurance regime would therefore consist of an accountant's report for societies with turnover of £90,000 and over, and a mandatory audit for those with turnover of £5.6 million or more. The range of income covered by the intermediate review stage appears to us to be very large.
The rationale given for the proposed change is that it would bring industrial and provident societies into line with non-charitable limited companies. We would query though whether the comparison with such companies is the right one to make in this case. It would appear to us that the nature of the industrial and provident society has more in common with a charity than with a trading company, the legal raison d'etre of the company being, after all, to serve the economic self-interest of its shareholders rather than to engage in co-operative or altruistic activities, as is the case with societies and charities.
The turnover threshold for charitable companies is likely to be raised to only £500,000 (very significantly less than the threshold which applies to other companies). If the proposal in the document were carried through, therefore, there would be a very substantial gap in the assurance rules as between those societies which were registered charities and those which were not. We consider that this gap would be too great to justify. Our preference, therefore, would be to raise the thresholds for societies so that they aligned with those for charities.
If the proposed increase is to be enacted, though, it should be borne in mind that the exemption rules for commercial companies assume that the type of company most likely to benefit from the exemption is the small business in which the owners and managers are one and the same. To cater for the situation in which there is no unanimous agreement to dispense with the audit, there is provision for a minority of members (10% is the current figure) to demand that an audit be carried out. We recommend that, if the regime for societies is to be aligned with that for companies, a comparable provision be included.