Changes in audit limits — the benefits of keeping an audit
The changes in audit limits for SMEs that came into place at the beginning of the year will come as welcome news for many – but before you stop your annual review, make sure you have all the facts. There are benefits to keeping an audit that go far beyond simple legislation.
What changes are taking place?
For accounting periods beginning after 1 January 2016, independent companies that meet at least two of the following criteria are no longer required to have their annual accounts audited.
The requirements for exemption are:
- A turnover of less than £10.2 million (previously £6.5 million)
- Gross Assets of less than £5.1 million (previously £3.26 million)
- Companies with less than 50 employees
Though this does mean that a significant number of larger SMEs are no longer legally obliged to undertake an annual audit, such a decision may cost you more than you can save.
The benefits of an audit
The primary benefit of having your financial statements validated by an independent third party is the credibility it provides. Such a process ensures your customers, your suppliers, investors, bankers and even the HMRC can be confident that your figures are both realistic and valid.
Banks and financial institutions look favourably on companies that undertake an annual audit. This can lead to more favourable interest rates on borrowing and better terms of credit with suppliers – so, while the Government no longer sees the need for smaller companies to audit their accounts, it is likely that this will remain a prerequisite for most credible businesses.
An annual audit also provides internal benefits to your business processes. A high quality audit will help identify weaknesses in internal controls and accounting systems, offering an early warning system of any potential points of failure. It will also identify opportunities for improvement within the business, yielding real financial benefit to the company as a whole.
Make it known that your financial accounts are open to external scrutiny, and it can even reduce the risk of fraud. A formal audit can detect many of the signs of potential criminal activity, but it also provides a significant deterrent to anyone considering this type of action within your business.
If you wish to sell your business, audited financial statements can add substance to the sale, particularly if they have been carried out over consecutive years. It is a simple way to add greater perceived value for any potential purchaser, and it will help your company stand out.
The high level of corporate confidence provided by a formal audit infiltrates every element of your business, from non-executive directors to the individual employee. It also removes any doubts, from potential critics, around what is so wrong with your accounts that you don’t want them audited!
Even though the Government no longer demands your financial statements stand up to external review, think carefully. It may still be in the best interests of your company for them to do so.