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Red Alert

21 March 2016

Why new rules intended to cut red tape could mean extra responsibilities and risks for business.

From this year, businesses that have a turnover below £10.2M will no longer have to have their accounts independently signed off by an auditor. Until now, an auditor had to sign off accounts of all businesses with a turnover of £6.5M and above.

This change is expected to result in thousands of businesses no longer having to be independently audited. Figures vary as to just how many businesses will be affected but the most conservative estimate states that 11,000 businesses will no longer be required to be audited. The change in the rules is part of Business Secretary Sajid Javid’s attempt to reduce the amount of regulation faced by all UK companies. While the move is being welcomed by many in the business community – and is in line with a European Union directive – it is worth considering what it will mean for those it will affect most. Businesses, after all, are responsible for their books. It is business personnel who can find themselves in the firing line when it comes to identifying any fraud or other wrongdoing. It is them who are expected to explain anything that seems unusual in the company’s books.

Warning Sign

Warning
Although the exact figure for the number of companies affected by this change is subject to some discussion, there is another statistic that is worth noting. This relaxation of auditing requirements will mean that 98% of Britain’s businesses will not have to carry out a full audit.

Understandably, the CBI has welcomed the change. But the Institute of Chartered Accountants in England and Wales (ICAEW) has already warned that the relaxation of auditing requirements will make businesses in that 98% more vulnerable to fraud, money-laundering and other financial offences. It has raised its fears with the Department for Business, Innovation and Skills.

Michael Izza, ICAEW Chief Executive, said: "We understand their concern is to reduce the regulatory burden on business, and this is an aim we fully support. We just believe the savings would be better made in less potentially damaging areas."

Whether the ICAEW obtains any government climb down on the new rules remains to be seen. It is unlikely.

Change
So while the change has alarmed accountants, what concerns should the more general business community have? For those working for companies whose turnover is between £6.5M and £10.2M, it means that their books will no longer have to be independently audited. It brings them into line with their counterparts working for companies whose turnover is below £6.5M: their books no longer have to face the scrutiny they previously had to undergo.

At first glance, this may appear to be an "easy ride" in comparison to businesses with a £10.2M-plus turnover who still have to be audited. But, as we touched on earlier, there is an argument to be made that those who are not audited are under greater pressure – and need to take precautions.

A finger of suspicion will always be pointed when wrongdoing is suspected. The argument that someone should have spotted it is a fair one but does not tell the whole story. Firms have to devise and implement their own procedures to give those in the company the chance to identify wrongdoing. Such procedures will always help tackle the problem. An absence of them is a dangerous and unrealistic way to proceed.

Identification
It may be that many of the companies newly freed from the responsibility of being audited feel they can leave the identification of wrongdoing to the accountant now the auditor will no longer be visiting. Then there are the many firms – either audited or unaudited – who feel that they need do nothing to prevent or identify fraud as the accountant will be on to any illegality in a flash.

This would be a huge mistake. It is imperative that companies do what they can for themselves to reduce the chance of any wrongdoing and the danger of them being implicated in it. Lumping responsibility onto the accountant is a risky, short-sighted approach.

Simple things such as maintaining comprehensive and detailed records of every contact a company has with customers and other third parties may seem like stating the obvious. But such records are essential if and when the investigating authorities come looking for answers.

On a similar theme, companies should not enter a business relationship blindly. They need to learn some basic information about those they are considering working for or with: What line of business are they in? What are the business patterns in their finances?

Do certain anomalies indicate anything suspicious? If the answers to such questions are not convincing, you need to tread warily. Such answers (or a lack of them) can give an indication of whether a business (or people working within it) are involved in illegality.

Precautions
To put it simply, ignorance of the law is no excuse. If a firm is to remain on the right side of the law, it has to be aware of the law as it applies to it and its clients. For example, it may be the case that a company may have genuinely never suspected that a customer or partner was involved in, for example, money laundering or other financial crime. But if we consider the money laundering example, the company’s explanations to the authorities will hold greater credibility if its senior staff are familiar with the law regarding money laundering; particularly the relevant aspects of the Proceeds of Crime Act and the Money Laundering Regulations.

In such circumstances, it is vital that a company has taken all relevant precautions to ensure that the finger of suspicion is not pointed its way – regardless of whether an auditor is also looking at the books.

Businesses’ relationships with their staff, customers and third parties can be laid out in the open, entirely visible to the authorities, when an investigation begins. They need to take steps to make sure there is nothing to see that arouses the suspicions of the investigators. Being audit free must not be seen as a get out of jail card.


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