Byers' figures don't add up

IF STEPHEN Byers, the Trade and Industry Secretary, thought his plan to raise the threshold at which companies are required to undergo statutory audit was likely to be greeted with the accountancy version of dancing in the streets, he must be disappointed.

On the face of it, he made an obvious move to add the small companies audit to the "bonfire of red tape" he promised to ignite. The businesses involved are typically owned by their managers, so there is no need for investors to be told what is going on. But, as often is the case, the situation is more complex.

Raising the level at which companies are required by law to have their accounts independently checked has been on various agendas for some time. Though small firms of accountants - fearful of loss of income - have tended to disagree, the general view has been lifting the starting point from the current pounds 350,000 annual turnover to pounds 1m makes sense.

But Mr Byers' plan - announced at the annual conference of the British Chambers of Commerce in Glasgow this month - is possibly to go as high as pounds 4.2m, the maximum turnover that can escape an audit under European Union law. And that seems to have changed the game considerably. Some see the proposal as simply gesture politics. Gerry Acher, chairman of the audit committee of the Institute of Chartered Accountants in England and Wales, says: "An audit cannot be seen simply as a cost. It is there to help the user of accounts take better- informed decisions."

Peter Langard, chairman of the small business committee of the Association of Chartered Certified Accountants, says research shows a substantial majority of small business owners see value in an audit.

Nor do we have to accept the view of a representative of a body that stands to lose from a reduction in the number of audits. Biman Mittra, managing director of Gomark, an information technology distribution company with turnover of pounds 3.8m, believes businesses could suffer from being freed from what can be seen as the yoke of the audit.

While accepting the argument in favour of abolishing the audit for companies with annual sales of less than pounds 1m, he believes the process should be fundamentally changed for small companies above that size.

The existing audit, he says, is not always productive or informative when it comes to the "nitty-gritty" of the internal workings of such businesses. He would like to see something that focused more on what commonly causes problems in such firms - issues such as directors mixing private and business affairs and cash-flow troubles. Managers of such concerns are often too busy chasing business to put the right procedures in place, and without internal checks and balances the results can be disastrous, he says.

"Above a certain limit, that is quite important," said Mr Mittra, adding that although his Kensington-based company does not employ many people, its collapse would affect a considerable number.

Will Lifford, head of client services at Mittra's accountants, Grant Thornton, sees benefits for his type of firm in taking this approach. It would enable them to "focus our efforts even further on giving business advice rather than also having to deal with the audit", he says.

This seems to be where Mr Byers and his advisers have become confused. Though some firms might be tempted to do away with their accountants' services through not having an audit, the reality is that very few would be able to.

Mr Mittra says: "I'm not sure external organisations like banks and factoring companies would take kindly to not having a clear idea of the company other than from the internal management."

Linda Papworth and her husband run a print-finishing business in Suffolk, with a pounds 70,000 turnover. She says their overdraft of pounds 4,000 will "be looked at" if she fails to produce full figures every quarter. "They won't accept my figures," she says.

At Acca, Mr Langard says: "It is likely that any savings produced by the change proposed would be much less than claimed. Acca believes the statutory independent audit has value across the board - from the owners and managers of small companies, to the Inland Revenue, to bankers and to society. Encouraging companies to dispense with external audits would be a short-sighted move that will damage the UK economy in the long term."