As we approach the end to what has been a uniquely challenging year, it is a timely opportunity to reflect on financial statement preparation, to allow Company Directors plan for both the preparation of financial statements and the requirement for an audit. With that in mind, in this short article, we will provide an update on the following key topics:
- The requirement for an audit; and
- Public filing considerations.
REQUIREMENT FOR AN AUDIT AND AUDIT EXEMPTION
As Auditors, we are often questioned on the value of an Audit for a small business owner, with the biggest comment being “Surely the money spent on an Audit could be put to better use in developing my business”. However, there are many advantages in conducting an Audit, even for the small business owner!
Companies which meet specific criteria, may, under the Companies Act 2014, avail of an exemption from the requirement to have the financial statements which are appended to its annual return audited. A company must qualify as a small company (or micro company).
To qualify as a small company and avail of these exemptions, a company must satisfy TWO or more of the following conditions in the current financial year and in the preceding financial year (unless it is its first financial year):
- Balance sheet total does not exceed €6m (micro; €350,000)
- Turnover does not exceed €12m (micro; €750,000)
- Number of employees does not exceed 50 (micro; 10)
There are some companies not entitled to the exemption from audit, i.e. PLC, PLUC, Investment companies, credit institutions, insurance undertaking, a company referred to in the 5thschedule of the Companies Act 2014 (e.g. an insurance intermediary). In addition, the late filing of an annual return requires an audit to be carried out in the following two financial years, irrespective of size.
Many small businesses in Ireland may not achieve the above levels of turnover, net assets or employees and on that basis, they would be in the position to dispense with the requirement to conduct an Audit and prepare their annual Financial Statements on an Audit Exempt basis.
However, there are certain circumstances where engaging for an Audit to be undertaken can be of added value for smaller companies and these should be considered before availing of audit exemption. The following are a number of benefits to conducting an Audit for the small business owner:
1. Preparing your business for sale
In circumstances where a company is being prepared for sale, an Audit can help to identify any existing or potential weaknesses in the business and in its accounting systems. By identifying these weaknesses early it gives the owner an opportunity to address and correct them well before a business is subject to due diligence in advance of any potential sale. An Audit will also enhance the credibility and reliability of the company’s trading performance and of its net asset position, which will provide assurance to potential purchasers.
2. Improving business efficiencies
While you may not be looking to sell your business, small business owners are always looking to improve efficiencies in the day to day operations of their business. By identifying existing or potential weaknesses through an Audit, it gives the small business owner the opportunity to work on such inefficiencies and improve the overall running of the business. This in turn should reduce costs and increase the profitability of your business.
3. Provide assurance to other directors
While a number of small businesses in Ireland have more than two directors, the day to day running of the business is generally managed by just one of these directors. In this situation, conducting an Audit would provide assurance to the other non-executive directors that the business is being run well and in an efficient manner, as weaknesses would be address and resolved on an annual basis.
4. Provide assurance to bankers
It has been a challenging year for the small business owner, particularly those who have significant bank borrowings. We understand that banks are now looking for significantly more detail from the small business owner, even for smaller levels of borrowing. By conducting an Audit on your annual Financial Statements it will provide your financial institution a level of assurance regarding the management and operations of the company.
5. Improve controls and reduce fraud
When you established your business you implemented controls and procedures on how your business was to be run on a day to day basis. However, these controls should be monitored and improved on a regular basis and evolve as the business evolves. As part of our Audit procedures, we review and test these controls to ensure they are operating in an efficient manner. If weaknesses are identified, we will bring them to your attention and make suggestions how such weaknesses can be overcome. In addition, we will review your procedures for the prevention and detection of fraud, which is vital to all business as such fraud could have a significant impact on your overall profit.
6. Reassurance from your Auditor
While an Audit may involve a greater level of work and therefore a slightly higher fee than simply preparing a Company’s Statutory Financial Statements on an Audit Exempt basis, such an increase in fees could ultimately be a relatively small investment when you take into consideration the benefits which can be achieved from an Audit. There is a misconception that we are there to find errors in your business and point out your mistakes. However, for our small business owners, we see ourselves as a key trusted advisor. One of our greatest successes comes from helping small businesses to grow, through working closely with the small business owner on identifying area’s where they can improve their business.
PUBLIC FILING CONSIDERATIONS
It is also a timely opportunity to reflect on the public filing of financial statements with the Companies Registration Office. Although a company must lay full Financial Statements before an AGM, depending on the type and size of the company it may be able to claim an exemption from filing full, or any, Financial Statements with the CRO. Some key reminders: Companies that meet the small company size criteria can claim the abridgement exemption from the requirement to file full financial statements.
So what gets filed with the CRO – in summary:
- Medium-sized company – full financial statements;
- Small company – full financial statements, with no profit and loss account; movement on the profit and loss reserve is required to be disclosed by way of note or on the Balance Sheet;
- As a result of the impact of events during the year, an increase or reduction in the criteria for company size (i.e. turnover, balance sheet totals, employee numbers) may bring the company within the relevant criteria thresholds or breach the historic thresholds resulting in a change to filing requirements. It is important to keep this in mind when preparing financial statements ;
- Unlimited Company – special auditors’ report – no financial statements filed.
Details of the types of entities and applicable exemptions above are laid out in the following link:
In summary, now is a timely opportunity to reflect on financial statement preparation and the planning for audit ahead of the year-end and what is the financial year-end for many businesses.
In our next financial reporting update article, we will look to key financial statement disclosures and getting the balance right to help Directors plan for the preparation of the financial statements and to give consideration to the required level of disclosures for key areas following this challenging year.