Part 9 Accounts and auditors
June 2011
75.140 Duty to keep accounting records
Every company must keep adequate accounting records. The records should be sufficient to show and explain the company’s transactions, disclose with reasonable accuracy the financial position at any particular time, and enable the directors to prepare accounts in accordance with the Companies Act 2006, see Paragraph 75.143. The records must show entries from day to day of all sums of money received and spent by the company and a record of assets and liabilities and if the company deals in goods a statement of stock held at the end of the financial year [Note 1]. If the company fails to keep adequate accounting records every officer who is in default, and cannot show the failure was honest and excusable, commits an offence and is liable on conviction to imprisonment or to a fine (or to both) [Note 2].
75.141 Duty to preserve accounting records
A private company needs to keep the records for three years from the date they were made, whilst a public company needs to keep them for 6 years [Note 3]. If the company fails to preserve its accounting records every officer who is in default, and cannot show that he/she acted honestly and the default was excusable, commits an offence and is liable on conviction to imprisonment or to a fine (or to both) [Note 4].
Further information regarding potential offences and misconduct may be obtained from chapter 42 of the Enforcement Technical Guide.
The directors of a company must prepare accounts for the company for each of its financial years. These accounts are called the company’s “individual accounts” [Note 5]. The directors must not approve accounts unless they are satisfied that they give a true and fair view of the company’s assets, liabilities, financial position and profit and loss [Note 6]. A company’s “individual accounts” must comprise a balance sheet as at the last day of the financial year and a profit and loss account. The balance sheet and profit and loss account must give a true and fair view of the company’s financial position and trading [Note 7]. A small number of companies the official receiver deals with may have prepared their accounts in accordance with international accounting standards. This is permitted under the Companies Act 2006 [Note 8] however the directors in the notes to the accounts must state that they have been prepared in this way [Note 9]. The requirements to prepare group accounts will be dealt with separately in part 13, paragraphs 75.269 to 75.275.
75.144 Accounting reference dates
For all companies incorporated after 1 April 1996 the accounting reference date is the anniversary of the last day in the month in which the company was incorporated. The subsequent accounting reference dates will automatically be on the same date each year. Companies incorporated before that date will already have specified an accounting reference date pursuant to previous company legislation [Note 10].
75.145 Changing an accounting reference date
A company by giving notice to the registrar of companies can shorten or extend the current or the immediately preceding accounting reference period. However, a company cannot continually extend the accounting reference period and restrictions apply if accounts and returns due to be filed with the registrar of companies are overdue [Note 11].
75.146 Requirement for accounts to be audited
A company’s annual accounts must be audited unless it has an exemption and if so, the balance sheet should include a statement by the directors to that effect. A company’s annual accounts need not be audited if the company is a small company, a dormant company or a non profit making company subject to a public sector audit [Note 12]. For the exemption to apply the company’s balance sheet must contain a statement from the directors stating that it is exempt, that the members have not required an audit of the accounts and that the directors acknowledge their responsibilities for complying with the Act regarding accounting records and preparation of accounts.
75.147 Small company exemption
A small company is one that’s turnover is not more than £5.6 million a year and whose balance sheet total for that year is not more than £2.8 million [Note 13]. The small company qualification excludes public companies, authorised insurance companies, bankers, some other finance companies and companies created under sections 117(1) and 122 of the Trade Union and Labour Relations (Consolidation) Act 1992 [Note 14].
75.148 Dormant company exemption
A company is exempt from the requirement for its accounts to be audited if it has been dormant since formation, or it has been dormant since the end of the previous financial year or if it is entitled to a small group exemption. Small public companies and some of the other companies excluded from a small company exemption are also entitled to a dormant company exemption [Note 15]. Dormant companies not entitled to claim exemption are authorised insurance companies, banking companies and certain other financial companies [Note 16].
75.149 Exemption for non-profit-making companies
A company is exempt if in the financial year it is non-profit-making and subject to an audit by the Comptroller and Auditor General, the Auditor General for Wales or the Auditor General for Scotland [Note 17].
