Who and what data you trust in business is important and increasingly audits are being used to provide confirmation of the facts – whether to shareholders, potential investors or banks.
An audit is a statutory requirement for many businesses and is often performed on a voluntary basis by firms who do not otherwise have a legal requirement to have one undertaken.
The purpose of a statutory audit to form an independent opinion on the financial statements of the audited entity on whether the financial statements show a true and fair view and have been properly prepared in accordance with accounting standards.
There has been some speculation that audit thresholds may increase which in my opinion will be a shame as many smaller firms do (and could) benefit from them. Audits have more value than being just a tick box exercise and that’s an important message.
Currently you don’t need an audit if your business meets two of these three criteria:
- Turnover of up to £10.2m
- Net assets of £5.1m
- 50 or fewer employees
You do need an audit regardless of the above if your business operates in a regulated area where audits are mandatory, such as insurance or banking or if your shareholders (with at least 10% of a holding in the business) make a request for an audit. There are also specific rules for groups and subsidiary companies.
So, for businesses outside of these criteria, why bother with an audit?
The key point is that an audit provides reassurance and a credibility to your numbers. Management accounts whilst telling a certain story are not verified, and if in the future you will be looking for investors, to sell your business or to obtain significant bank lending then an audit can play a crucial role.
It may also highlight areas where your business might be missing out, such on lucrative tax reliefs as well as other tax benefits, or where your systems and processes could benefit from tightening up.
Who do you pick to carry out an audit?
Auditors need to be independent, and they are there to verify a set of financial statements which set out the performance of the business and give assurance that the numbers and the narrative are materially correct.
Like anything you pay for what you get, and the real value from an audit which many firms miss is to instruct a well-rounded firm who will look at your business holistically, may spot opportunities and who should tell you what tax reliefs you might be missing out on. They will also provide a management letter which gives advice on operational efficiencies – what is or isn’t being done well. Investors find this letter a useful document as it summarises for them what might be needed, what policies and procedures especially, to help steer a business onto a more productive and profitable path. It also provides confirmation that the right processes and procedures are in place for that business as it can benchmark against similar firms.
Just a couple of examples of audit success that I have seen recently is firstly where a business had not claimed tens of thousands of pounds in R&D credits as they hadn’t thought they qualified and significant tax rebates were subsequently claimed for them.
Also, where a group of businesses had not been structured for optimal tax efficiencies and a simple reorganisation produced significant tax savings for them. I could go on as there are so many other examples I have seen over the years, and the key point is that auditors who are professional, well-rounded businesspeople are able to spot opportunities that businesses can benefit from.
Of course, auditors are there to look for other things which may hide behind the numbers and with the risk of business fraud being at an all-time high, knowing you have the robust systems in place to identify risk and prevent it as well as cash and payment controls could mean the difference between success or failure.
Audit could be your eyes and ears on the ground where it is impossible to have oversight of all your operations so I would urge business owners to think about how it could help them on their business journey, rather than think of it as something burdensome that needs to be done once key thresholds are met.