Move to cut red tape will mean fewer firms face the audit test
Michael Barnett, audit director at Grant Thornton (NI) LLP
The number of small companies in Northern Ireland will rise significantly in 2016, and to some extent that will be due to the establishment of new indigenous businesses. This will be viewed as a sign of improving economic conditions and the long-awaited rebalancing of the economy.
However, much of the increase will not be down to the creation of new companies, but due to changes in the criteria by which a company qualifies as small.
For accounting periods beginning on or after January 1, 2016, a company will qualify as small if it can satisfy at least two of the following three criteria for (usually) two consecutive financial years: Turnover - £10.2m; balance sheet total (total assets), £5.1m; employees - 50 (previously £6.5m; £3.26m; and 50 respectively).
The Government has taken the opportunity to apply similar increases to criteria for medium sized companies and small and medium sized groups. The changes form part of the Government's move to reduce red tape.
The Department of Business Innovation and Skills (BIS) estimates that 11,000 more UK companies (formerly medium-sized companies) will qualify as small. Upon reclassification they will enjoy the benefits of reduced accounting disclosure, and the ability to file abbreviated financial statements (comprising an abbreviated balance sheet and limited notes) with Companies House.
Furthermore, a recent decision in the House of Lords to raise the audit threshold for qualifying companies to the new small company limits (the maximum level available), will mean those 'reclassified' small companies may also avail of audit exemption. As before, some companies by their nature will not qualify.
BIS expects that only 3,000 reclassified companies will avail of the audit exemption, but that estimate is considered low by many commentators. While it is reasonable to expect companies with strong governance to retain the audit function or alternative measures of assurance, it is argued that it is well governed companies which will potentially have a lesser need for audit, and that financial reporting standards may decline in those companies that choose the exemption.
In the Northern Ireland context, a company with a £10m turnover is still a significant enterprise, and concerns are being raised about the reduced level of information that will be publicly available to creditors and credit rating agencies.
In the Republic of Ireland's Companies Act 2014, legislators introduced the following lower thresholds for audit exemption: Turnover - €8.8m (£6.8m); balance sheet total - €4.4m (£3.4m); and employees - 50.
For local businesses with companies in both jurisdictions, the differing criteria may give rise to auditing anomalies. For example, a Northern Ireland group with £9.5m consolidated income may not require an audit, but its Republic of Ireland subsidiary with total assets of €5m may well do.
One certainty is that fewer companies will undergo an annual audit from 2017. Auditing has increasingly become a specialist service and the changes in the small company criteria and the audit threshold are likely to accelerate that process.
For information or advice on accounting and auditing, Michael can be contacted at Michael.email@example.com