Should owner managed/family businesses do away with the annual audit?

Audit limits are going up so more private companies will have the option to dispense with the annual audit, so should they?

Whilst there can, for the right business, be significant benefits to becoming a limited company there have always been downsides and one of these is increased external scrutiny of the company finances. This is, if you like, part of the price to be paid for that “limited liability” enjoyed by the shareholders of such companies.

The primary form of external scrutiny has for many years taken the form of an external audit which is undertaken by a firm of suitably qualified accountants.

Any company can volunteer to have its accounts audited but once a company breaches certain size criteria it must subject its accounts to audit in order to comply with the Companies Act.

On 26 January the Government announced that, following consultation, it has decided to increase the mandatory audit thresholds.

Private companies are required to have an audit if, at their balance sheet date, they have exceeded at least two, for the two consecutive financial years.

The table below shows the old and new limits:

If companies operate via a group structure then the limits above must be applied across the group.

The changes take effect for accounting periods beginning on or after 1 January 2016 and so generally it will be at least a year before the first companies feel the benefit of the new limits in 2017 when they are going through the process of getting their accounts prepared and filing them at Companies House. The Government estimates that a further 7,400 will now be able to choose whether to have their accounts audited.

In addition, it should be remembered that several years ago the Companies Act was amended to allow privately owned groups to exempt some or all their subsidiary companies from audit even if the group as a whole exceeded the mandatory audit thresholds. The parent company remains subject to audit but this presents some cost savings to groups. However, it requires the parent company to guarantee the liabilities of the subsidiaries for whom exemption is claimed and so has been of limited appeal.

So ditch the audit?

So, if your company will now fall below the new thresholds and you are an owner of owner managed/family business should you ditch the audit as soon as you are able?... maybe.

On the face of it ditching the audit seems attractive due to the cost saving in terms of audit fees and the time spent with the auditor. For some owner managed and family managed companies that will be the right thing to do, in particular:

• Where all owners are involved in day to day management,
• Where there is currently a low level of external debt,
• Where there is little prospect of debt being required in the future,
• And where a future sale is unlikely

Then maybe the audit adds little value and is a burden that should be dispensed with?

However, for others there can be good reason to voluntarily retain the external audit;

• Business owners not involved with the management of business may seek the comfort of an external audit and owner managers may welcome the endorsement that it provides
• Owner managers may value the challenge and scrutiny to which their finance staff are subjected
• Depending on the source it can be a requirement of certain external funders that an audit is conducted regardless of size.
• If there is a requirement for future funding or a sale then subjecting the accounts to an audit may help to anticipate and deal with any areas of potential difficulty in the due diligence exercise undertaken by the funder/purchaser.

Commenting of the new limits Scott Bentley, head of family business at Francis Clark says that “Owner managed and family companies need to review their circumstances, future plans and talk to the ownership group in order to reach the right decision for them. They should then review that decision as plans and circumstances change”.

Francis Clark’s Corporate Business partner Stephanie Henshaw comments “We welcome the additional choice that raising the audit threshold gives private companies and will be talking to our clients to help them decided the best option for them.”

The government has stated it will keep the new system under review and take action quickly if there is evidence that UK’s financial reporting assurance is not meeting the needs of user and regulators.