Accountancy: Scrapping audit rules could send companies to the wall: The Chancellor may be taking risks with essential safeguards, argues Kenneth Duncan, president of the Chartered Association of Certified Accountants

AT THE heart of the debate about the statutory audit requirement for all limited companies, regardless of size, is the matter of principle - no audit, no protection.

In other words, companies that want to enjoy the benefits that limited liability status affords ought to have to undergo an annual audit.

The Chartered Association of Certified Accountants has always taken this view. It is not based on a desire to harm small businesses or maintain unnecessary red tape. On the contrary, the association has made measures to assist small businesses a priority in successive Budget submissions - and we are delighted that this Chancellor decided to introduce many of them.

We have also welcomed the Government's deregulation initiative and have put forward many proposals to cut unnecessary bureaucracy. For example, we accept that there are some small companies for which limited liability status - and therefore the audit - is inappropriate. However, instead of abolishing the audit requirement, the Chancellor should have come forward with proposals to make it easier for companies to disincorporate.

We also believe that the statutory audit requirement is an essential element for the survival and growth of small businesses. We reject the view that it is an unnecessary and bureaucratic waste of money.

This view - which the Chancellor seems to have accepted - betrays lack of knowledge of the audit process. Even without the statutory requirement, all companies will still have to file annual accounts with Companies House. For all but a few, this means that an accountant will still be used to prepare the company accounts.

Nevertheless, the statutory audit ensures that all necessary information is made available in the accounts' preparation, and that they can therefore be relied on by their users: not only shareholders but employees, creditors and customers, who invest their labour, trust and money.

The annual audit gives these groups at least some reassurance that the businesses with which they are involved are financially sound and secure.

We agree with the Conservative MP, Geoffrey Clinton-Brown, who said, during last week's parliamentary debate on the Budget, that he was concerned about the creditors of unaudited companies, who 'could be at risk'.

To mitigate this risk, he hoped that 'those businesses will be required to add a caveat on their invoices, letterheads and quotations, so that all their creditors and customers know precisely with what type of business they are dealing'.

Despite the abolition of the statutory requirement, there is no doubt that some small companies still need to undergo an audit. The audit is the key that opens the door to a number of opportunities. Without an audit, small enterprises will find it virtually impossible to raise finance and obtain contracts.

Banks and other financial institutions will surely continue to require audited accounts when deciding on borrowing applications from companies. Large companies will no doubt continue to insist on audited accounts when considering dealership appointments and supply contracts.

Traditionally, the Inland Revenue has found the statutory audit useful in providing tax officials with authorised information on company accounts.

The UK is notable among European countries for the relatively small number of tax inspectors employed to review such accounts. This, of course, is now likely to change, with the result that the burden small businesses will face in an Inland Revenue audit will be far greater than the fees attached to the statutory audit.

The Chancellor also announced that companies with a turnover of between pounds 90,000 and pounds 350,000 will only need a report verified by an 'independent accountant'.

Further details will be announced early in the New Year. These will be followed by a short consultation period with secondary legislation being introduced in the spring.

Many questions remain unanswered. How rigorous will the report be? How will it differ from the audit? Do all shareholders, as recommended by the Government's consultation document published last May, have to agree to opt out of the audit process? Will the Government accept the suggestions of Mr Clinton-Brown? How will an 'independent accountant' be defined?

We are of the opinion that, as a result of last week's announcement, more small companies could go to the wall.

The real gainers from the Chancellor's decision may not be, as he hopes, small businesses, but insolvency practitioners and liquidators.

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