What’s an audit exemption?

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Small and medium-sized private companies with limited revenue and limited liability partnerships (LLPs) in the UK and other EU countries can claim exemption from the government’s annual audit of accounts if they meet certain criteria. In the US, only publicly traded companies and private company benefit plans must be audited annually. The cost of audits can be prohibitive for small businesses, but audits contribute to efficient management, transparency, and discourage fraud. The Association of Chartered Accountants (ACCA) conducted roundtable meetings in 2010 and 2011 to understand the consequences of raising the exemption threshold limit in the EU.

An audit exemption is a grant in the United Kingdom and other European Union countries for small and medium-sized private companies with limited revenue, as well as limited liability partnerships (LLPs). This allows them to claim exemption from the statutory requirements for the government’s annual audit of accounts. In the United States, only publicly traded companies must be audited annually, as well as benefit plans of private companies. All publicly traded companies in the UK, as in the US, cannot claim an audit exemption.

While the reasons for an audit are sound, small businesses have a good case for wanting an audit waiver. The cost for small businesses can often be prohibitive, although audit fees for small and medium-sized enterprises (SMEs) are often 0.5% or less of company profits. Small businesses can also claim that they are required by law to keep books of account with detailed daily records, even if they are eligible for the audit exemption.

Qualifying for a UK audit exemption requires a company to meet all three requirements. It must meet the legal definition of a small business. The company must also have a financial turnover of not more than £6.5 million. In addition, a company must also have a balance sheet total not exceeding £3.26 million pounds.

The confusion is established with the subsidy for the audit exemption when defining what a small company is. A private company must meet two of the three conditions laid down in the UK to qualify as a small business. They include the number of employees being 50 or less, as well as the two previous conditions of a balance sheet total of £3.26 million or less and annual turnover of £6.5 million or less. Annual turnover is defined as net sales volume or profit after subtracting all discounts and taxes.

External audits of private enterprise businesses by the government are seen as generally beneficial for a number of reasons. They contribute to the efficient management of companies, increasing the reliability of internal financial processes. As an audit is an increased level of public transparency into private corporate behavior, they discourage fraud and money laundering. Audits also encourage key stakeholders to run the business as efficiently as possible.

Despite these benefits, of an estimated 4,500,000 companies in the UK in 2006, 97% were companies with 0-49 employees, eligible to claim the audit exemption. Another 2% were medium-sized companies with 50 to 249 employees, and while some qualified for the audit waiver, a 2006 survey indicated that 73% favored a voluntary audit even if they received the waiver.

A series of roundtable meetings in late 2010 and early 2011 were conducted by the Association of Chartered Accountants (ACCA) in Europe and involved other countries that grant audit exemption to small companies, such as Australia and New Zealand. The meetings included the European Commission and experts in the financial services sector, with the aim of understanding the consequences that could occur if the exemption threshold limit is raised in the European Union. The meeting revealed that currently around 98.7% of all European companies receive audit exemption. Additionally, some countries have a high cap or high limit after which it is no longer allowed, with Germany and Belgium setting the cap at €8.8 million in annual turnover and countries such as Greece, Poland and Spain setting the cap markedly lower.

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