Statutory Audits vs Non-Statutory Audits: A Guide for UK SMEs

Audits can feel like a little bit of a dark art for small and medium-sized businesses. You might tune out the minute it comes up and think “stress,” “paperwork,” “that thing big companies do”. But what about audits and the difference between statutory and non-statutory audits is essential (and helpful) to know?

Audits, which are compulsory in the UK for some types of accounting entities, exist as a means of verifying the financial health of a company and to give stakeholders peace of mind that all is well. They come in two types: statutory (required by law) and non-statutory (which you are free to implement). The difference is vital for SMEs, as not all are required by law to have an audit carried out. In any case, selecting the right one could always do more than just check off some boxes

Let’s break it all down.

What is a Statutory Audit?

A statutory audit is an essential financial checkup that a firm has to perform as per the law. In the UK, this is referred to as the Companies Act 2006. It is a detailed, systematic review of a company’s financial statements by an independent auditor. The goal? To assert its accounts as “true and fair,” and in keeping with financial reporting standards.

So, who actually needs one?

Companies must carry out a statutory audit if they meet at least two of these three thresholds:

• An annual turnover of more than £10.2 million
• Assets worth more than £5.1 million
• More than 50 employees

Even if a company doesn’t meet these requirements, some are automatically required to have a statutory audit. These include:

• Public limited companies (PLCs)
• Subsidiaries of larger groups (unless certain exemptions apply)
• Companies in regulated industries (like financial services)
• Any company where 10% of shareholders request an audit

Statutory audits are subject to strict regulation and have to be performed in accordance with exacting standards, for example, FRS 102 or IFRS, for the type of company being audited. The outcome needs to be submitted together with Companies House, and it is visible to the public.

What is a Non-Statutory Audit?

As the name suggests, a non-statutory audit is done when it is not required by law. They are optional, but that is beside the point. Most businesses actually prefer to have one.

Why? What could be the reason for that?

• Investor/lender confidence: If you are fundraising, an audit can be a signal to the market that everything is in order.
• Better internal controls: Audits are often used to create process improvements between audits.
• Preparing for sale or IPO: As a sale or IPO is considered, potential buyers or investors will want to see strong financials.
• Stakeholder transparency: Demonstrates accountability and responsive democratic governance.

Non-statutory audits are less rigid than statutory audits. Businesses can define both their own scope and goals, hence providing ample opportunity for customisation. The reporting does not have to conform to such a rigid template unless the business demands so.

While not as stringent in terms of scrutiny, non-statutory audits keep the process organised and offer inherent accountability and insight. This can be an excellent path for SMEs and startups, leading up to more structured processes in the future.

Key Differences: Side-by-Side Comparison

Practical Implication for SMEs:

Even if an SME falls below the statutory thresholds, it may still benefit from a voluntary audit, particularly where there are plans for growth. Knowing what type of audit (if any) your business requires can help in resource allocation as well as avoiding compliance-related headaches.

Which Audit Type is Right for Your Business?

There’s no one generall answer. Here is what you need to know to decide whether a statutory or non-statutory audit is right for your business.

• Size and structure: If you sit within the statutory thresholds, then you have to. There is no option here; a statutory audit must be undertaken. If you don’t, well, there are alternatives.
• Industry norms: Some industries expect more transparency, even from smaller companies.
• Stakeholder needs: Are you trying to win over investors? Secure a loan? Planning to sell your business?
• Growth plans: Want to IPO or just scale massively? While it is not mandatory to be audited, for proper practice and procedure, a non-statutory audit can help.

Non-statutory audits can help boost credibility, improve financial procedures and demonstrate you are serious about governance even if not required. Some businesses will even come to run both types over different periods as a trade-off between being compliant vs. having meaningful strategic insight.

Audit Obligations for UK SMEs: Overview

In the UK, most SMEs are eligible for audit exemption. Your business will be exempt from statutory audit under the Companies Act 2006 if it fulfils two out of three criteria: turnover below £10.2 million, assets not exceeding £5 million and fewer than 50 employees, generally speaking.

However, an exemption from responsibility is not to be inferred. You still need to:

• File annual accounts with Companies House
• Prepare accurate financial statements
• Keep detailed records for HMRC inspections

The consequences of non-compliance could include fines, disqualification of directors or damage to your reputation. It is a charity that gives VAT and Corporation Tax breaks to those small businesses that it claims in return for enterprises registering with it (Companies House & HMRC), but any error, no matter how genuine, can open up scrutiny.

Despite this, many SMEs choose to perform non-statutory audits as a kind of risk management. It can serve as a way to detect potential issues or irregularities and allow you time to rectify them before they become major concerns.

Conclusion

It is not merely a box-ticking exercise, but understanding the difference between statutory and non-statutory audits allows us to become more informed business decision makers. Statutory audits are the ones that you must do if you hit certain thresholds, but if not, non-statutory audits can bring huge value.

The more you understand your audit obligations, the better you will be at keeping up with them and stand a chance of even winning over those that matter to you while also allowing yourself to tweak things around and work towards improving your financial health. If in doubt, always speak to a qualified audit professional who can guide you in the right way for your business.

Solid finances and tight processes allow you to concentrate on what counts, namely, growing your business with confidence.