One of the main objectives of the PACTE law, which came into effect May 22, 2019, is to focus on enhancing the activity of VSEs and SMEs. The project leaders consider that the assignment of certification of financial statements carried out by statutory auditors is too complicated for the smallest organizations. They recommend raising the French audit thresholds to the level of the European thresholds by 2023. In this context, it is more important than ever to highlight the added value of the statutory auditors’ duties to the entire economic environment and to each company that appoints them.
Your new statutory audit obligations
The PACTE law involves harmonizing and raising the statutory audit thresholds. Thus, they are the same for all the legal status of company. Any company which passes two of the three following thresholds is obliged to appoint a statutory auditor:
- Turnover excluding VAT of €8million
- Total assets of €4million
- 50 employees
Regarding the group of companies’ audits, the parent company is required to appoint a statutory auditor if the whole group exceeds the thresholds, as well as the important subsidiaries.
In practice, this reform means that 75% of companies that were obliged to appoint a statutory auditor are now exempted, what represents 153,000 companies. However, raising the thresholds has already been achieved in Denmark, Sweden and Italy. We can really learn lessons from their experiences.
The added value of the statutory auditor to your business partners
The profession of statutory auditor is a profession regulated by the Ministry of Justice. Its mission is to certify that your annual financial statements are accurate and honest by auditing, in a non-exhaustive way, the work of the chartered accountant or your internal financial staff. It is absolutely different from the chartered accountant’s mission. Beyond your company, the certification contributes to ensuring the reliability of financial information, which promotes trust between the various stakeholders. Since the Enron affair, all European audit reforms have aimed to reinforce the statutory auditor’s independence, who cannot prepare financial statements. We cannot be both judge and jury.
For you, as executives, increasing reliability of financial information translates into trust. On the one hand, the certified financial documents you provide to your creditors or investors have more credibility. Thus, it is easier to obtain funding in a relationship of trust. On the other hand, you can check solvency and financial health of your business partners. Thus, you reduce the risk of payment default by your customers or bankruptcy by a strategic subcontractor. In return, your suppliers trust your company’s financial strength.
The statutory auditor, a stakeholder of your good performance/to improve your performance
As in Sweden, Italy or Denmark, most companies below the European thresholds will not re-appoint statutory auditors after the enforcement of the PACTE law. However, the statutory auditor really has an added value for each company.
Firstly, during the audit approach, the statutory auditor takes note of the company’s operations, development perspectives and its economic and competitive environment. Even if he cannot advise you, because he must maintain his independence, he will recommend you some ideas on how your company should operate. Then, he will audit your annual financial statements. This control is not exhaustive, but material accounting discrepancies could be highlighted. The more your company grows, the more volume and complexity of operations increase and the more you are exposed to risks of mistakes. For example, in Italy, an increase in the number of accounting discrepancies has been measured following the increase in audit thresholds. The statutory auditor supports your growth, and he is an essential advantage to limit this risk.
Secondly, the statutory auditor’s attention focuses on the success of the company. If the business continuity is threatened, he will initiate an alert procedure. The first step involves notifying this threat to the executive. Then, the statutory auditor will study the solutions to solve the problem proposed by the executive. Thus, according to the firm Tera Consultants, companies appointing a statutory auditor “suffer 40% fewer collective proceedings and go into liquidation half as much as the average of SMEs”.
Thirdly, the Swedish situation shows that removing the financial expense of the statutory auditor does not necessarily improve the profitability of companies. In addition, from the data analysis of the database Diane concerning French companies, Tera Consultants revealed that companies’ financial health indicators are better when they appoint a statutory auditor. On average, EBIT is at least 10% higher and the solvency index at least 20% higher.
To conclude, when we only focus on the interest of the company and not of the French economy, it seems interesting to keep your statutory auditor even if it is not mandatory, especially if new specific audit standards are introduced for small organizations.