The Value of Audit

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The audit exemption threshold rose again last year, so more than 90% of UK registered companies can now choose whether or not to have their financial statements audited. Most commentary has focused on this as reducing red tape and freeing up time for the important business of business. However, few mention the all important question:

What impact does not having an audit have on companies’ financial reports and their bottom line?

The government, keen to reinforce its pro-business credentials, says that the net effect is a saving. Indeed, the results of a poll of small businesses conducted by the Department for Business, Energy & Industrial Strategy published this January showed businesses estimated average savings of £4,500 from not having an audit in 2015. However, the results of an independent academic study commissioned by ICAEW’s Research Trusts looked at the consequences of audit exemption. It used data from Companies House filings to analyse 10,705 audit-exempt private company financial reports from 2006 to 2014.

They found financial reporting quality is lower for companies that do not have an audit, when compared with those that do. More of a surprise was the finding that companies that do not have an audit appear to pay more tax per pound of profits than those that do. The researchers estimate that an unaudited firm could save more than £28,000 in tax if it had an audit – more than three times the sample’s average audit fee!

I would suggest that the value for companies in continuing their relationship with their advisers is not so much with the audit, but with the auditor. Audit is seen as compliance, whereas the value our clients get from working with us often comes from the advisory work that arises on the back of the audit.

So, before you consider taking advantage of audit exemption, I recommend you take some time to consider the likely cost-benefit of doing so. It may not be as clear-cut as you first thought.

If your company is considering taking advantage of audit exemption, either now or in the future, please contact us to discuss your assurance requirements.

For more information, please contact Matthew Grant at hello@garbutt-elliott.co.uk – 01904 464 100 or fill out the contact form below: