Clauses 468 and 469: Companies subject to public sector audit

743.     These two clauses, the only new provisions in this chapter, are intended to enable a public sector auditor to audit non-commercial, public sector bodies that happen to be constituted as companies.

Clause 468: Non-profit-making companies subject to public sector audit

744.     This clause exempts from Companies Act audit any non-departmental public body that is a company and is non-profit-making, if it has been made subject by order to a public sector audit.

745.     For most UK bodies, such an order can be made under the Government Resources and Accounts Act 2000, and the body in question will then be audited by the National Audit Office on behalf of the UK Comptroller and Auditor General. Under the Audit and Accountability (Northern Ireland) Order 2003, an order can make a body subject to audit by the Comptroller and Auditor General for Northern Ireland. And under section 96 of the Government of Wales Act 1998, an order can make a body subject to audit by the Auditor General for Wales.

746.     Some Scottish bodies are subject to public sector audit by the Auditor General for Scotland (AGS) under statute, namely the Public Finance and Accountability (Scotland) Act 2000. But there is at present no order-making power to make further companies subject to audit by the AGS. Such a power is conferred by the following clause.

747.     The companies exempted by this clause are not subject to the Fourth Company Law Directive: the Directive is based on Article 44(2)(g) (formerly 54(3)(g)) of the EC Treaty, and Article 48 of the Treaty excludes from the scope of Article 44 undertakings that are non-profit-making. That is why subsection (3) gives "non-profit-making" the same meaning as in the Treaty.

748.     Subsection (2) clarifies that a group company can benefit from this exemption, only if every company in the group is non-profit-making.

749.     Subsection (4) confirms that clause 452(2) applies to a company that uses this exemption, so that its directors must make a statement on its balance sheet that the company is eligible for the exemption.

Clause 469: Scottish public sector companies: audit by Auditor General for Scotland

750.     This clause creates a new power whereby Scottish Ministers can provide that a company should have its accounts audited by the Auditor General for Scotland (AGS). This is available for companies depending on their functions or their funding: the Scottish Ministers can designate a company under this power if its functions are public functions that are all covered by the Scottish Parliament's responsibilities; or if the company receives all or most of its funding from a public body already audited by the AGS. In the case of the latter, the funding body may be audited by the AGS because it is covered by the Public Finance and Accountability (Scotland) Act 2000, or because it is itself a company that Scottish Ministers have made auditable by the AGS by a previous order under this clause.

751.     If an order is made under this clause providing that a company should have a public sector audit by the AGS, and if that company is non-profit-making, then it will benefit from the exemption from this Part in the preceding clause.

CHAPTER 2: APPOINTMENT OF AUDITORS

752.     This Chapter broadly restates the existing law in sections 384 to 388A of the 1985 Act on the way in which shareholders appoint a company's auditors, with some minor changes (as explained below). The provisions are reorganised to deal with private and public companies separately. The Chapter also introduces a new power for the Secretary of State to require disclosure of the terms of audit appointments.

Private companies

753.     These clauses restate the law on appointment of auditors of private companies, providing that auditors are generally to be appointed by shareholders by ordinary resolution. For any financial year, this will generally be done within 28 days of the circulation to a company's shareholders of the accounts for the previous year.

754.     There are two changes: firstly, that an auditor's term of office will typically run from the end of the 28 day 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.

755.     The second change is that an auditor is now deemed to be re-appointed unless the company decides otherwise.

Clause 470: Appointment of auditors of private company: general

756.     This clause provides for a private company's obligation to appoint an auditor, unless it is taking advantage of exemption from audit. The appointment is to be done by the shareholders by ordinary resolution, except that the directors can appoint the company's first auditor (or the first after a period of audit exemption), and can fill a casual vacancy.

Clause 471: Appointment of auditors of private company: default power of Secretary of State

757.     This clause provides for the obligation on a company to inform the Secretary of State if it has failed to appoint an auditor within 28 days of circulation of its accounts; and the Secretary of State's power to appoint an auditor in those circumstances. It derives from section 387 of the 1985 Act.

Clause 472: Period for appointing auditors

758.     This clause provides for the time period (28 days) following the sending out of a private company's accounts during which an auditor should be appointed.

Clause 473: Term of office of auditors of private company

759.     This clause provides that the end of the term of office of the auditor of a private company is to be the end of the 28-day period for appointing auditors. It further provides in subsection (2) that at the end of his term an auditor will automatically be deemed to be re-appointed except in four cases:

• if he was appointed by the directors;

• if the company's articles require actual re-appointment;

• if the members have given notice to the company under the following clause; or

• if the directors decide that they do not need auditors for the following year.

