Audit Exemption - CGi Official Response

20 June 2007
 
 
Mr John Ogier
Project Director Company Registry Project
PO Box 451
North Plantation
St Peter Port
GY1 3GX
 
 
Dear Mr Ogier,
 
Response to Draft Company (Guernsey) Law, 2007 in relation to
Request for exemption from audit for Small Guernsey Incorporated Trading Companies
 
Background
 
The Companies (Guernsey) Law, 1994 (the current law) states that on every balance sheet date the auditors shall report to the shareholders on the accounts of the company (an auditors’ report). The exception to this is where the company is an ‘unaudited company’ according to Schedule 2 of the law. This unaudited status is granted where;
 
-         the company is dormant or asset-holding only and
-         the shareholders have agreed unanimously to the company being an unaudited company.
 
Therefore it is requirement in Guernsey law to have a set of accounts every financial year which are audited.
 
The audit report is prepared by independent auditors and whilst generally issued within the accounts is not part of them.
 
An audit is undertaken by the auditors in line with Auditing Standards issued by the Auditing Practices Board which govern auditing practice in the United Kingdom and the Republic of Ireland. These standards are applicable to all companies from very small companies to listed companies.
 
It is possible, with agreement from the Guernsey Tax Office, to submit to them, accounts which have been properly prepared in accordance with generally accepted accounting principles, to accompany the normal requirement of returns and computations. The Tax Office does not require audited accounts. 
 
However, the requirement to produce audited accounts is still in Guernsey law and directors who do not cause an audit report to be produced are breaking the law.
 
Current situation
 
This month (June 2007) the draft Companies (Guernsey) Law, 2007 was issued by Commerce and Employment for consultation. This is a document of over 500 pages of which Sections J284 to J293 deal with the preparation and audit of the accounts of a company. Representations were made in 2005 in response to the Green Paper requesting that the exemption from audit for small companies be considered and included in this updated law. The issue of exemption in the current draft has the same requirements as the 1994 law, nothing has changed.
 
A significant part of the cost of producing an audit report is compliance with Auditing Standards. There is no getting away from this since ‘all the boxes have to be ticked’ whether or not they are appropriate from the point of view of the company. One of the reasons for this is the need for auditors to comply strictly with procedures to avoid, as far as possible, any potential loss from litigation if the accounts are challenged. Therefore there is a requirement for the same diligence for a small company as for a large corporate entity.
 
Situation in UK
 
In the UK it was recognised that an audit was of little benefit to small companies and the small company exemption was introduced in 1994. Small companies could still volunteer to have an audit if they wished. The main criteria for identifying a small company at that time were a turnover of less than £90,000. This has since been raised to £1,000,000 in 2000 and presently stands at £5,600,000. Our understanding is that it is likely to be increased again shortly.
 
The alternative which has been established in the UK is the preparation of an Accountant’s Certificate, whereby a qualified accountant prepares the accounts in line with accounting standards and certifies that he has done so. There is no requirement to comply with the Auditing Standards. In this way, the work that is done is relevant to the company and sufficient to satisfy tax requirements.
 
Situation in Jersey
 
We understand that the accounts of a company registered in Jersey are not required to be audited unless either the company is a 'public company' (i.e. has more than 50 shareholders), it is subject to financial regulation or its articles of association specify that its accounts have to be audited.
 
Situation in the Isle of Man
 
In the case of the Isle of Man, the accounts of an ordinary company registered there can be exempt from audit if the company satisfies at least two of the following conditions;
 
- Turnover does not exceed £5.6 million
- Balance sheet does not exceed £2.8 million
- No more than 50 employees.
 
Furthermore in the case of the recently introduced New Manx Vehicle (MNV), except where the entity is regulated, there is no audit requirement at all.
 
The Effect on this disparity to Guernsey
 
The restriction of audit exemption in the case of Guernsey companies to dormant and asset holding companies is therefore out of line with Guernsey’s principal competitor jurisdictions and in our members experience deters trading companies from incorporating in Guernsey.
 
Where there is a need for a trading company to be administered in Guernsey it is common for the audit requirement to be circumvented by using a Jersey, or more likely, a BritishVirginIsland company. 
 
Summary
 
In Summary the benefits of our proposed change are
 
  • Cost. The preparation of accounts with an Accountant’s Certificate rather than an Audit Report should reduce the cost of operating a company in Guernsey which will be a major saving to those local companies who wish to make this choice. 
  • Accountants could then concentrate more on services which provide added value to the client rather than something for which he sees no benefit.
  • Economic Growth. The adoption of this proposal would facilitate economic growth generally and for the smaller businesses in particular.
  • Less unnecessary bureaucracy. Shows Guernsey is in favour of a reduction of red tape in connection with operating certain businesses.
  • Guernsey remains a leader. Guernsey provides a competitive environment versus other jurisdictions.
 
 
In our view the only companies that should be subject to an audit requirement are;
 
- Companies subject to financial regulation
- Companies whose securities will be marketed to the public
- Companies whose shareholders have decided that they wish the accounts of the year concerned to be subject to audit.
 
 
The intention should be to encourage interested parties, both those resident in Guernsey and elsewhere, to use Guernsey companies and therefore Guernsey should be extending the exemption from audit to as many categories of companies as possible.
 
 
Yours sincerely
 
 
 
 
 
 
 
 
Philip Duquemin
Chairman CGi
 
 
 
 
Confederation of Guernsey Industry
The CGi (Confederation of Guernsey Industry) represents the interests of nearly 100 local businesses in what is loosely termed light industry which incorporates manufacturing, industrial and service organizations. Its member organizations employ over 5,000 Guernsey based employees or nearly 17% of the islands working population. The businesses provide a very diverse range of products and services both in the Channel Islands as well as globally.