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Home / ... / Audit Exemption : A Cost Saving for Small Companies

Recent changes in Irish company law, not least the much discussed Companies (Accounting & Auditing) Act 2003 - have placed an additional burden on companies who now face even higher compliance costs. The increase in audit exemption threshold may be the one ray of light on the horizon.

Following the commencement of Section 53 of the Companies (Accounting & Auditing) Act 2003, the turnover threshold for private companies availing of audit exemption has been increased from €317,434 to €1,500,000. Welcome as this news is, companies cannot yet avail of this higher threshold since it applies only to financial years commencing on or after 1 July 2004.

On hearing the news of the increase in the threshold some companies mis-understood and thought they could immediately avail of the exemption from audit, not realising that the new threshold only applies to financial years commencing on or after 1 July 2004.

Apart from the turnover threshold, companies also need to satisfy a number of conditions some of which include:

- Turnover does not exceed €317,474 (increasing to €1,500,000) - The balance sheet total (i.e. fixed and current assets) of the company does not exceed €1,904,607, - Average no of employees does not exceed 50, - The company is not regulated by Central Bank, - The company does not carry out insurance services - The company is not a holding company or a subsidiary, - The company will file its current Annual Return on time and also filed its previous Annual Return on time. Therefore a company that wishes to have the option to avail of the audit exemption next year must ensure that their Annual Return for the current year is filed on time; otherwise it will be unable to avail of the audit exemption next year,

The exemption is lost if during the financial year any one of the conditions above is not met. Furthermore, a company may not avail of the exemption in a financial year if those members holding 10% or more of the voting rights in the company request the company not to avail of the exemption in that year. Such request from the members must be served by notice on the company not later than one month before the end of the preceding financial year. For example, if a company's financial year commences on 1 July 2005, the members notice must be served on the company no later than 31 May 2005.

To avail of the exemption, the directors must be of the opinion that the company satisfies the relevant conditions in respect of the current year as well as the previous year.

The decision to avail of the audit exemption must be recorded in the minutes of a directors’ meeting.

Terminating the auditors’ appointment A company availing of the exemption is required to notify the auditor in writing of their intention to avail of the exemption and to terminate the auditors' services. The auditor is required within 21 days of the notification from the company to serve a notice on the company. The notice from the auditor is required to state that there are no circumstances connected to the decision to terminate his appointment which ought to be brought to the attention of the shareholders or creditors of the company or, if there are such circumstances, a statement of what those circumstances are. The auditors are also required to file a copy of the notice with the Registrar of Companies within 14 days.

Why should companies be exempt? An audit places a financial and administrative burden on small companies, particularly owner-managed companies where the directors are the shareholders of the company and where the stakeholder and public interest risk of non-audit was low. The increased audit exemption threshold will take the burden away from many thousands of businesses.

NI & UK Perspective The increased exemption threshold is welcome and brings Ireland into line with that in effect in Northern Ireland currently (Stg£1m) and ensures that Irish businesses no longer appear less attractive due to differences in exemption thresholds.

In England and Wales the exemption threshold has been increased to Stg£5.6 million (the maximum allowable under EU directives) for financial periods ending after 30 March 2004.

Why Audit? Many companies that qualify for audit exemption continue to have their financial statements audited primarily to protect the company shareholders - especially those not involved in the management of the company.

Directors of companies who now qualify for audit exemption need to consider whether the audit process is still valuable to them.

An audit brings further benefits which might outweigh the audit cost including:

- Ensuring that the company's systems and controls are effective, - Providing a check on the accounting records, - integrity of the financial information being used by the directors and owners of the company , - Assuring the reliability and Enhancing credibility of financial statements when raising finance or applying for credit from suppliers - Giving the auditors an opportunity to provide business and financial advice as a result of the detailed examination of the systems and procedures (management letters) - Acting as a deterrent to and may protect from risk of fraud, money laundering and other illegal activities.

Banking Companies should also consider whether they need to stay within the audit framework to fulfil obligations to the shareholders or the company's bankers. Certain existing loan contracts or overdraft agreements may require the company to present audited accounts each year. Companies may wish to consider meeting with their bank if they are considering availing of the audit exemption to ensure that the bank will be willing to accept un-audited accounts. It is often in a company's commercial interest to have an audit to attract financial lenders.

Revenue Commissioners The move to un-audited accounts may increase the risk of error in the information used to compile tax returns due to a lack of testing which is inherent in the audit process.

