Recently the Department of Jobs Enterprise and Innovation undertook a national consultation in relation to Audit Exemption Thresholds. While we welcomed the consultation and what it was trying to achieve in our opinion the Department were consulting on the wrong matter.
Under S.I. 308 of 2012 and Section 32 of Companies (Amendment) (No. 2) Act, 1999 to avail of the audit exemption a company currently must meet 3 of following 3 criteria
- The turnover of the Company does not exceed €8,800,000
- The balance sheet total does not exceed €4,400,000
- Average employees does not exceed 50
The thrust of the consultation was to follow most other EC Countries and change the requirement that a company must only meet 2 out of the 3 criteria to be eligible to avail of the exemption. We whole heartedly endorse and support this approach and have said so in our submission on the consultation to the Department of Jobs Enterprise & Innovation.
However in our opinion the real change needed here is the requirement for the company to be up to date with their filing requirements in the Companies Registration Office.
We fully agree with directors being penalized for not complying with their duties to meet their filing deadlines. Irish company law provides up to nine months after a financial period end to hold an AGM and gives generous timelines from the expiry of the financial period end to the Annual Return Date by which annual returns must be filed. If somebody is responsible for the stewardship of a company they should comply with these laws.
Significant progress has been made in relation to corporate compliance in Ireland in recent years. Based on the 2011 Companies Registration Office Annual report of the 185,181 companies on the register, a total of 87.9% filed on time.
Based on a study done by Ramboll Management for the European Commission in 2007 as cited in the Working Document of February 2009 in relation to the Impact Asssessment of the Directive of the European Parliament and of the Council amending the Council Directive of 78/660/EEC on the annual accounts of certain types of companies as regards Micro Entities the combined estimated percentages of Micro and Small entities in the EC amounted to 96% of all companies. If this percentage were applied in Ireland 177,774 companies would fit the definition of Micro and Small entities. Based on the current draft of the Companies Bill 2012 companies limited by guarantee and small group companies (including parent and subsidiary) will be eligible to avail of the audit exemption. Based on the 2011 CRO report combined with the Ramboll Management EC estimates, in the region of 170,000 companies will be eligible to avail of the audit exemption in the future.
If 12.1% of all companies currently are filing late on this basis approximately 20,500 companies who should be eligible to avail of the exemption will not be able to do so because they are filing late. Using conservative estimates of hourly rates for accountants and auditors combined with very conservative time estimates for the difference in work required for an accountant to do a compilation under ISRS 4410 and to do an audit under the Clarity ISAs (UK and Ireland) the minimum extra cost to a small company who requires an audit is somewhere between €1,200 and €1,300. On this basis there is a combined cost to SME businesses of somewhere in the region of €25,000,000 per annum.
This cost could be saved by a small change to Irish company law by removing the requirement for filing annual returns on time as a condition of small companies to avail of the audit exemption. If companies are to be penalised for late filing the penalty should be levied as a financial penalty and the link to audit exemption broken.
The real issue with filing on time in the current and preceding year as a criteria for availing of the audit exemption is that in the real world it is the auditor or accountant who is the one that ultimately pays the price. Many small company directors do not understand the difference between a compilation under ISRS 4410 and an audit under the Clarity ISAs. The concept and value of an audit is strained and questionable for SME clients at the best of times. Companies and their directors who can not avail of the audit exemption due to late filing invariably do not place an appropriate value on the audit and derive very little benefit from it. The auditor or accountant struggles to recoup the fee and are simultaneously being put under significant pressure through the enhanced regulatory regime of their respective institutes under the watchful eye of the Irish Auditing and Accounting Supervisory Authority. We fully agree that if an auditor signs an audit report they should comply with all the standards and that the auditing profession needs to be subject to rigorous regulation to maintain public confidence. The difficulty is with these small companies the accountant ends up paying the price directly or indirectly for the actions of a director who they cannot control and are not responsible for.
The current approach to late filing and audit exemption needs to be changed. We are the only country in the European Community who have created this criteria and it needs to be removed. The ordinary accountant in practice voices this concern on an ongoing basis but nobody appears to be taking heed.
To demonstrate the concern of accountants for the unnecessary cost and burden we set up an online petition recently. 841 accountants responded in a period of 16 days. These 841 respondents represent approximately 25% of all registered and regulated accountancy practices in Ireland. We are a small independently owned service provider to the accountancy profession in Ireland and this petition was circulated to our contacts and run over a very short time frame so it is safe to assume that there are many more accountants who have not signed up to our petition for any one of a number of reasons that share the view and opinion of the 841 who have.
We have made our submission to the Department of Jobs, Enterprise and Innovation but our concern is that the accountants voice may not be heard. Maybe the time has come for accountants to make themselves heard on this through direct lobbying of the people who can really influence the outcome.
From our perspective this change is inevitable once accountants get their message across as it just reflects plain and simple common sense. The next question though is how the profession and in particular SME Accountants will react to the changes in relation to audit and the income derived from it?
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