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October 5, 2011

UK government considers reducing SME reporting requirements

The UK government has issued a proposal that would see reduced financial reporting requirements for SMEs in order to save companies more than £600m ($917m) on accounting fees and administrative costs.

The consultation Audit Exemptions and Change of Accounting Framework by the Department for Business, Innovation and Skills sets out plans to allow more small companies and subsidiaries to decide whether or not to have an audit.

The government is also proposing to introduce legislation in 2012 to exempt most subsidiary companies from mandatory audit, provided their parent is prepared to guarantee their debts. This would lead to savings estimated at £406m per year, according to the government.

Currently in the UK, SMEs have to meet turnover and balance sheet thresholds to be exempt from audit.

Under the new proposals, UK SMEs would be eligible for audit exemption by meeting any two of the three criteria – turnover, balance sheet total and number of employees.

The Minister for Corporate Governance Edward Davey said the volume and costs of reporting requirements for UK companies have increased and businesses have stressed the need for more flexible and targeted rules.

 “Audit is very valuable for many companies. But the proposals we’ve published today are aimed at removing EU gold plating and freeing up enterprise, which ultimately benefits the whole UK economy and will help put us on the path to long-term, sustainable growth,” Davey said.

In response to the consultation Institute of Chartered Accountants for England and Wales (ICAEW) chief executive Michael Izza said audit plays a vital role in the oversight and governance of companies.

“In my view many SMEs and subsidiaries will continue to choose to have an audit, even though they may qualify for exemption, because it provides confidence and peace of mind. It can be important to have audited accounts when pitching for contracts or seeking finance,” he said.

Grant Thornton head of assurance Phil Crooks agreed and added audit provides credibility to the HMRC, finance providers, creditors, potential employees and advisors particularly in this economic environment where people are uncertain.

Crooks said despite welcoming the consultation he is unclear about the government’s interpretation about EU gold plating, “when it is actually more UK gold plating”.

“The UK has actually driven the sort of exemption that goes even further for small companies then the EU, in a sense that we require the balance sheet and the PNL requirements to be met rather then just two out of the three like the EU require,” Crooks said.

The consultation is open for comment until 29 December.

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