In the United States, unlike other foreign jurisdictions, statutory audits are not required except for public companies.
The banks and financial institutions however require various financial information from their clients and may need clients to go through an audit by an independent accounting firm.
Further, companies may wish to opt for audits with financial professionals voluntarily. They may opt for lesser costly alternatives like review or compilation.
SOX as we know it came into federal legislation in November 2002 after the emergence of Enrol Scandal. SOX is also popularly known as the Public Company Accounting Reform and Investor Protection Act.
SOX Act requires all the public companies to furnish an annual report of the effectiveness of their internal accounting controls of SEC.
The annual report shall focus on a wider range of governance issues emphasizing the prevention of fraud in public companies.
SOX requires the mandatory hiring of the external auditor and their opinion on internal controls. This results in increased disclosure regarding all financial statements. SOX penalizes the non-complying companies criminally and civilly.
Many other countries have formed similar acts in accordance with SOX or similar provisions are ingrained in the Companies Act of the particular country.
The recent trend is many private companies and even not for profit organizations are adhering to the provisions of SOX.
The SOX is entrusted to create audit committees and makes them responsible for audit aspects in the companies. Compliance with SOX creates credibility among investors.
Securities and exchange commission (SEC) guidelines on audit threshold.
SEC requires all the public companies to go through an audit. The SEC has recently rolled back audit requirements for smaller companies’ internal controls.
By doing so, the SEC has defined the audit parameters and reduced companies’ compliance costs. The external audit is still required under the SOX act for larger companies.
SEC has stated that smaller companies with revenues with less than $ 100 million would require to establish internal controls over financial reporting and the board of directors and financial officers would still be required to certify the various compliance and financial statements.
They would be still responsible for complying with ICFR guidelines. These smaller companies would still be subject to the independent external auditor in accordance with ICFR guidelines.
Audit threshold in the UK
Let’s take another popular destination for businesses, United Kingdom. UK has explicitly defined the threshold for the audit unlike United States. The companies may qualify for an audit exemption if it has at least 2 of the following:
- an annual turnover of no more than £10.2 million
- assets worth no more than £5.1 million
- 50 or fewer employees on average
However, if companies opt for audit exemption using the above threshold, it has to issue statement as “For the year ending [your company’s year-end date], the company was entitled to exemption from audit under section 477 of the Companies Act 2006 relating to small companies.
These accounts have been prepared in accordance with the provisions applicable to companies subject to the small companies’ regime.”
The shareholders may ask for audited statements if the ownership is more than 10% of the company. In that case the company has to comply strictly.