Small private firms spared need to hire external auditors

Mr Julius Mwatu. PHOTO | SALATON NJAU | NMG 

Small private firms can now breathe a sigh of relief after fresh changes to the law lowered the threshold for companies required to hire external auditors to prepare annual financial statements.

Latest amendments to the Companies Act (2015) now exempt companies with a gross annual turnover of less than Sh50 million and asset base of Sh20 million, from hiring auditors, leaving the decision to the discretion of the firm’s directors.

The initial provision of Section 717 of the companies’ statute compulsorily required all companies to hire accountants to prepare their financials.

While tax and legal experts reckon that the changes are in line with global best practices aimed at cutting red tape for small companies with less than 50 employees, accountants say the amendments are not aligned to existing value-added tax (VAT) laws. 

“The reason behind the audit exemption for small companies was to reduce red tape and costs. The provision has been virtually lifted from the Companies Act of England,” said Shitul Shah, a partner at Daly & Inamdar Advocates.
But the Institute of Public Accountants of Kenya (ICPAK) faulted the amendments saying the line should have been set at Sh5 million turnover, which is the threshold for paying VAT.

“We have been talking to Treasury on this because the threshold is not aligned to the income tax and VAT Act,” said Julius Mwatu, chair of the accountants’ regulatory body.

The ICPAK also warns that the audit waiver puts small businesses at risk because they will not access prudent financial advisory on the health of their enterprises.

Analysts at consultancy firm Grant Thornton said audit firms are unlikely to feel the pinch of reduced business from small private firms, because they are still required to file tax returns with Kenya Revenue Authority.

“Whether or not one carries out an audit you are still required to file your accounts with the KRA as you file your tax return. Many companies would still need guidance on this, more so to ensure the rightful amount of tax is paid,” said Mbiki Kamanjiri, tax manager at Grant Thornton.