Why LCE Audits Are So Important For Businesses?

Audits are a part of accounting which usually go under the radar in terms of exposure and engagement. Auditing however is one of the most important services a business needs, gaining the ability to accurately grasp your financial figures whilst examining and verifying that everything going on in your business is legitimate and correct.

Auditing is often one of the main services that an accountant offers to clients, allowing a qualified professional, or set of professionals, to closely scrutinise figures and documents to make sure that any regulatory or governing bodies (HMRC for example) are happy and not wanting to investigate any illicit activity. Our Audit department at Nordens are able to tailor our audit work to the size and complexity of the operations of the company, removing a lot of the unnecessary audit work to create a more efficient audit process for everyone.

As with most services in accounting, the scalability of work greatly differs according to the size and capacity of a business. This is where LCE (Less Complex Entities) audits come into action, providing often smaller businesses with the correct procedures and standards to effectively analyse financial information in a correct manner.

We break down exactly what LCE audits are and why they’re so important, as well as the potential changes to international practice standards that could separate the process from regular auditing altogether.

What Are LCE Audits & What Is The Market Condition For Them?

LCE (Less Complex Entities) audits are slightly different from the normal auditing that goes on in the accounting world. LCE auditing is basically the analysis of financial figures and documents which are considered not that complex, usually involving smaller businesses which turn over less profit and require less documentation than big corporations.

According to the ICAEW, ‘The smaller audit market is facing a drawn-out crisis. With the number of firms available to perform small audits slowly shrinking, SMEs, smaller charities and other organisations are at risk of losing access in their local communities to high quality audit services, despite a real need for those services. Some high street firms are finding it increasingly difficult to justify remaining in the audit market.’

Many SMEs and small businesses, such as sole traders, often find it a difficult task checking over their financial and credit information to a quality standard. As well as this, because of the often-high service charges for auditing, many go about doing this themselves leading to problems arising such as incorrect information filed which could place them in murky waters with relevant authorities.

Nordens’ Director and Head of Audit, Lorraine Curtis, believes, “Having an audited set of financial statements can help to open the door to more funding options for companies in order to help raise the capital that they require to grow their businesses. In addition, audits for LCEs can help to the owners to have a better understanding of the working of their companies, improve credit ratings and create a more credible standing for the company within their trading sector which in turn can help to improve their ability to gain additional work and contracts from potential customers.”

What Are The Proposed Changes In Standards For LCE Auditing?

As a result of this grey area in auditing, The International Auditing and Assurance Standards Board (IAASB) have shed some light on proposed changes to the international auditing related to LCEs. Based on the feedback from a discussion paper and outreach, the IAASB has developed a draft standard that is proportionate to the typical nature and circumstance of an audit of a less complex entity and is responsive to those stakeholders’ challenges and is a global solution.

The public consultation on this draft new standard was open until January 31, 2022. When finalised and properly looked over, the standard will meet the growing global need while reducing the emerging risk of jurisdictional divergence. This landmark new draft standard represents a new era for the IAASB, and stakeholder feedback is now needed.

There is plenty of proof why LCEs require access to high-quality audit services in places like UK with high audit exemption limits. Many audits are carried out on companies that would be exempt were it not for the fact that they are parts of larger corporation groups. Credit rating agencies and financial lenders look for assurance and verification on the information provided by smaller businesses to ensure there is minimal risk in funding these businesses. As well as this, many organisations are required to have an audit under their articles of association or shareholders’ agreement, therefore there is a clear need for auditing standards for these LCEs.

The official ICAEW response to the draft document claims, “The availability of audit services to LCEs depends on the willingness of practitioners to provide such service. This, in turn, depends on the availability of efficient and effective auditing standards.”

Many experts and specialists are pointing their cause for concern around risk assessment and the audit of accounting estimates. These standards would naturally be difficult to apply to LCE audits, with many arguing for a new, separate auditing standard solely for LCEs. Many businesses and firms are warm to the idea of introducing a separate standard for LCE audits, whilst others are less sure, concerned about the potential need to develop and maintain two audit systems and length of time and resources this would take.

ICAEW’s Director of Policy, John Boulton, said: “On balance, ICAEW believes this standard is a real opportunity to make it easier to understand auditing standards in an SME environment – principally by removing redundancy designed for more complex environments. That should make it more efficient to audit LCEs. We face a looming crisis of LCE audit availability, and this is an achievable and potentially effective way of heading that off. It’s in the public interest that we do what we can to support the market for smaller audits. It’s time for the standard-setters to step up and exercise global leadership.”

We hope this has outlined the importance and need for LCE audits, as well as the potential changes to standards proposed by the IAASB. If you require any further information on audits, or anything accounting related for that matter, please don’t hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.