THE ISSUE: Should the audit threshold be adjusted?
This discussion does not address public companies or financial institutions such as banks and insurance companies.
A threshold unchanged after 28 years – over a quarter of a century – is obviously nonsensical.
This in isolation is a strong argument for an increase, which few, if any, oppose.
A relatively small increase could equate to the rate of inflation over the same period 28 years. However, this isn’t sufficient in today’s business environment, a factor significantly influenced by the amount of international business in the island and the rapidly growing competition for same in other jurisdictions.
Observations on the need for an audit regardless of threshold have to be considered. There are too many cases in which the document referred to as “audited financial statements” is produced at considerable cost and nuisance and is literally read by no one.
Because it is of no use to anyone. Another way of looking at it is by the essential business concept of cost versus benefit. Audit is slightly unusual because the entity incurring the cost does not ostensibly receive the benefit. Nevertheless, someone should. Why incur the cost of an audit in the absence of any benefit?
The evolving context of what constitutes an audit and Generally Accepted Accounting Principles-compliant financial statements is another factor. Collectively they have mutated significantly since the Sarbanes Oxley legislation in the United States and the widespread impact of same.
It is a genuine burden to produce increasingly incomprehensible audited financial statements. The nuisance component of the burden cannot be underestimated.
There is no compelling corporate reason to legislate an audit of closely held companies. The shareholder(s) could agree to have an audit and creditors could insist on an audit as a condition of the credit extended. There are no other corporate reasons.
The perceived need for audit to enhance the island’s overall regulatory environment is misleading.
This is regulation for its own sake, serving no purpose and makes us uncompetitive.
The countries providing most of our international business, mainly the United States and Canada (a country of superlative regulatory reputation), and our competing, well regulated jurisdictions, such as Bermuda and The Cayman Islands, do not mandate audits for private companies.
It has been argued that an audit provides comfort for the accuracy of tax returns even though they can be submitted without audited financial statements. If this is the only reason to have an audit, it equates to an extremely expensive and difficult tax return.
In any event, online filing creates a further distancing from the taxpayer’s audited financial statements.
In spite of the above, the reality is that the concept of an audit threshold will be retained.
Public policy in Barbados will not conceive of such an apparent loosening of the regulatory environment even though it has little or no substance. Many audit firms will also be concerned.
However, a small or moderate increase reflects an ongoing adherence to regulation for its own sake and is not in the island’s best interests.
• Chris Evans is the principal of CGE Group of Companies.