760.     When there is a change of auditor, subsection (1)(a) provides that the term of office of the incoming auditor does not begin before the end of the previous auditor's term. This means that a new auditor's term will typically begin immediately after the end of the 28-day period for appointing auditors.

Clause 474: Notice by members excluding deemed re-appointment

761.     This clause enables members with at least 5% of the voting rights in a private company to give notice that the auditor of a company should not be automatically re-appointed. The company's articles can enable members to do this with less than 5% of the voting rights, but cannot increase the required percentage.

762.     Subsection (4) provides that the deadline for such a notice excluding the reappointment of an auditor is the end of the financial year the accounts for which he is auditing. Subsections (5) and (6) deal with the mechanics of sending and receiving the notices.

Public companies

763.     These clauses restate the law on appointment of auditors of public companies, providing that auditors are generally to be appointed by shareholders by ordinary resolution in the general meeting before which the company's accounts are laid.

Clause 475: Appointment of auditors of public company: general

764.     This clause restates a public company's obligation to appoint auditors, unless it is taking advantage of exemption from audit. This is to be done by the shareholders by ordinary resolution, normally at the general meeting at which the accounts are laid. The directors can appoint the company's first auditors (or the first after a period of audit exemption), and can fill a casual vacancy.

Clause 476: Appointment of auditors of public company: default power of Secretary of State

765.     This clause restates the obligation of a company to inform the Secretary of State if it has failed to appoint an auditor at the general meeting that considers the previous year's accounts; and the Secretary of State's power to appoint an auditor in those circumstances.

Clause 477: Meaning of "accounts meeting"

766.     This clause defines "accounts meeting" as the meeting at which the company's accounts are laid. The expression is used in this Chapter and in Chapters 4 and 5 of this Part.

Clause 478: Term of office of auditors of public company

767.     This clause restates that an auditor of a public company holds office until the end of the meeting at which the accounts they are auditing are laid, unless they are re-appointed. And it provides that where there is a change of auditor, the term of office of the incoming auditor does not begin before the end of the previous auditor's term. This means that a new auditor's term will typically begin immediately after the end of the accounts meeting.

General provisions

768.     These clauses apply to both private and public companies.

Clause 479: Fixing of auditor's remuneration

769.     This clause restates the provision that it is the members of a company, by ordinary resolution, who determine the auditor's remuneration, or decide the method by which it should be determined. If the auditor was appointed by someone other than the members, then it will be the directors or the Secretary of State as appropriate who will determine his remuneration.

Clause 480: Disclosure of terms of audit appointment

770.     This clause creates a new power for the Secretary of State to require companies to disclose information about the terms on which they engage their auditors. Subsection (2) provides some examples of the detailed requirements that the Secretary of State could specify in regulations. Subsection (3) provides that regulations can require disclosure of changes in terms as well as the terms at the time of appointment. Subsection (4) specifies that the regulations are to be made by negative resolution.

Clause 481: Disclosure of services provided by auditor or associates and related remuneration

771.     This clause restates the existing power of the Secretary of State, in section 390B of the 1985 Act, to require disclosure of details of all the services supplied to a company by its auditor, and the remuneration involved. Subsections (2) to (4) give some illustrations of the detailed requirements that the Secretary of State can specify in regulations: subsection (2) relates to the level of disaggregation of different services and remunerations, and between the auditor and his associates; subsection (3) lists some of the definitional issues that can be covered in regulations; and subsection (4) provides examples of where the information should be disclosed.

772.     Against the possibility that following subsection (4), the regulations might ask for disclosure in a document compiled by the company rather than the auditor, subsection (5) says that the regulations can require the auditor to supply the directors with any information that may be required, e.g. about the auditor's associates.

773.     Subsection (6) specifies that the regulations are to be made by negative resolution.

CHAPTER 3: FUNCTIONS OF AUDITORS

Clauses 482 to 485: Auditor's report

774.     These clauses restate the existing law, in section 235 of the 1985 Act, on what the auditor should include in his report on the accounts.

775.     In clause 482, subsections (1) and (2) contain the basic duty to produce an audit report and require that it should set out the way the auditor has approached the audit. Subsection (3) requires the auditor in his report to state his opinion on three overlapping matters: (i) whether the accounts provide a true and fair view, (ii) whether they comply with the appropriate reporting framework, and (iii) whether the accounts comply with the requirements in Part 15 of the Bill (and, where applicable, with article 4 of the IAS Regulation (Regulation (EC) 1606/2002 on the application of international accounting standards)). Subsection (4) requires the audit report to be either qualified or unqualified, though it is open to the auditor to draw attention to aspects of his audit without qualifying the report.

776.     The other three clauses in this group restate the law on what the auditor should include in relation to (i) the directors' report, (ii) the operating and financial review, and (iii) the directors' remuneration report.

