Progress towards harmonisation of audit exemption in the EU and the case of the UK Jill Collis* Abstract The purpose of this paper is to examine the extent to which the European Union (EU) has achieved harmonisation in terms of audit exemption for small companies. Using the case of the UK, it analyses the sufficiency of turnover as a surrogate for the motivation of the directors of small, private companies to have a voluntary audit of their annual financial statements. The data is drawn from a survey of the directors of small companies (Collis, 2003), which was conducted at a time when the UK government was consulting on a proposal to raise the size thresholds for a small company to the EU maxima. An analysis of secondary data reveals that 92% of the EU-25 offer audit exemption to small companies and the UK is one of three countries now using the maximum EU size thresholds. Focusing on the UK experience, 42% of directors of small companies want to continue having an audit. It was found that turnover is not sufficient alone as a surrogate for either management or agency factors and makes an independent contribution to the explanation of the demand for audit. Management factors relate to the view that audit provides a check on accounting records and systems and improves the quality of the financial information. Agency factors relate to providing assurance to shareholders if the company is not wholly family owned or has external shareholders, providing assurance to the bank and other lenders, and the view that audit has a positive effect on the company’s credit rating score. In the UK, raising the thresholds to meet EU harmonisation objectives has meant that the enlarged category of small companies contains two subgroups with differing needs. Deregulation means directors are free to choose and in a significant proportion of cases it would appear that the benefit of an audit outweighs the costs. This will be reassuring news to the accountancy profession, banks, lenders and other creditors who rely on the audited financial statements for assessing and monitoring risk. However, lenders and creditors have the economic power to ensure that their needs are met and this UK study shows it is important that regulators in other EU member states protect the needs of minority shareholders requiring the assurance of an independent audit. Acknowledgements I am grateful to Professor Michael Bradbury (UNITEC Institute of Technology, Auckland, NZ) and Professor Len Skerratt (Brunel University, Uxbridge, UK) for their helpful comments on earlier drafts of this paper * The author is a senior lecturer at Kingston University. Correspondence should be addressed to: Dr Jill Collis Kingston University Faculty of Business and Law Kingston Hill Kingston upon Thames Surrey KT2 7LB, UK Tel: +44 (0)20 8547 2000 E-mail: j.collis@kingston.ac.uk