Accountancy: Mysteries of the audit revealed: A survey shows that the prejudices of small firms don't add up

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THE Government's recent announcement of its willingness to abolish the statutory audit for 'very small companies' has been broadly welcomed. After all, pressure for such a move has been building for several years. However, the general euphoria appears to have disguised a number of misconceptions.

The finding that most horrifies Clive Parritt, national managing partner of Baker Tilly, the accountancy firm that has just published a survey of small company directors' attitudes to the audit, is that nearly half of directors think that auditors, rather than them, are responsible for the preparation of annual financial statements.

This might account for the belief of most directors that audit represents more than 45 per cent of accountants' annual fee. 'In fact, in companies of this size, fees for audit seldom account for more than 30 per cent of the total fee, and in the very small companies the proportion will be nearer 15 per cent,' Mr Parritt said.

Given this, it is perhaps not surprising that the majority of the 200 senior executives who responded to the postal survey last month are in favour of abolition of the audit for companies similar in size to their own; they no doubt envisage huge savings that - again according to the survey - can be added to profits rather than invested in other financial advice.

This last view is in stark contrast to the opinion being widely broadcast that accountants serving smaller companies would benefit as much as their clients from the end of the audit, because they would be released to provide services that are more profitable than the increasingly onerous and often resented audit.

Mr Parritt stresses that - unlike some members of his profession, particularly members of the Chartered Association of Certified Accountants - he is not against the idea behind the consultative document issued by the Department of Trade and Industry in April. This proposes that companies with an annual turnover below the VAT registration threshold of pounds 37,600, and with a balance- sheet total of not more than pounds 100,000, should be able to avoid the audit if their shareholders approve. Such companies cannot be public limited companies, part of groups or subject to statutes such as the Financial Services Act.

He sees it as a significant move, especially since the Inland Revenue has been persuaded to shift from its long-held pro-audit stance. He is just anxious to point out that companies may not be saving as much as they think.

This would be particularly true if the half-way house put up for discussion in the document, which must be commented on by the end of this month, is adopted. Valued by 72 per cent of the directors questioned, this measure involves the replacement of the audit by a compilation report produced by a qualified independent accountant. It would, however, still use a great amount of an accountant's time, but not provide the protection of a full audit to interested parties.

But not all executives see themselves as the real beneficiaries of the audit. Indeed, 41 per cent of them consider that the Inland Revenue gains most from a company's audit. In contrast, 22 per cent believe directors benefit most, followed by 14 per cent each citing shareholders and banks. A small percentage felt that auditors were the winners.

Just over half of those replying felt companies' customers benefited least from the audit, while 13 per cent thought suppliers gained least.

In this context, it is easy to understand the view held by about a third of executives that - apart from size of turnover - the issue of owner-management is most important in deciding whether the audit requirement should be abolished or not. Where, as is often the case with very small companies, the managers also owned the company, the justification for the audit was markedly reduced, Mr Parritt said.

But that does not mean that businesses can avoid accountants. 'They need them for preparing tax returns, for producing reports for banks, for themselves, and for general advice,' he said.

Perhaps, though, as he admits, there is room for accountants to help themselves. 'The accountancy profession has never really explained how fees are broken down so people know what they are paying for.'

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