Proposals to remove the statutory audit requirements under the Companies Act for small firms and Appointed Representatives (ARs) have been issued by the Financial Services Authority (FSA).
Small FSA authorised firms and ARs which only undertake mortgage and general insurance business are already exempt from the audit requirement by virtue of an amendment made to the Companies Act in September 2005, and the consultation paper proposes to extend this exemption to other small firms.
The FSA estimates if the audit requirements are removed it would save 3,200 small firms £8.9m each year, the most benefit being to financial advisers, and would save ARs £4m each year.
The average cost of a statutory audit for a small firm or an AR is between £2,150 and £3,370.
The proposal is backed by the Department of Trade and Industry (DTI) and if the consultation meets with support, the FSA and DTI will take the necessary steps to implement the changes in companies legislation and the FSA Handbook.
The FSA has considered whether the change would affect the amount of protection for consumers dealing with exempted small firms and ARs, but it believes the degree of protection would not be reduced because:
- Most small authorised firms are now subject to the Retail Mediation Activities Return (RMAR);
- The capital requirements for firms will remain unchanged; and
- Any firm holding client money will still be required to have a client money audit.
If the extension of the audit exemption is made, the FSA says it may in the future make greater use of skilled persons as a supervisory tool to supplement its supervision and thematic work.
It believes such occasional use of skilled persons will minimise the risks of a reduction in the standard of a firm’s internal controls because firms will know they could still be subject to a detailed inspection by an external auditor or FSA staff.
It expects to select approximately 50 firms a year to be subject to review by a skilled person.
Stephen Bland, director of small firms at the FSA, says: “We are committed to better regulation. Small limited liability companies currently compete with sole traders and partnerships which are not subject to audit. We are working with the DTI to produce a level playing field for these small firms which should promote competition and thus bring benefits to consumers.”
The consultation period will run for two months from today and, subject to the necessary support for the proposal, the FSA aims to revise its Handbook by the end of the year.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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