What Is an Audit Exemption?

Ray Hawk
Ray Hawk
Woman holding a book
Woman holding a book

An audit exemption is an allowance in the UK and other European Union nations for small- and medium-sized private companies with limited revenue, as well as limited liability partnerships (LLPs). It allows them to claim exemption from the statutory requirements of the yearly accounting audit by the government. In the United States, only publicly-traded companies must be audited yearly, as well as the benefit plans of private firms. All publicly-traded companies in the UK, as in the US, are not allowed to claim an audit exemption.

Though the reasons for an audit are sound, small companies have a good argument towards desiring an audit exemption. The cost to small companies can often be prohibitive even though audit fees for small & medium enterprises (SMEs) are often 0.5% or less of company profits. Small companies can also claim that they are required by law to maintain books of account with detailed day-to-day records even though they are eligible for the audit exemption anyway.

Qualifying for an audit exemption in the UK requires that a company meet all of three requirements. It must meet the legal definition for a small company. The company must also have a financial turnover of not more than £6.5 million pounds. In addition, a company must also have a balance sheet total of not more than £3.26 million pounds.

Confusion sets in with the allowance for the audit exemption when defining what a small firm is. A private company must meet two of three established conditions in the UK to qualify as being small. They include the number of employees being 50 or less, as well as the two previous conditions of a balance sheet total of £3.26 million pounds or less, and an annual turnover of £6.5 million pounds or less. Annual turnover is defined as the net sales volume or profit, after all discounts and taxes have been subtracted.

External business audits of privately held firms by the government are seen as generally beneficial for several reasons. They contribute to the efficient management of companies by increasing the reliability of internal financial processes. As an audit is an increased level of public transparency as to private corporate behavior, they discourage fraud and money laundering. Audits also encourage the major stakeholders to run the company in the most efficient way possible.

Despite these benefits, of the estimated 4,500,000 businesses in the UK as of 2006, 97% were companies with 0 to 49 employees, which were eligible to claim the audit exemption. Another 2% were medium-sized firms, with 50 to 249 employees, and, though some qualified for the audit exemption, a survey in 2006 indicated that 73% were in favor of a voluntary audit even if they were granted the exemption.

A series of round-table meetings at the end of 2010 and beginning of 2011 was conducted by the Association of Chartered Accountants (ACCA) in Europe and involved other countries that grant the audit exemption to small businesses, such as Australia and New Zealand. The meetings included the European Commission, and experts in the financial services industry, with the aim of understanding the consequences that may occur if the exemption threshold limit is raised in the European Union. The meeting revealed that currently about 98.7% of all European companies are granted the audit exemption. As well, some nations have a high threshold limit or cutoff point after which it is no longer allowed, with Germany and Belgium setting the limit at €8.8 million Euros in annual turnover, and nations such as Greece, Poland, and Spain setting the limit markedly lower.

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