Weekly Blog by Philip King, CEO of the ICM - 'Reading between the lines?'

Last week Vince Cable announced that the Government was tabling the Statutory Instrument to implement the planned changes to accounting thresholds.  The accompanying BIS press release heralded the fact that allowing 36,000 more companies to choose not to have an audit "will help save UK companies millions every year and free them up to expand and grow their business, which ultimately benefits the entire British economy".

 

How frustrating it is to see the Government fail to grasp a fundamental principle of trade credit and business. Suppliers make credit decisions based on the information available to them; the more information, and the more reliable it is, the better will be the quality of the decision.  It follows that, where the information supports it, credit will be more readily available to the business requiring the goods or service.  Most likely, 36,000 companies will now follow the implicit steer from Government and leave potential suppliers struggling to justify the granting of credit.  Will that aid economic growth? I think not!

 

We should remind ourselves what audits do.  Formally, they ensure the accounts represent a true and fair view of the company's financial situation giving suppliers confidence in the status of the business they're being asked to support through the provision of goods or services on credit.  But they do much more besides.  Very often, they highlight errors in the business's accounting system, records or processes, they identify any gaps or omissions that could be attributable to inefficiency or, worse, fraud, and they provide an independent and objective view of the business.  A good auditor can be very useful to a business; I know the ICM's auditor takes a real interest in its business and our discussions go far beyond the accounts and the numbers.

 

Interestingly, only this week, I saw a draft article for a European magazine by a university academic referring to the positive impact of the changes in 2006 that obliged German companies, especially small and medium-sized ones, to disclose financial statements and the resulting increased transparency!

 

I understand the thinking behind the changes and I have no problem for micro-businesses with very low turnover where accounting is cash-based and simple, but we're talking here about businesses with turnover up to £6.5m and 50 employees.  When an error eventually comes to light and the company fails because it's too late to do anything about it, there will be impacts on the business, its suppliers, its employees and the economy.  The suggestion that something that can be so invaluable is an unnecessary regulatory burden is misguided, naive, and unhelpful.