‘‘Can we trust our customers’ financial statements?’’

This is a question that credit controllers and finance teams may be asking more often, given the recent rise in the audit exemption threshold.

For financial years starting on or after 1 January 2016, fewer companies will be required to have their financial statements audited. Companies will be exempt if they meet two of the following three criteria for (generally) two financial years:
  • a turnover of less than  £10.2 million;
  • total assets to the value of less than £5.1 million;
  • fewer than 50 employees.
These thresholds are considerably higher than before. The turnover threshold, for example, has increased from £6.5 million, while the total assets threshold used to be £3.26 million. It’s thought that 7,400 companies will no longer need to get their financial statements audited – although the Government has estimated that 4,400 may continue to do so voluntarily.

We don’t know yet how businesses will respond. If companies decide not to have an audit, they might still seek some other form of assurance on their financial statements, or they might not.

What is certain is that credit controllers can no longer assume that some quite substantial businesses will be producing audited financial statements. There is a risk, as professional bodies like the Institute of Credit Management and the Institute of Chartered Accountants in England and Wales have highlighted, that the quality of some company accounts could fall, with damaging consequences. It’s possible that weakening company performance, even insolvency, might not be detected as early. There’s also a potentially increased risk of fraudulent activity going undetected. 

Credit managers will need to take additional care when extending credit to customers. Although unaudited financial statements may still be prepared and checked by professional accountants, credit managers cannot place the same level of confidence in them. So what can they do to reassure themselves about clients’ credit-worthiness?

A range of credit assessment tools are available, including Moore Data, an online system provided for clients by Moore Stephens. The system draws on over 6 million records on businesses trading in the UK including County Court Judgements, Gazette information, director records and other matters vital for risk management and credit control. Moore Data applies a health rating system to companies, attaching red flags when increased monitoring or a full review of the account status is recommended. Users can set up alerts to be notified when the position of specific companies changes. 

Above all, credit managers need to take note of the changing audit environment and be prepared for an increase in unaudited financial statements. It’s important to treat what they contain with a healthy degree of scepticism.

For more information, please contact us.   

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