The audit threshold is to be raised from £350,000 to £1 million for accounting periods ending after 31 July 2000. The government is considering a further increase to an amount as high as £4.8 million in 2001. This decision will be made as part of a fundamental review of company law.
Until 11 August 1994, all limited companies had to be audited, even when the shareholders and directors were the same people, and however small the company was. In 1994, companies with an annual turnover below £90,000 were exempted, and those with a turnover between £90,000 and £250,000 had to produce a less demanding compilation report.
On 14 June 1997, both limits were raised to £350,000. There are some exceptions where exempt companies are still required to be audited. Subsidiaries of non-exempt companies, for example, must be audited if the group turnover exceeds the threshold. A company which is exempt may elect to be audited, and will often do so if it wishes to float or raise substantial capital within a few years.
The increase will remove the audit requirement for 150,000 companies, over 15% of trading companies. A further increase to £4.8 million would take out another 75,000.
These increases have been widely welcomed by small businesses and the accounting profession. There are proposals that the statutory audit should be replaced by a new system of inspection which concentrates on procedures and client issues rather than the narrow issues of whether the accounts are true and fair, and comply with the Companies Act.
The present audit requirement is unchanged in principle from 1948, which in turn was largely based on practices of the 19th century intended to help banks and railway companies to raise funds. There has long been an awareness of the expectation gap by users of accounts who may believe that the audit report provides a check that the accounts are accurate and that the company is being properly run.
The Auditing Practices Board has launched a survey on how it should be replaced by a new body as part of the revision of audit requirements.
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