Audit exemptions for certain subsidiaries


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Subsidiary companies are now eligible to take an audit exemption with effect from 1 October 2012. So if you are a subsidiary that is not listed and is not in the banking or financial services world then you may well be able to exempt yourself from audit. There are some criteria, you need to have a parent company that produces consolidated accounts within the EEA, so they effectively do UK GAAP consolidated accounts or EU service directive equivalents. That parent company also needs to give a guarantee of all of the debts of the subsidiary at the balance sheet date and that guarantee will remain in force until the liabilities are paid off. If you do all of that you then also need to file the parent company's consolidated accounts and the guarantee and the notice that you are exempt from audit and you need to make sure all your shareholders agree. I you do all of those then you will be now, as a subsidiary, able to exempt yourself from the audit requirements. You still need to file your unaudited accounts though with Companies House.

So if you are a subsidiary that is eligible to exempt yourself from audit a question you should ask yourself is do you actually want to do that? There are reasons why you might want to have an audit of your subsidiary, either because there are requirements say in your banking covenants that require audited information or you may well be such a significant part of the group that you will effectively need to be audited in detail anyway, and it may well be that your suppliers would ask to see audited information. The other thing to consider is that the parent company that gives an unlimited guarantee on all your liabilities is making quite an onerous decision on doing that, and that’s something that the parent company directors would need to consider as to whether that would be appropriate for their fiduciary duties.

So there are a few things you should think about as to whether you want to take the audit exemption. Clearly an obvious reason for doing so might be to obtain a cost benefit but there are some other risks that you might need to weigh up against that in terms of working out what the right answer to the equation might be.

As we said in the May edition of Accounting briefing, the Government is seeking to reduce corporate compliance costs by allowing certain subsidiaries to take audit exemptions. The new exemptions came into company law in September and are effective for accounting periods ending after 1 October 2012 − that is, immediately. The requirements that must be fulfilled are that:

  • the subsidiary is not listed or a banking or insurance company;
  • the parent must be established under the law of an EEA state;
  • all shareholders must agree to the exemption being taken;
  • the parent must guarantee all outstanding liabilities of the subsidiary at the balance sheet date until they are satisfied in full;
  • the subsidiary must be included in the consolidated accounts of the parent, which must comply with the Seventh Directive or IFRS;
  • the parent must disclose in the consolidated accounts that the subsidiary is exempt from an annual audit; and
  • the guarantee, the consolidated accounts and the shareholder agreement must be filed with Companies House.

Companies taking the exemption will still be required to prepare and file their unaudited annual accounts with Companies House.

We welcome the option being available to companies but warn that any decision to take the audit exemptions should not be taken lightly. We recommend that companies seek legal advice before entering into the guarantee and consider a number of areas including:

  • Is the unlimited guarantee issued by the parent in the best interests of the parent and a proper exercise of the parent company director’s fiduciary duties? Is the guarantee allowed under the parent’s existing bank covenants or other agreements?
  • Is the subsidiary required to have an audit for other purposes (for example, other regulations, bank covenants or lease agreements)?
  • Would audited accounts be attractive to the subsidiaries suppliers or potential purchasers?
  • Will some audit work on the subsidiary still be required to support the Group audit opinion? and
  • Would the cost saving outweigh the reduced assurance on the results of the business?

Your usual PwC contact would be delighted to discuss these proposals with you further or email us on