THE ISSUE: Should the audit threshold be adjusted?
Under the Companies Act of Barbados, a public company or a company that has gross revenue or assets in excess of $1 million must place audited financial statements before its shareholders at each annual general meeting and must file a copy of those audited financial statements on the public record.
The shareholders of a company which is below the threshold of $1 million are not required to make their financial statements public, and may resolve not to appoint an auditor.
This does not include financial services entities like banks and insurance companies, which must have their annual financial statements audited, regardless of size.
The $1 million threshold has been in place since 1982 and, given inflation and growth in the economy over the years, there is a strong case for an increase.
Many jurisdictions have recognised that the burden of regulation falls disproportionately on smaller companies, and the audit requirement may be seen as only one of a number of legal and regulatory requirements with create additional expenses (in time and money) for small companies. Barbados should not be any different.
Furthermore, independence rules restrict or prevent auditors from offering specifically the types of services which are most useful to small, growing companies.
A reasonable increase in the audit threshold will allow small businesses to take full advantage of their chartered accountant’s wide knowledge and expertise.
Concerns have been expressed that the audit provides little value to many international business companies, especially those which have a large asset base but do not trade, or are closely held and have no third party creditors.
In fact, it has been suggested by some that there should be no mandatory audit requirement for private companies unless the company provides financial services or otherwise holds assets from the public in a fiduciary capacity. This is the case in North America, from where much our international business is sourced, and it is also the case for many of our competing international business jurisdictions – there is no mandatory audit requirement for private companies.
It is my strong belief, though, that the mandatory audit regime has contributed significantly to good corporate and business practices in Barbados.
Furthermore, if we were to remove the mandatory audit requirement, or increase it substantially, we may very well experience a reduction in corporation tax collected by Government, whether or not through deliberate actions of companies. Verification of the figures reported in corporation tax returns is not a direct function of the audit, but is clearly a beneficial and desirable side effect.
In addition, Barbados’ strategy as a jurisdiction should not and cannot be to try to compete against low-tax, low-regulation jurisdictions to attract “brass-plate companies”.
Some international business jurisdictions have shown rapid growth because they are attractive to companies and individuals that are trying to avoid tax obligations and hide assets. It is not by chance that these jurisdictions have few corporate governance requirements, do not require physical presence in the jurisdiction, and have no mandatory audit requirement.
Barbados, in contrast, has built its sector on the highest standards of regulation and transparency. We need now to go even further and build the sector around companies that have substantial business operations in Barbados and therefore contribute substantially to employment, foreign exchange earnings, corporation tax and growth of the economy.
We need to ensure that the direct benefits of the international business sector are enjoyed by as many of our citizens as possible.
Independent auditors are an important pillar in the effective regulation of the international business sector. As we tinker with the audit threshold, we must be careful not to jeopardise Barbados’ hard-earned reputation in pursuit of unquantified benefits which may never materialise.
