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November 14, 2008

Audit threshold rise hampers small – firm training

Increased audit exemption thresholds in the UK have led to insufficient audit work for small firms, which affects their ability to train junior staff, according to a report from the UK Professional Oversight Board (POB).

This is due to trainees and audit staff not gaining enough audit experience to qualify as an auditor or maintain competence at a reasonable cost once qualified.

This was one of seven conclusions drawn from the board’s Report on Practical Training for Auditors. The review involved all aspects of practical training, including the approval and monitoring of training at firms.

It was conducted by a research team from the University of Glamorgan in Wales and is particularly relevant as the audit exemption threshold in the UK recently rose from companies with a turnover of up to £5.6 million ($8.6 million) to those with a turnover of £6.5 million. Companies with balance sheet totals of up to £3.5 million are now also exempt, rising from £2.8 million under the previous regime.

Barrons, an Essex-based three-partner firm, has been affected by threshold rises. Audit and accountancy services manager Russell Tillbrook says that audit work and practical hours have been much harder to come by for the firm since the previous audit exemption threshold increase in 2004, when turnover and balance sheet totals rose to £5.6 million and £2.8 million, respectively.

“That probably took a lot more clients out of audit than you will find with a jump of £5.6 million to £6.5 million,” he said, adding that he estimates the firm lost about a third of its audit clientele at that point.

Tillbrook said he agrees with the report’s findings that the rise in thresholds has made it more difficult to offer junior staff practical experience.

“We’ve found that the people who have come in have got less exposure to audit work than previously, and this is probably due to the issues that there are less audits about now,” Tillbrook said, adding that the firm typically recruits talent with a year of experience.

“That means that if we take them out of audit, we have to instruct them from scratch and train them on the basics of auditing techniques,” he said.

The POB report found the drop in audit work could also potentially affect large firms. It suggested audit trainees in large firms often favour a career path other than audit and that larger firms rely on trained auditors from smaller firms to fill any gaps.

However, mid-tier firms The Accountant approached said audit thresholds were not depleting their talent pools and that recruitment challenges stemmed more from poaching by the private sector.

PKF UK head of audit Richard Bint said it has been difficult to recruit and retain qualified auditors but there is no shortage of people wanting to train as an auditor.

He noted that banks have been “hoovering up” large numbers of qualified people but presumably “now they are spitting them out again at an equally fast rate”.

The next stage of the POB review will be establishing a working group to identify, assess and prioritise possible actions.

Arvind Hickman and Carolyn Canham

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