The current Australian reporting regime does not require a “small” proprietary company to prepare and lodge audited financial statements with the Australian Securities & Investments Commission (ASIC).
While many small proprietary companies do not avail themselves of or require audit services, it is worthwhile noting that there are various benefits that can be gained from having an external audit.
Internal benefits can include:
• Analysis and better understanding of financial performance
• Assessment of risks, economies and efficiencies
• Identification of key areas for system improvement
• Uncovering fraudulent activities or inaccuracies and errors
• Review of internal control and recommendations
• Ensuring correct accounting treatment of transactions
Auditors can provide a broad perspective of the company and deliver effective analysis and relevant information for management to use to assist in evaluating the company’s performance and systems and implement any necessary changes.
An external audit also provides confidence to stakeholders including management, shareholders, potential investors, lenders and regulators that the data and representations shown in the financial statements is fairly stated through an independent third party.
It is important to note that under Section 45A of the Corporation Act 2001 there are three criteria used in deciding whether a company is classified as a “small” proprietary company (including any controlled entities) as follows:
(a) Consolidated revenue less than $25 million for the financial year
(b) Value of the consolidated assets less than $12.5 million as at the end of the financial year
(c) Company has fewer than 50 employees at the end of the financial year
If a company satisfies at least two of the three criteria it is considered a “small” proprietary company and is not required to prepare a financial report. If a company doesn’t satisfy at least two of the criteria it is then considered a “large” proprietary company which triggers specific reporting requirements such as:
• Prepare Financial Statements in accordance with Accounting Standards
• Prepare a Directors Report
• Financial Statements must be audited
• Financial Statements must be lodged with ASIC
We have had previous experience with a new client whose company had grown substantially and had changed from a “small” to “large” company without management realising that they had new reporting obligations including the necessity of an audit. We were able to provide advice to the client and liaise with ASIC to ensure all reporting obligations were met.
It is imperative that directors of proprietary companies are aware of their company’s reporting requirements especially as the company grows as the benefits that can be gained from having an external audit are valuable whether compulsory or not.