75.150 Members can request an audit
The members of a company can issue a notice to obtain an audit of its accounts for a financial year for a company that would otherwise be exempt. For the notice to be valid, members not less than 10% of the nominal value of issued share capital, or any class of it needs to have requested the audit. The notice must be given within one month of the end of the financial year [Note 18].
75.151 Who can act as an auditor?
An auditor must be independent of the company [Note 19] with a current practicing certificate issued by one of the recognised supervisory bodies [Note 20]. The recognised supervisory bodies currently (2011) are The Institute of Chartered Accountants in England and Wales, The Institute of Chartered Accountants of Scotland, The Institute of Chartered Accountants in Ireland, and the Association of Chartered Certified Accountants.
75.152 Appointment of Auditors – private companies
An auditor must be appointed for each financial year unless the directors reasonably resolve that audited accounts are unlikely to be required. In private companies the first auditor is appointed by the directors. The members must then appoint, or re-appoint an auditor for each year within 28 days of the directors sending the accounts to members or at the end of the time allowed for the sending out of the accounts, if they are circulated late [Note 21]. The members can appoint or re-appoint an auditor at a meeting or by written resolution (see part 11, paragraph 75.192).
75.153 Appointment of auditors – public companies
With public companies the directors appoint the first auditor of the company. The auditor holds office until the end of the first meeting of the company at which the directors lay its accounts before the members. The members can then re-appoint the auditor, or appoint a different auditor to hold office until the end of the next meeting at which the accounts are laid [Note 22]. If a public company fails to appoint an auditor the Secretary of State may appoint one or more persons to fill the vacancy [Note 23].
75.154 Auditor’s term of office - private company
If the members do not pass a resolution appointing an auditor for a particular year the auditor in office is deemed to be re-appointed until the members pass a resolution to reappoint him/her or remove him/her from office. However this does not apply if the auditor was appointed by the directors or where the articles of association require reappointment [Note 24].
The auditor conducts an audit of the company’s financial accounts in accordance with the International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. In the course of an audit an auditor examines the evidence supporting the amounts and disclosures in the company’s financial statements sufficient to give assurance that they reflect the true position of the company’s affairs.
An auditor must be satisfied that adequate accounting records have been kept by the company, that the company’s accounts are in agreement with the accounting records and, in the case of a quoted company, that the relevant part of the directors’ remuneration report is in agreement with the accounting records. If the auditor, after carrying out such investigations as are necessary, is of the opinion that the accounting records are inadequate, that the accounts or directors’ remuneration report, if appropriate, are not in agreement with the accounting records then he/she must state that in his/her report. If the auditor does not obtain all the information and explanations required to complete the audit he/she shall state that fact in the report. Further, if in the opinion of the auditor, the accounts were incorrectly prepared in accordance with the small companies provisions this should be stated in the report [Note 25].
75.157 Auditor’s right to information
An auditor has a right to access the company’s books, accounts and vouchers at any time. Further, an auditor can require a number of people associated with the company or its subsidiary to provide information or explanations as he/she requires for the performance of his/her duties. A statement made to an auditor to provide information to the auditor in the course of his duties cannot generally be used in evidence against the person who made the statement in a criminal trial (see paragraph 75.158) [Note 26]. A company with an overseas subsidiary must take all reasonable steps to obtain information and explanations for the auditor [Note 27].
75.158 Failure to provide information to an auditor
A person commits an offence, if they knowingly or recklessly, provides, or purports to provide, any information or explanation to an auditor that is misleading, false or deceptive in a material particular [Note 28]. A person who fails to provide information or an explanation to an auditor without delay, unless it was not reasonable practicable, commits an offence [Note 29]. A parent company and every officer in default commits an offence if they do not take all reasonable steps to obtain information and explanations from a foreign subsidiary [Note 30].
