Audit thresholds for financial services companies – Why should we be concerned?
Updated: Oct 21, 2021
How can it be that a significant number of financial services firms, particularly in the IFA/wealth advisory and SIPP/SSAS space, can sign off their own accounts with no requirement to undergo an audit, despite being responsible for customer investments and pension assets running into hundreds of £millions and even £billions?
I believe this issue requires addressing urgently. Having spent a great deal of my career within large corporate financial services groups, I expected that all companies in the sector - regardless of size - which advised on, administrated or provided pension wrappers for client assets, would be subject to some level of audit. This is not the case.
You may be surprised the learn that:
· There is no requirement for almost all small to medium companies, many of which are self-managed, to undergo an audit, regardless of how many millions – indeed sometimes a billion plus - in customer assets they are responsible for;
· Many IFA/wealth advisory and SIPP providers and administrators have gone bust in recent months, leaving no provisions or assets for complaints and redress, with the liability falling to the FSCS;
· It is astonishing that it is possible for owners / directors of such companies to take out large dividends or assets prior to a company’s collapse in the absence of any audit.
The same audit thresholds* apply to a company providing and administrating client pensions with assets totaling more than £1bn, or an advisory firm with investments under advice of over £1bn as they do for, say, a plumbing, advertising or vehicle sales company.
The same audit thresholds apply to a company providing and administrating client pensions with assets totaling more than £1bn, or an advisory firm with investments under advice of over £1bn as they do for, say, a plumbing, advertising or vehicle sales company.
This leaves the possibility, for example, of an IFA or a SIPP/SSAS provider with turnover of less than £10m and assets of less than £5m not requiring an audit, even if the assets it looks after for clients are in excess of £1bn*.
To put £1Bn of assets in the context of the current audit thresholds, this would represent for example:
· A SIPP or SSAS administrator with 2,000 members with an average pension pot of say £500K;
· An IFA/Wealth manager targeting High Net Worth individuals; 500 clients with an average investable worth of £2m.
With both these dynamics it is more than possible that the firms would not be caught by the existing audit thresholds.
The number of recent failures of such firms brings into stark reality the consequences this deficit has for consumers.
And it is the innocent IFA and SIPP businesses that are shouldering the compensation burden for their failing counterparts, through increased FSCS levies and PI fees, in some cases threatening their very existence. Ultimately, of course, these costs – at least in part – will have to be passed on the to the end customer.
It is the innocent IFA and SIPP businesses that are shouldering the compensation burden for their failing counterparts
I am sure that the general public would be incredulous to learn that many of the firms responsible for looking after their life savings are not subject to any independent audit.
My overriding concern is that these issues fall between two regulatory stools, i.e. the FCA and the accountancy profession. I have recommendations that involve automatic audit requirements that I am putting to the industry and my institute for their thoughts.
Next time I will discuss how this situation has been allowed to arise in the first place, and how it can be fixed.
* Your company 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 https://www.gov.uk/audit-exemptions-for-private-limited-companies