While keeping a close eye on the activities of your competitors is advantageous, it’s important to keep your own affairs in order.
STAY ON THE RIGHT SIDE OF ASIC AUDIT RULES
In a dynamic business environment, it is not uncommon for mid-sized companies to discover that they have triggered one of the Corporations Act 2001 requirements for lodging audited financial statements without realising it. Companies often trade for several years without realising they have a legal obligation to file and can potentially face a costly catch-up exercise to comply with the rules.
WHO IS REQUIRED TO PROVIDE AUDITED FINANCIAL STATEMENTS?
All Public companies, including unlisted ones, are required to prepare and lodge audited financial statements with the Australian Securities & Investments Commission ("ASIC").
Although most proprietary companies are not required to file audited financial reports with ASIC, they may need to if they are classified as a "large" company under the Corporations Act 2001.
You will be "large" if you satisfy any two of the following three requirements:
- The consolidated gross operating revenue for the company and its controlled entities for the year is $10 million or more.
- The value of the consolidated gross assets of the company and its controlled entities at the end of the financial year is $5 million or more.
- The company and its controlled entities have 50 or more employees (full-time equivalents) at the end of the financial year.
Additionally, while you may not require an audit as a "large" company, a proprietary company can be directed by its shareholders to prepare an annual financial report so long as shareholders with at least five percent of voting rights make the request. If you need to prepare and lodge audited accounts with ASIC, generally these must be lodged within four months after the relevant year end.
Exemptions Privately-owned companies that were in existence in 1994, when the "small" and "large" proprietary company’s classifications were introduced, can also gain an exemption. A "grandfather" clause exempts them from having to lodge their audited financial statement provided they are continuing to audit annually and their financial information is distributed to shareholders and members of the company.
Proposed changes The Commonwealth Government is currently reviewing the requirements for proprietary companies to be audited. This may include increasing the thresholds for revenue and assets to reflect inflation since the requirements were introduced in 1995, or further increased amounts to better reflect what is considered to be a "large" company in today’s economic environment. It is likely that the "grandfather" exemption will be removed. There is also the possibility of the removal of the employee test and for a company to have to satisfy only one of the two remaining criteria in order to be required to prepare and lodge audited accounts.
BENEFITS OF OBTAINING AN AUDIT
A company can stands to gain a number of benefits from initiating an independent audit of its financial statements. These include:
- Providing the directors with confidence on the accuracy of the reported financial figures. It also acts as a deterrent to fraud and financial mismanagement.
- Providing management with a report on any potential weaknesses in the financial controls of the company identified in the course of the audit, together with recommendations for improving those controls and hence the risk profile of the company.
- Receiving audit recommendations that can result in improved efficiency, productivity, additional revenue and cost avoidance or reduction.
- Audited financial statements can lend credibility to the financial status of your business when provided to third parties and demonstrates your willingness to submit your financial affairs to independent scrutiny.
- Obtaining access to the knowledge and expertise of people in the audit firm with significant experience with a wide range of other companies and industries that have seen businesses with the same issues you are facing.
Significant benefits are obtained when you are considering introducing financial partners or selling your business, as the availability of audited financial statements will assist with the due diligence process in any potential transaction.
Clever Companies do not stand still. They are dynamic and constantly challenge the status quo. Our Private Client Service team is committed to helping these private businesses make the most of their opportunities. To learn more about the topic covered in this article please visit our website or call us.
Karen Crawford: (03) 8603 3226