Clauses 486 to 490: Duties and rights of auditors

777.     These clauses bring together and restate the existing law on the auditor's duties (currently in section 237 of the 1985 Act) in investigating, forming an opinion, and making his report; and on the auditor's rights (sections 389A to 390 of that Act) to be provided with appropriate information.

778.     Clause 486 lists areas where an auditor must investigate and report on any problems: the company's accounting records, and whether there is consistency between these and (i) the accounts and (ii) - where there is one - the appropriate part of the directors' remuneration report. The auditor is also to report if he has not been able to get all the information he needs. If possible, he is to make good any gaps in the information relating to payments to directors. And he is to report if he believes that the company is taking advantage of the small companies accounts regime without being entitled to do so.

779.     Clause 487 restates the auditor's rights to obtain information and explanations from the company and its UK subsidiaries, and from appropriate associated individuals.

780.     Clause 488 sets out the corresponding right to require the company to obtain information or explanations from any subsidiaries that are not incorporated in the UK.

781.     Clause 489 sets out offences for those who supply inaccurate information to auditors or fail to respond to auditors' requests for information without delay.

782.     Clause 490 requires a private company to send to its auditor all the information about any written resolutions that it sends to its shareholders. It also gives the auditor of any company - public or private - the right to attend any general meetings it may have, and to be allowed to speak on anything relevant to the audit. The auditor must also receive all communications relating to general meetings.

Clause 491: Signature of auditor's report

783.     This clause specifies who must sign the audit report submitted to a company by its auditor. The report must state the name of the audit firm, or if an individual has been appointed as auditor, his name. This is as currently required by section 236 of the 1985 Act.

784.     For cases where the auditor is a firm, the clause then makes a change from the 1985 Act by requiring the signature of an individual, the "senior statutory auditor", as defined in the following clause. This anticipates a new requirement that will be introduced by the EU Audit Directive (2004/0065(COD)). If the auditor is an individual, he must sign as under the 1985 Act.

Clause 492: Senior statutory auditor

785.     This clause defines a new term - the "senior statutory auditor" - for the individual who will be asked to sign his name to an audit report carried out by a firm. The firm will identify this individual according to standards to be issued by the European Commission, or if there are no standards, to guidance issued either by the Secretary of State or by a body appointed by him by an order subject to negative resolution.

786.     Subsection (2) specifies that to be eligible to be a senior statutory auditor of a company, an individual must be eligible himself to be appointed as auditor of the company.

787.     Subsection (3) ensures that for an individual to be nominated as senior statutory auditor will not affect his exposure to liability in any way.

Clause 493: Name of auditor etc to be stated in published copies of auditor's report

788.     This clause requires a company to ensure that the copies of its auditor's report it sends out include the name of the auditor and of the senior statutory auditor if there is one, except in the circumstances explained below.

789.     Subsection (2) explains which copies are covered: it would include the version circulated to shareholders, and the one sent to the registrar, as well as any others that would be expected to be seen by members of the public.

790.     Subsections (3) to (5) provide an exemption to the requirement to include the names of the auditor in published copies of the audit report. This is available if the company believes that disclosing the names in this way could expose the auditor, or anyone else, to a risk of violence or intimidation. To take advantage of the exception, the company must pass a resolution that the names of the auditor and the senior statutory auditor should not be stated on published copies of the audit report. It must then send a copy of the resolution, including the names of the auditor and senior statutory auditor, to the Secretary of State. When copies of the audit report are submitted to the registrar with the annual accounts and sent out to members, it must then contain a statement that the company has taken advantage of this exemption.

791.     Subsections (6) and (7) restate the offence, currently in section 236 of the 1985 Act, of not including the auditor's name - and now also the senior statutory auditor's name - as required.

Clause 494: Offences in connection with auditors' report

792.     This clause creates a new criminal offence in relation to inaccurate auditor's reports. The offence is committed by any individual eligible to be a statutory auditor who knowingly or recklessly causes a report to include anything that is misleading, false or deceptive; or to not include a statement of a problem with the accounts.

793.     Subsection (1) sets out the offence of commission, and subsection (2) that of omission. The items whose omission can be an offence are listed in paragraphs (a) to (d) and include statements about inadequate accounting records and about the auditor having been unable to obtain all necessary information and explanations.

794.     Subsection (3) defines the individuals potentially caught by the offence as the auditor, if a sole practitioner, or his employees or agents; or the directors, members, employees and agents of an audit firm. But the offence only applies to such an individual if he is an accountant who would be qualified to act as auditor of the company in his own right. Subsection (4) sets out the maximum penalty as an unlimited fine.

