Audits not the only safeguard

Michael Wills, Trade and Industry minister, responds to an Independent article on small company audits
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CHANGE CAN always be worrying. But I was surprised to see concerns expressed at the Government's proposal to consult about raising the threshold for statutory audits of small companies. The pounds 350,000 level, under EU Company Law Directives, could go as high as pounds 4.2m.

Since he took over at the DTI, Stephen Byers, Ian McCartney and other ministers have devoted much energy to the concerns of small companies about burdensome regulations, including holding two Red Tape Summits.

Surely it makes sense to look again at the audit requirement? Surely we should ask whether government should oblige small firms to pay every year for one particular form of financial health check? Raising the threshold would not mean small firms would have no financial checks by independent outsiders. B ut it would mean they could choose the form most appropriate.

The audit is only one set form of health check, and there are limits to its utility. In practice, how many creditors rely solely on an audit for their security? How many people buying a small firm confine their due diligence investigations to scrutinising the audit? It makes sense to give small firms the opportunity to pay for only one financial health check that meets many of their needs. The form of the audit remains the same year in, year out, but the needs of individual small firms vary.

Some accountants may be alarmed by the potential disappearance of a large slice of statutorily mandated business. If the threshold was raised to pounds 2m, 150,000 small businesses would no longer have to be audited. But I believe raising the threshold could be a springboard to new value-added business for accountants.

I asked a lunch group of small businesses in the West Country what they thought. The one accountant was the most vigorous supporter. He wanted the threshold raised straight to pounds 4.2m, saying: "It gets in the way of a good relationship with clients. Small firms resent being forced to pay and many see no value in it at all."

That is the key point. With an audit on average costing pounds 5,000,a pounds 2m threshold would mean small businesses saving pounds 750m a year. In practice, the saving is likely to be significantly less. All small firms need good financial controls. Raising the threshold will allow them and their accountants to invest in the services they really need.