Companies’ Office The Institute of Chartered Accountants in Ireland has prepared compilation procedures which set out standards to be adhered to when preparing accounts. Companies which are audit exempt must still prepare accounts in the prescribed format and file them at the Companies Registration Office together with an Annual Return form. In addition, an Annual General Meeting must be convened to lay the accounts before the members.

The balance sheet must include a statement from the directors to the effect that:

- the company is availing of the exemption, - the company satisfies the relevant conditions - no notice has been received from the relevant shareholders requesting the company not to avail of the exemption, - the directors acknowledge their obligation to maintain proper books of account and to ensure that the financial statements give a true and fair view of the state of affairs of the company at the financial year end and of its profit or loss for such year and otherwise comply with the provisions relating to the accounts

In the event that the directors do not comply with the requirement to make these statements they will be guilty of an offence and liable to prosecution.

When a company no longer qualifies Where a company that availed previously of the exemption, no longer qualifies for the exemption due to a change in conditions, (e.g. because of failure to submit its Annual Return form on time or due to turnover increasing beyond the exemption threshold of €1.5 million), the company directors are required to appoint an auditor 'as soon as may be'. The newly appointed auditors would remain in office only until the next Annual General Meeting, at which time the shareholders will either re-appoint the auditors or appoint another firm in their place.

For growing companies the audit exemption may be less attractive because, once the turnover threshold is exceeded, due to the absence of an audit in the preceding year a qualification may be required in the approaching first audit report.

To the Future For many small companies availing of audit exemption, assistance in the accounts preparation from a firm of accountants continues to be a requirement in practical terms. The accountancy firm usually includes an accountants' report with the financial statements prepared.

Non-executive directors of companies will be in favour of continuing the annual audit on a voluntary basis because of the assurances and reliability the procedure brings to the financial statements. The current emphasis on corporate governance and good practice will ensure that many exemption qualifying companies will continue to voluntarily audit.

Given that the timely filing of the current and preceding Annual Returns is a pre-requisite to ensuring a company may avail of the audit exemption, it is worth noting that 71% of companies filed their Annual Returns on time during 2004. However, 25,898 companies paid a total of €18.6 million in late filing fees during 2004.

Company Directors need to ensure their company's Annual Return is filed on time to ensure they have the option of availing of the audit exemption.

Whilst availing of audit exemption will reduce ongoing compliance costs this may not be the only criteria that should be considered by company directors.

I have a small company which has done no trading, made no profit or loss, and has no employees. I missed my ARD. Completely at a loss Help

Hi, I have a small company, which issued 2 invoices last year, paid 2 invoices only both to me for expenses and lost about €1000. I missed by ARD and now am told that I need a full audit. Is there anyway to avoid this disproportionate expense ?

HI, I am winding up my company which is one year old. I have a CT1 form to fill out. My accountant says that i have to do audited accounts in order to fill this out. The turnover was very small 10,000 with the company making a loss 3000. Do i qualify for audit exemption as i am winding up, have sent in my annual return on time. appreciate any help

is an accountants report required in the abridged accounts of an audit exempt company

dod, to answer your query while a company may be entitled to avail of the audit exemption, it is not obliged to prepare exempt accounts. The directors must consider whether it is appropriate for the company to prepare such accounts taking into consideration the requirements of external sources such as banks, outside investors etc. Also, where a company is audit exempt, shareholders holding 10% or more of the voting share capital can request that the company prepare audited accounts.

Jack, To answer your query, currently there is no provision for small group companies to avail of the audit exemption provisions as the qualifying conditions state that a company must not be a parent or a subsidiary.

In the UK the audit exemption also applies to small group companies whose total group turnover is under the exemption limit and other conditions. Is there any such exemption in Ireland?

A company appoints an auditor who completes an audit that the company requires for business purposes. The company is not required to submit audited accounts to the Companies Office because it qualifies for the exemption. If an audit is completed on the accounts, does that fact over-ride their right to the exemption? If they avail of the exemption as they don't choose to disclose professionally sensitive information to competitors unless legally required to do so, are they then obliged to dismiss their auditors whom they will require on an on-going basis for business purposes only?

i have a new audit client who meets the criteria for audit exemption. His year end is 30th sept 2007. What documents does he need to have in place in order to avail of audit exemption for this years accounts?