At the conclusion of an audit the auditor must report to the company’s members on the annual accounts sent to the members or laid before them in general meeting. The report must include, an introduction identifying the accounts that were the subject of the audit, a description of the audit identifying the auditing standards used, a statement that the accounts have been prepared in accordance with the relevant financial reporting framework (currently the Companies Act 2006) and where appropriate Article 4 of the European Union Regulation on International Accounting Standards (Regulation (EC) 1606/2002). The auditor must make a statement as to whether the accounts give a true and fair view of the company’s financial affairs. If the auditor’s report confirms the accounts give a true and fair view it is referred to as unqualified. If the auditor’s report confirms that the accounts do not give a true and fair view of the company’s trading, including the reasons for this belief, it is referred to as a qualified report. The auditor’s report must include any matters that the auditor wishes to draw to the attention of members if he/she does not present a qualified report [Note 31]. The auditor must confirm whether the directors’ report is consistent with the accounts [Note 32].
75.160 Auditor’s report to be signed
The auditor’s report must state the name of the auditor and be signed and dated. If the auditor is an individual the report must be signed by him/her. If the auditor is a firm the report must be signed by the senior statutory auditor in his/her own name, for and on behalf of the auditor [Note 33]. Section 504 of the Companies Act 2006 explains the meaning of the senior statutory officer. If the auditor reasonably believes that the publication of his/her name will create a serious risk of violence or intimidation and proper notice has been given, then the Secretary of State can direct that the auditor’s name be omitted from the report [Note 34].
The members of a company may remove an auditor from office at any time during their time of office [Note 35]. A period of 28 days notice must be given by the members or directors of their intention to ask a general meeting to remove the auditor. The company must immediately send a copy of the notice of intended resolution to the auditor who will usually have the right to make a written response and to speak at the meeting [Note 36]. The company must send notification to the registrar of companies within 14 days of the resolution being passed to remove its auditor. Failure to provide this notice is an offence committed by the company and every officer who is in default [Note 37]. Although a company may remove an auditor from office at any time the auditor may be entitled to compensation or damages for the termination of his/her appointment.
75.162 What an auditor must do when he/she ceases to hold office
If an auditor is removed from office or resigns he/she must deposit a statement at the company’s registered office [Note 38]. If the company is not quoted on a stock exchange he/she may simply state that there are no circumstances that need to be brought to the attention of the company‘s members or creditors [Note 39]. If the auditor believes that there are matters that need to be brought to the attention of the company’s members or creditors he/she must deposit a statement of the circumstances in connection with the cessation of office [Note 40]. If the company is quoted on a stock exchange he/she must deposit a statement setting out the circumstances of his/her cessation of office irrespective of any matter that should be brought to the attention of its members or creditors [Note 41].
75.163 Time scale for depositing the statement
If the auditor resigns from office, the statement must be included with the notice of resignation. If the auditor fails to seek re-appointment the statement must be deposited with the company not less than 14 days before the end of the time allowed for the next appointment of an auditor. In any other instance the statement must be lodged not later than 14 days after the date he/she ceased to hold office [Note 42]. An auditor who fails to comply with these timescales may commit an offence [Note 43].
75.164 Other bodies the auditor must notify
The auditor must send a copy of the statement regarding cessation of office to the registrar of companies within 28 days unless the company makes an application to the court (see paragraph 75.165). If the company makes an application to the court, and it fails, the auditor must file a copy of the statement within 7 days of receiving notice. An auditor who fails to comply with these requirements may commit an offence [Note 44]. The auditor must also notify the appropriate audit authority of the cessation of office within the same timescales. The notification must include a statement of the reasons he/she ceased to hold office. An auditor who fails to notify the appropriate audit authority may commit an offence [Note 45]. The appropriate audit authority on receiving notice of an auditor ceasing to hold office must inform the accounting authorities, i.e. the Secretary of State or a person authorised by him/her [Note 46].
75.165 The company’s duties regarding an auditor’s statement
If an auditor deposits a statement setting out the circumstances connected with his/her cessation of office the company must, within 14 days, send a copy of the statement to all its members unless it applies to the court which may direct otherwise. The company has 14 days to circulate the result of the application. If the company does not comply, it and every officer in default may have committed an offence [Note 47].
[Back to Part 8 Directors, their duties and powers] [On to Part 10 Returns to registrar of companies]