Allister Heath, the only business journalist I actively rush to read every morning has had a funny turn this morning:
CABLE RIGHT FOR ONCE
EVERY little helps. Vince Cable’s business department plans to make 36,000 small companies exempt from having to audit their accounts – a process that currently costs almost £10,000 per year. It will also allow 83,000 subsidiaries to opt out.
While it doesn’t go that far, this is nevertheless one of the few genuine deregulatory measures taken by a government that has otherwise continued to add extra red tape (contrary to what it claims). For once, therefore, Vince Cable deserves to be congratulated. I can hardly believe I have just written this – but I mean it.
Well, he's right that this government, like the last one, has categorically failed to deliver any meaningful improvement in business regulation. But it's unfortunate that he shares with Cable the misguided notion that audit is an unnecessary regulatory burden.
It's important to distinguish two issues here. Firstly it's right that the government should be very careful about what it mandates. So I have no problem with the government reducing the number of companies that are required to have an audit by law. But Cable has gone further. By articulating the cost of audit, he's incorrectly ignoring the benefits that those companies get from their audit. For some of them, the cost will not exceed the benefit. But for others the benefits can be significant. Audit helps give owner-managers a better grip on their business. It may help identify internal control weaknesses that could damage the business, or to find improvements that could boost profitability. Most vitally, an audited set of accounts can help convince lenders that the company is a better credit risk, reducing their borrowing and credit costs.
But, even worse, Cable's rhetoric is unacceptably disparaging of an important business process. As an analogy, imagine for a moment that the government were to decide to do away with the annual MOT for cars. While this would be bad for many garages, they would be outraged if government were to paint the MOT as an unnecessary burden on motorists. Doing so would undermine any hope they might have of selling an annual car health-check to motorists on a voluntary basis. Given the the importance of growth to the government's agenda, it's astonishing that Cable would put the boot into the accountancy sector in the way he has. And even more incredible when you think that his department has responsibility for the sector (through the Financial Reporting Council).
Audit wasn't invented by government. However, the current audit requirements, some of which are felt by politicians to be burdensome, are entirely due to government. They have some serious chutzpah trying to take credit for destroying a market which, were it not for them, would happily offer value-added services to business. Only, thanks to the graceless nature of Cable's withdrawal, that now looks unlikely.
The ACCA don't like Vince's proposals, while the ICAEW are decidedly lukewarm and are asking their members for feedback.
Filed under: Auditing, Regulation with tags acca, allister heath, audit exemption, city am, frc, icaew, red tape, vince cable
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