Extending Audit Exemption Under the Companies Act 1985
Comments from ACCA
May 2006
ACCA is pleased to comment on the FSA’s proposal, contained in CP6/06, to extend the range of limited companies which are exempt from the statutory audit under the Companies Act 1985.
In the absence of any official explanation on the matter, we assume that the rationale for continuing to subject investment companies to the statutory audit requirement, while other small companies are exempt, is based on the additional public interest dimension of such companies and the perceived need to assure regulators and clients and prospective clients that the financial affairs of such companies are being properly managed in accordance with the law’s requirements. In making any change to the current situation, therefore, the issue is whether these interests are being protected to an equivalent level.
We accept that those firms which come within the proposed exemption would still be subject to the controls listed in paragraph 4.4 of the consultation paper, thereby ensuring that such companies are regulated more tightly than other small companies. This will provide some extra assurance concerning the ability of these companies to meet the specific regulatory demands of the FSA. Those demands will not, however, be the only relevant factor in any final decision on this matter and the perception of the public is also an important factor.
We would invite the FSA to consider whether the nature of the additional regulatory controls provide a level of assurance about the inherent reliability of companies’ financial information which is comparable to that provided by the audit.
Controls of the kind listed in paragraph 4.4 will be different in nature and scope from the controls inherent in the statutory audit. The audit process is intended primarily to provide direct assurance for the company’s shareholders that the company’s directors are complying with legal requirements and that they are accounting for their stewardship in the way required by law and accounting standards. Indirectly the audit process can perform a similar function for the benefit of lenders, credit managers, clients and prospective clients and the tax authorities.
The external audit will also address the underlying state of the company’s finances, including the company’s accounting records, and consider the extent to which the company’s accounts reflect those underlying records. This aspect of the audit process is integral to providing overall assurance on the reliability of the company’s financial statements. We query whether the FSA’s additional controls will be sufficient to satisfy it with regard to the fundamental reliability of the company’s figures. With specific reference to question 6 of the document, regarding whether unaudited companies should be allowed to include unaudited reserves and unverified interim profits in their regulatory returns, it seems to us obvious that such figures will necessarily form part of companies’ figures if they do not have their financial statements audited.
In making its decision on this matter, therefore, the FSA must essentially consider whether it can accept unaudited figures as reliable for its own regulatory purposes. We think there is room for doubt on this point. It should also be borne in mind that the small company audit exemption threshold is now at a very high level (and may well go significantly higher still following recent changes to EU law) and that many companies which qualify as ‘small’ now have income and assets of material amounts.
With regard to the cost estimates set out in paragraph 4.32, these appear to us as reasonably accurate, so do not dispute the aggregate figure given for the cost savings which could accrue to small companies from the proposed change.