Clause 495: Guidance for regulatory and prosecuting authorities: England, Wales and Northern Ireland

795.     This clause enables the Secretary of State to issue guidance about handling matters where the same auditor's report could give rise both to disciplinary proceedings by a regulatory body, and to prosecution for the new offence. Subsection (2) requires the Secretary of State to obtain the Attorney's General agreement to any guidance.

796.     Subsection (3) lists the regulatory and prosecuting authorities the guidance would be intended to help. The list includes the accountancy supervisory bodies, the Financial Reporting Council, the Director of the Serious Fraud Office and the Director of Public Prosecutions, as well as the Secretary of State himself. Under subsection (4), the Secretary of State's guidance is limited to England, Wales and Northern Ireland.

797.     It is likely that one of the most important aspects of the guidance would be to enable prosecutors to decide not to prosecute in a particular case that would be better handled through disciplinary proceedings.

Clause 496: Guidance for regulatory authorities: Scotland

798.     This clause enables the Lord Advocate to issue guidance about handling matters in Scotland where the same auditor's report could give rise both to disciplinary proceedings by a regulatory body, and to prosecution for the new offence. Subsection (2) requires the Lord Advocate to consult the Secretary of State before issuing guidance.

799.     Subsection (3) lists the regulatory bodies the guidance is intended to help. The list comprises the accountancy supervisory bodies, the FRC, and the Secretary of State.

CHAPTER 4: REMOVAL, RESIGNATION, ETC OF AUDITORS

800.     This Chapter restates the law on the ways in which auditors can cease to hold office. The current provisions are in section 388 and sections 391 to 394A of the 1985 Act.

801.     There are some changes to the existing law resulting from the changes elsewhere in the Bill making it easier to pass written resolutions. There are also changes in the requirements when auditors leave office: increasing the range of cases in which there is a requirement for a statement explaining why they are leaving, and requiring copies of any statement to be sent to shareholders and to appropriate regulators.

Clause 497: Resolution removing auditor from office

802.     This clause restates that the shareholders in a company always have the right to dismiss its auditor by ordinary resolution. As at present, to remove the auditor before the end of his term of office, even a private company will need to hold a general meeting to pass such a resolution.

803.     Subsection (2) requires special notice of the resolution (see note on following clause). Subsection (3) provides that shareholders' right provided by this clause does not prevent the auditor being entitled to being compensated for termination of his appointment. Subsection (4) specifies that the resolution described here is the only way in which an auditor can be removed before the end of his term of office.

Clause 498: Special notice required for resolution removing auditor from office

804.     This clause restates the requirement that a resolution to dismiss an auditor needs special notice (i.e. 28 days' before the general meeting, as defined in clause 288). The company must send a copy to the auditor it is proposed to dismiss, and then he has the right to make a statement of his case. The company then has to circulate his statement to the shareholders (or if time does not allow, the statement can be read out at the meeting).

805.     Subsection (6) provides protection if the auditor it is proposed to dismiss abuses his right to have a statement circulated, e.g. by requesting defamatory material to be published. It enables the company, or someone else, to apply to the court, and the court can then determine whether the right is being abused, in which case the company is not obliged to circulate the statement. The court can order the auditor to pay some or all of the costs of the proceedings.

Clause 499: Notice to registrar of resolution removing auditor from office

806.     This clause restates the obligation on a company that has decided to dismiss its auditor to inform the registrar within 14 days.

Clause 500: Rights of auditor who has been removed from office

807.     This clause restates the right of a dismissed auditor to attend appropriate meetings, namely any meeting at which his term of office would have expired (i.e. a public company's accounts meeting), or any meeting at which it is proposed to replace him.

Clause 501: Failure to re-appoint auditor: special procedure required for written resolution

808.     This clause sets out the procedure for changing auditor from one financial year to the next by written resolution (a procedure only available to private companies). This may be done (i) during the term of office of the outgoing auditor, or (ii) afterwards, if no replacement has been appointed. But case (ii) will arise only if there is no automatic deemed reappointment for one of the four reasons in clause 473(2).

809.     Subsection (3) provides that the company must first send a copy of the proposed resolution both to the outgoing auditor and to his proposed replacement; and subsection (4) provides that the former then has 14 days to make a statement setting out his views. Subsection (5) then provides that the company should send, to its shareholders, the resolution together with any statement from the outgoing auditor. Subsection (6) specifies how the general rules on written resolutions are to apply in this case.

810.     Subsection (7) provides protection if the outgoing auditor abuses his right to have a statement circulated, e.g. by requesting a defamatory material to be published. It enables the company, or someone else, to apply to the court, and the court can then determine whether the right is being abused, in which case the company is not obliged to circulate the auditor's representations. The court can order the auditor to pay some or all of the costs of the proceedings.

811.     Subsection (8) provides that failure to comply with the rules in this clause will make the resolution ineffective.