Ever since 1993, Companies’ legislation has allowed those below a certain size limit (by reference to turnover, gross assets and number of employees) to forgo their annual audit – the check by independent, fully-qualified auditors – to ensure that the annual financial accounts were reasonably stated and not misleading.
Over the past 15 years or so , as increasing numbers of companies have taken advantage of this exemption, the benefits of an audit –for all other than listed and public interest companies – have been called into question. The general aim of an audit was to protect shareholders and others who came into contact with a company from inaccurate or misleading information , and to give them a reasonable faith in the reliability of the financial statements. This was clearly of need when reviewing the accounts of major public companies. After all, these Companies were asking investors to part with their money without any checks on how they might use it so it was important for investors to know that someone independent had been over the books.
Whether the same benefit applied to the shareholders of smaller companies, particularly those where the individuals running the business were the same people as those who owned it, i.e. the directors were the same as the shareholders (the vast majority of businesses in the UK ) was a separate question.
The ICAEW (Institute of Chartered Accountants in England and Wales) has recently introduced the idea of an ‘assurance service’ – a stamp of credibility less so than an audit but more than that of the report on an audit exempt Company.
There will always be the need for larger and public interest bodies to undergo audit. But, in the meantime , banks and others, such as creditors and HMRC , seem to have accepted that as long as annual accounts have been put together with the assistance of a reputable firm of accountants , they can be relied upon.