Despite operating as limited companies, many smaller independent dealers have escaped the need to have their annual accounts subjected to formal statutory or Companies Act audit scrutiny and reporting over the past few years. They’ve been able to take refuge under what appeared to be the quite generous Audit Exemption Threshold for small companies. This meant that if their turnover was below £5.6m in the year to March 2008, and they employed no more than 50 staff, they could forget about a formal audit. Indeed, the exemption threshold was raised in the last Budget to £6.5m for financial years beginning on or after April 6, 2008, and no doubt a few smaller dealers breathed a sigh of relief and thought that they could ignore the issue for another year. Maybe some of them still can. No doubt there will also be a few readers who’ve only been in this dealer business for a couple of years, having perhaps spent a long time in the forecourt trade as site managers or commission operators, and having set up as limited companies, haven’t actually needed an audit in the time they’ve been working for themselves.
However, some may need to think again. We’re all painfully aware of the recent surge in pump prices. Add to that the relentless upward drive of the Retail Prices Index (4.3% officially between May ’07 and May ’08) and in particular the even higher inflation rate on forecourt staples such as tobacco and groceries, and suddenly many retailers may find that their turnover figures are getting very close to the point at which they’ll exceed the audit exemption threshold.
Look at a single-site company selling five million litres of fuel. At today’s prices there’s a turnover (ex-VAT) of around £5.3m without even considering the shop, car wash, or any other income. Go up a little to a six million litre site and you’re looking at fuel turnover alone in excess of £6.3m. Time to talk to the auditors?
Formal financial auditing is a specialised business. You have to be a registered auditor to do it. In recent years audit fees have gone up way above inflation. Typically many small limited company site operators would have expected to pay maybe £3,000-£5,000 for an audit a few years ago. Today, with virtually no changes in the site business itself, those same sites will be looking at a fee of £8,000-£12,000. We’ve seen some auditors try to double their fees, citing government legislation as they try to get £15,000 for what’s really just a two-week job (spread over a few months) on a single site’s accounts, which was not even done on site.
What can you do? Well, first and foremost you can’t bend the rules as far as small company exemption is concerned. Any professional reading your annual accounts will immediately recognise if/when they need to have an auditor’s report attached to them. Secondly, don’t be rushed into thinking that you should simply de-register your business from being a limited company (sole traders don’t need auditing). That may be a sensible long-term assessment, but in the short term there’ll be a multitude of things to consider before ceasing to trade as a limited company. For starters, many of your long-term contracts (finance, property, fuel supply etc) will be in your company’s name. Terminating the company may result in a lot of legal agreements having to be re-written and perhaps re-negotiated. Almost certainly, there’ll be some serious taxation implications to consider before switching operations to sole trader status. You will need expert legal and accounting/taxation advice before you decide what to do.
One way of minimising your audit costs is to operate the best management accounting and reporting systems you can. That means regular management accounts derived from proper control systems. It means proper record keeping and taking stock counts and keeping the results on file. Apart from the fact that all these internal systems produce benefits to you throughout the year, they do save the auditors from charging you a fortune for having to start by producing their own accounts from scratch.
Naturally, it also helps if your auditor understands your business and understands how you produce the management accounts that you give them to work on.
At EKW we do not do statutory audits but we do work alongside registered auditors to minimise the cost to our clients.