The audit of annual accounts is one of the issues that most concern the CEOs and CFOs of companies, especially in the European Union, given the high level of regulation in place. This worry grows even more when it comes to companies that are starting to expand internationally and are dealing with legislation that they do not know in detail, or in the case of small companies for which these audits represent a great effort in terms of both administrative and workload. In order to standardize criteria, the European Union issued a directive in 2013 – the 2013/34/EU Directive on annual financial statements – which specified in greater detail the requirements for conducting audits. Among other aspects, it stipulated that small companies are not obliged to undergo a statutory audit, thus relieving this type of organization, which represents a majority percentage of all companies in Europe, of its burden.
In this sense, the audit was mandatory for medium and large companies, for PIEs (Public Interest Entities, i.e. those listed on a regulated market), for credit or insurance entities and others defined by each country. However, States are free to impose the obligation on small companies depending on the needs or criteria of each government.
The UK is not an exception to this directive. Because of the specific political situation caused by the Brexit, and although it is not yet known what will happen after 1 January 2021, it is worth analyzing the situation. In this sense, in the United Kingdom a company is considered small or exempt from audit if it meets at least two of the following requirements:
- An annual revenue of not more than £10.2 million or
- Assets not exceeding £5.1 million or
- 50 or less employees on average.
But, in addition, there is an exception to the mandatory audit for companies not considered small with a number of limitations or nuances.
A company can apply for an exemption from audit in the UK market if its parent company is regulated under the law of an EU state, provided that a number of certain circumstances are met. To qualify for this exemption, it must provide, before the due date of its annual accounts, written notice from the directors indicating their agreement to the exemption, a copy of the parent company’s consolidated accounts (including a copy of the auditor’s report setting out information about the UK company), an assurance in respect of all liabilities and contingent liabilities outstanding at the end of the financial year and the completion of certain forms with the UK registrar of companies.
In the United Kingdom, as in other countries in our environment, the audit is one of the requirements that companies have to meet perhaps more “complex”. The need for proper compliance with accounting regulations is essential for the proper functioning and credibility of the company in the eyes of third parties. A good financial department or an adequate team of advisors allows this obligation to be fulfilled without major problems and allows companies to focus on what really matters.