Why SMEs choose voluntary audit

When the UK government raised the thresholds for defining a small company in 2004 to the EU maxima, it increased the number of small companies able to:

  • Forgo having a statutory audit of their accounts; and
  • File abbreviated instead of full accounts.

The option for abbreviated accounts mean that a small company need only publish an abbreviated balance sheet and its associated notes, rather than a full profit and loss account and balance sheet – with notes to both. However, they can voluntarily publish full accounts (audited or unaudited) if they wish.

Over the last few years, we have seen a number of proposals relating to small company accounting and auditing regulations that have started from a premise that the regulations are an administrative burden. Therefore, we need to look at the often neglected benefit side of the equation. My latest study investigates the reasons why micro-companies with turnover under £0.31m and under ten employees, choose voluntary audit. Why do they publish full accounts? Among a sample of 419 micro-companies surveyed, I found that 22 per cent had a voluntary audit while 45 per cent considered the benefits of placing full accounts on the public record to outweigh the costs.

Having first looked at the characteristics of micro-companies choosing to have a voluntary audit, I found that for companies where cost is not a major concern, the directors get advice on accounting and auditing regulations from their (external) accountant. They not only know what their options are, but have an opportunity to discuss the costs and benefits with someone who probably knows the business very well. In addition, the directors believe the audit provides a valuable check on the company’s accounting systems and records, as it provides assurance for internal investors and the bank/lenders.

When turning to the characteristics of micro-companies that choose to file full accounts, I found that choosing the cheapest option is not a major factor. This is not surprising. Although abbreviated accounts involve a little extra work, accounting software makes it easy to generate them from the full accounts for shareholders.

I identified two main characteristics: 

  • Companies volunteering full accounts also opt for voluntary audit; and
  • Their directors believe that the bank/lenders use the published accounts.

Although both voluntary behaviours were influenced by the awareness that full audited information was useful to credit rating agents, this was not one of the strong factors. This may be due to an information gap or because personal credit ratings are considered to be more important in small businesses.

The clear message gained from my research is that micro-companies have similar assurance and reporting needs to non-micro small companies. The statutory requirement to register annual accounts ensures that this important source of regulated, general purpose information is available to users. It is, particularly, available to those who lack the legal or economic power to demand special purpose financial statements. Regulators should take account of the information gap that would arise if micro-companies were prevented or discouraged from publishing full, audited financial information.

It could lower the quality of the financial information used by internal and external parties and have an adverse effect on the company’s credit rating score and, hence, its ability to borrow and obtain trade credit. Therefore, regulators should not give the impression that there are no benefits to filing full audited accounts because it might constrain the very firms that are seen as the ‘engines for growth’ in the economy.

Dr Jill Collis is a reader in accounting at Brunel University.

Share this story

Close
Menu
Send this to a friend