4 Mar 2015 09:23am

Crossing the audit threshold

Over the last decade the audit threshold has been rising steadily, forcing smaller firms to evolve their services. But have they got the right expertise and are they aware of potential pitfalls? Iwona Tokc-Wilde investigates

New European regulations have already caused sweeping changes in the UK audit industry, although the new audit regime, including changes to structure for regulation, oversight and new technical and ethical standards, is still a work in progress.

If you follow the issue you will know that the latest moves from the Department for Business, Innovation and Skills (BIS) and the Financial Reporting Council (FRC) are their respective consultations on the new EU Audit Directive and Regulation, to be implemented in the UK by June 2016. “BIS is consulting on the broader regulatory points and principles of statutory audit regulation, while the FRC is consulting mostly on ethical standards for auditors and how to make it work in detail,” says Henry Irving, head of ICAEW’s Audit and Assurance Faculty.

The consultation process on the 2013 EU Accounting Directive has finished and it is very likely that the UK audit exemption thresholds will rise again. The gross assets threshold, currently £3.26m, is expected to rise to £5.1m; the turnover threshold is likely to rise from £6.5m to £10.2m.

But to put this in perspective: 99.9% of all 4.9m private enterprises in the UK are classed as micro, small or medium-sized, according to ICAEW’s report The 99.9%: small and medium-sized businesses. Only 0.2% of companies are likely to find their status recategorised to small when the thresholds increase (BIS puts this number at 11,000).

“Our research shows that SMEs are becoming less familiar with the concept of audit too, as a consequence of the gradual rise of audit exemption for that section of the economy,” says Irving. “There is even some anecdotal evidence that they confuse a financial statements audit with HMRC tax inspections,” he adds.

Another rise in thresholds will not affect the majority of smaller accountancy practices either, as most have not been doing audits for years. “Nowadays, only a quarter of small to medium practices are registered to be auditors,” says Irving.

You need to start small and with clients who know your capabilities and the value you can add

So these reforms could, in fact, represent a world of opportunity for those proactive and innovative accountants that serve growing businesses. “When you remove regulation, the need for more and better business advice is strong,” says Irving. “Clearly though, as clients grow, their needs become more sophisticated, so practices need to develop the right skills and competencies to be able to meet those needs.”

As ICAEW’s early research confirms, audit threshold changes mean that many smaller practices will need to fill the void by evolving their services from purely compliance-based offerings to include provision of other, non-standard services. These could be added-value services such as: cashflow planning, accounting software training, HR advice (linked to provision of payroll), pension scheme accounting, start-up mentoring or even an interim/part-time CFO role.

Indeed, the practices that specialise and tailor their services to their clients’ needs are also the most successful in terms of their own growth.
Aynsley Damery is partner at Tayabali Tomlin, a firm with over 30 years’ experience and offices in Cheltenham, Moreton-in-Marsh and London. Inspiring and challenging clients to build better businesses is at the core of the firm’s proposition and it draws on its own growth experience. “If it works for us, it is likely to work for our clients,” says Damery.

The firm offers a bespoke, 12-month entrepreneurship programme centred around the needs of owner-managed businesses that are looking to grow. The programme encompasses business and financial modelling, customer value propositions, systems planning, time management, strategic planning and management control. “We put it together from our own experiences and at the request of a number of our clients who were eager to learn from us how to put into place some of what we had done,” says Damery.

The breadth of its experience also allows the firm to offer an interim and part- time CFO/FD service, for which a proven track record is paramount. “Prospective clients want to see testimonials and speak to existing clients about what value they receive,” says Damery.

And if you have no track record but are thinking about expanding your current service offering to include outsourced CFO/FD? “You need to start small and with existing clients who know your capabilities and the value you can add. Keep up to date with business trends and teaching, especially on commerciality and strategic thinking. You will also need to practice what you preach, otherwise you will lack authenticity,” says Damery. “And remember, CFO/FD services are not just about offering management accounts and payroll bundled up.”

Both experienced and new practices now also earn a good proportion of their fees from start-up advice and mentoring, taking advantage of the UK’s booming start-up market.

According to StartUp Britain, some 550,000 businesses were created in 2014: that is a new record. “As a very rough estimate, I’d say about 10-15% of our fee income comes from business consultancy, including start-up advice and mentoring,” says Carl Reader, director at Dennis and Turnbull, a Swindon firm set up 20 years ago. “Start-up work is increasing, too, particularly off the back of my blog for start-ups,” he adds.

Oxford-based Ridgefield Consulting is only three and a half years old, with a current turnover of £200,000. “For us, start-up work is a no-brainer and, outside acquisition, likely to generate the majority of all new fees,” explains director Simon Thomas, who says the firm wins on average one new client every two weeks.

Other than the customary help with their business plans, cashflow forecasts, marketing strategies, accounting controls and presenting ideas to potential investors, the firm also offers soft skills training.

In fact training, particularly systems and software training, is now a frequent added-value service, although it is not a big fee-earner. “The take-up of our accountancy software training is disappointingly low,” admits Reader. This is in line with ICAEW’s findings that only 4% of small and medium-sized businesses obtain IT services from their accountants.

While drawing on your own professional and business experience is one thing, provision of specialist services is fraught with pitfalls and therefore requires specialist skills and competencies.

Some firms offer HR advice on the back of their payroll services. “But accountancy firms are only well placed to offer this if they have HR advisers on board, either with generalist HR experience or with HR experience in the industries of their key clients,” says Nicola Bell, HR director at Carter Backer Winter (CBW). “They must also appreciate the point at which a piece of HR advice needs to be referred to a solicitor,” she adds.

Acquiring relevant experience is also a must if a firm wants to develop a specialism, such as charity. “You must understand how charities are formed and their variants, together with the variations in tax and accounting legislation governed by the two current Statements of Recommended Practice (SORPs),” says Alex Bell, owner of Studholme-Bell. The firm’s income from charities work is now approximately 5% of total fees and growing year on year.

Pension scheme accounting and advisory also demands specialist knowledge, which Simon Thomas of Ridgefield Consulting gained when he was accounting for large household pension schemes in his previous employment with EY. “The main issue is compliance with the many complex rules of The Pensions Regulator, including those on eligibility, auto-enrolment and changes in membership.”

Be aware of Department for Work and Pensions and Pension Protection Fund issues, adds Thomas.

Finally, although the actual insolvency appointments can only be taken by licensed insolvency practitioners, some accountants without the licence offer “pre-insolvency” services. “They mustn’t go beyond their remit,” warns John Dickinson, head of corporate recovery and insolvency at CBW.

“Understanding where the line should be drawn is especially important when they advise directors prior to a formal insolvency procedure. The risk is that those directors may become personally liable for actions they take as a result of their accountants’ advice. Should this be the case, the advising accountant becomes vicariously liable.

“Accountants considering pre-insolvency services should have enough expertise to be clear about when they stop giving ‘information’ and start giving ‘advice’.”

Iwona Tokc-Wilde



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