New rules on auditors
Part 16 of the Companies Act 2006 replaces various
provisions on the audit of companies from the 1985 Act.
It also introduces a number of significant changes to
the law on auditing. Much of the law in this area reflects
EU Company Law Directives. These main changes are summarised
in the topic Changes to the law on auditors made by
Companies Act 2006. In summary, Part 16 provides:
Chapter 1: Requirement for audited accounts
This Chapter restates the existing requirement for company
accounts to be audited, subject to the existing exemptions
for smaller companies..
The only changes from the existing law are the removal
of special rules for the audit of the accounts of small
charitable companies and new provisions disapplying
the requirement for audit in relation to certain companies
in the public sector audited by public sector auditors.
Chapter 2: Appointment of auditors
This Chapter broadly restates the existing law on the
way in which shareholders appoint a company's auditors,
with some minor changes. The provisions are re-organised
to deal with private and public companies separately.
It also restates the rules on auditors' remuneration
and the disclosure required of services provided by
auditors and introduces a new power for the Secretary
of State to require disclosure of the terms of audit
appointments.
There are two main changes:
- An auditor's term of office will typically run
from the end of the 28 days period following circulation
of the accounts until the end of the corresponding
period the following year. This will apply even if
the auditor is appointed at a meeting where the company's
accounts are laid.
- An auditor is deemed to be re-appointed unless the
company decides otherwise. Note, however, sec488,
which enables members with at least 5% of the voting
rights in a private company to prevent an auditor
being automatically re-appointed by giving notice
to the company. The company's articles can enable
members to do this with less than 5% of the voting
rights, but cannot increase the required percentage.
Chapter 3: Functions of auditors
This is largely a restatement of the existing law. The
main changes are:
- Sec504: Senior statutory auditor
This section defines the senior statutory auditor
as the individual who must sign an audit report carried
out by a firm.
- Sec507: Offences in connection with auditors'
report
A new criminal offence of knowingly or recklessly
causing an audit report to include anything that is
misleading, false or deceptive, or omitting a required
statement of a problem with the accounts or audit.
Chapter 4: Removal, resignation, etc of auditors
Again, mainly a restatement of existing provisions
The main changes are:
- Sec514 Changing auditor at end of period of office
by written resolution (private companies only).
This may be done during the term of office of the
outgoing auditor or afterwards, if no replacement
has been appointed, but only if there is no automatic
deemed reappointment. The company must send a copy
of the proposed resolution both to the outgoing auditor
and to his proposed replacement; and the former then
has 14 days to make a statement setting out his views,
which must be circulated to the members.
- Sec519: Outgoing auditor's statement. This
changes the position under sec394 of the 1985 Act,
where auditors were only required to make a statement
if they considered there were relevant circumstances.
Auditors leaving quoted companies will now always
be required to make a statement of the circumstances;
and auditors leaving other companies must make a statement
unless they think that there are no relevant circumstances.
- Sec522 auditor's statement to be sent to the
audit authority.
A new obligation on departing auditors to send copies
of their leaving statements to the audit authority
(Professional Oversight Board of the Financial Reporting
Council). In relation to major audits (i.e. the audit
of a listed company, or of any other company where
there is a major public interest), the departing auditor
should always send a copy of his statement to the
appropriate audit authority at the same time as he
deposits his statement with the company. In relation
to other audits, the departing auditor must send his
statement to the audit authority only if he is leaving
before the end of his term of office.
- Sec523: Duty of company to notify appropriate
audit authority
A new duty on a company to notify the audit authority
whenever an auditor leaves office before the end of
his term. The company may either send the statement
of circumstances made by the auditor or send in its
own statement of the reasons.
- Sec524: Audit authority to inform accounting
authorities
The audit authority must give the accounting authorities
information about auditors' departure, and they may
pass on the statements which they receive from departing
auditors or from companies. The accounting authorities
are the Secretary of State and anyone appointed by
the Secretary of State, currently the Financial Reporting
Review Panel, part of the Financial Reporting Council
organisation.
Chapter 5: Quoted companies: right of members to
raise audit concerns at accounts meeting
This Chapter introduces a new right for 5% or 100 members
of a quoted company to raise questions about the work
of the auditors at the AGM.
Chapter 6: Auditors' liability
The main change is to make it possible for auditors
to enter into a liability limitation agreement with
a company, but the agreement will be effective only
to the extent that it is fair and reasonable. The agreement
must be approved by an ordinary resolution. The court
will be able to substitute its own limitation if the
agreement purports to limit liability to an amount that
is not fair and reasonable in all the circumstances.
PART 42: STATUTORY AUDITORS
This Part is largely a restatement of Part 2 of
the 1989 Act with some modifications.
The main changes are:
- The 1989 Act regulates only the auditors of companies.
Sec1210(1) defines the meaning of statutory auditor
more broadly to include also those who audit building
societies, insurers and banks. The list can be extended.
- It also provides that the Comptroller and Auditor
General and the regional Auditors General are eligible
to be appointed to perform statutory audits and provide
a mechanism for the regulation and supervision of
their functions as statutory auditor.
- There are new regulations applying to a third country
auditor (whether based in the UK or not) of the accounts
of a company incorporated or formed in a non-EU country,
whose shares are admitted for trading on a UK market
such as the London Stock Exchange.
Related topics
Companies
House website has more detail on this. Once on the
site, go to the guidance booklets section, select Accounts
and Accounting Reference dates.
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