SCRAPPING audits for small businesses could leave firms vulnerable to fraud, a professional body has warned.

The Government has decided to raise the audit exemption threshold for small companies from £1 million to £5.6 million. This will mean far fewer businesses will need to have their accounts audited.

But while the Yorkshire and Humber branch of the Institute of Chartered Accountants in England and Wales (ICAEW) has welcomed the cutting of red tape for businesses it has warned the change could also create problems.

David Dickson, chair of the ICAEW regional SME Group, said: "An increase such as this can seem superficially attractive but in reality it does carry certain risks.

"It has never made much sense to saddle a small firm with an audit when often the same people who ran the business also owned it, such as a husband and wife.

"However, raising the limit to more than £5million will bring in many larger and complex enterprises with external shareholders and lenders who need to be as confident as possible about a company's financial status."

The organisation is worried that with levels of fraud and money-laundering increasing all the time the move could make it easier for criminals to take advantage of small firms.

It also believes it could have a long-term impact on the business environment, including standards of business behaviour and the quality of financial information available to stakeholders.

The new thresholds are likely to apply to company accounts with years ending after December 2004.

And Mr Dickson, of Garbutt & Elliott in York, has urged businesses likely to be affected by the changes to sit down with their financial advisors and take an in-depth look at the implications.

"There may well be cases where, even though the company turnover might suggest an audit is no longer necessary, other considerations such as bank finance, outside shareholding and a possible future sale might dictate whether an audit is still desirable," he said.

"Companies should also not simply see this as a way of saving money on professional services. "There are many areas where a chartered accountant can be of real help to a business far beyond auditing."

Updated: 13:50 Wednesday, December 10, 2003