Auditors and annual return
Part 16 of the 2006 Act deals with audit. Chapter 1 deals with the requirement for audited accounts. Section 475 provides that a company’s annual accounts for a financial year must be audited unless the company is exempt from audit under s 477 (small companies) or s 480 (dormant companies), or unless it is exempt under s 482 (non-profit-making companies subject to public sector audit).
If a company is so exempt, it must include a statement to that effect in its balance sheet (s 475(2)).
The statement must be to the effect that the members have not required the company to obtain an audit of its accounts for the year in question under s 476, and the directors acknowledge their responsibilities for complying with the requirements of the Act with respect to accounting records and the preparation of accounts.
Section 476 provides that the members of the company may require an audit. The members who wish for an audit must hold not less in total than 10 per cent in nominal value of the company’s issued share capital or any class of it, or if the company does not have a share capital, must constitute not less than 10 per cent in number of the members of the company.
Section 477 provides for exemption from audit for small companies, provided that the company qualifies as a small company in relation to that year and that its turnover in the year is not more than £5.6m and its balance sheet total for the year is not more than £2.8m.
Section 478 provides for exclusion from the small companies exemption of a public company, a company that is an authorised insurance company, a banking company, an e-money issuer, a MiFID investment firm or a UCITS management company, or a company carrying on insurance market activity. A special register body within s 117(1) of the Trade Union and Labour Relations (Consolidation) Act 1992, or an employers’ association under s 122 of the same Act, is similarly not exempt.
Section 479 provides that small companies are not entitled to exemption in the case of group companies unless the conditions in the section are complied with.
These are that the group must qualify as a small group and must not at any time in the year be an ineligible group, and that the group’s aggregate turnover in the year is no more than £5.6m net or £6.72m gross, and the balance sheet total for that year is not more than £2.8m net or £3.36m gross.
Section 480 deals with dormant companies which are themselves exempt from audit.
Section 485 provides that an auditor or auditors of a private company must be appointed for each financial year of the company unless the directors reasonably resolve otherwise on the ground that audited accounts are unlikely to be required. Part 42 CA 2006 provides for the qualification of such auditors.
Section 486 deals with the appointment of auditors of a private company and the default power of the Secretary of State. If a private company fails to appoint an auditor in accordance with s 485, the Secretary of State may do so in order to fill the vacancy.
Section 489 deals with the appointment of auditors of a public company. These must be appointed for each financial year of the company unless the directors reasonably resolve otherwise on the ground that audited accounts are unlikely to be required.
In default, once again, the Secretary of State may appoint somebody to fill the vacancy (s 490).
Section 491 provides that the term of office of auditors of a public company is in accordance with the terms of their appointment.
Section 492 deals with the fixing of the auditor’s remuneration. This must be fixed by the members by ordinary resolution or in such manner as the members may, by ordinary resolution, determine.
Section 493 provides that the Secretary of State may make provision by regulations for securing the disclosure of the terms of appointment of the companies’ auditors, their remuneration and their duties.
Section 494 provides that the Secretary of State may make provision by regulation for securing the disclosure of the nature of any services provided for a company by the company’s auditor whether as auditor or otherwise, or by his associates, and the amount of any remuneration received or receivable in this regard.
Section 495 provides that a company’s auditor must make a report to the company’s members on all the annual accounts of the company which are sent out to the members in the case of a private company, and in the case of a public company, which are laid before the company in general meeting.
The report must state clearly whether in the auditor’s opinion the annual accounts give a true and fair view, and have been properly prepared in accordance with the relevant financial reporting framework, and have been prepared in accordance with the requirements of the Act and, where applicable, article 4 of the IAS Regulation.
The auditor’s report must be either unqualified or qualified, and must include a reference to any matters to which the auditor wishes to draw attention by way of emphasis without qualifying the report (s 495(4) CA 2006).
The auditor’s report should include an introduction identifying the annual accounts that are the subject of the audit and the financial reporting framework that has been applied, and a description of the scope of the audit identifying the auditing standards in accordance with which the audit was conducted (s 495(2)).
Section 496 provides that the auditor is to report on the directors’ report. The auditor must state in the report on the company’s annual accounts whether, in the opinion of the auditor, the information given in the directors’ report for the financial year for which the accounts are prepared is consistent with those accounts.
Section 497 provides for an auditor’s report on the auditable part of the directors’ remuneration report.
If the company is a quoted company the auditor must report to the company’s members on the auditable part of the directors’ remuneration report and state whether, in his opinion, that part of the directors’ remuneration report has been properly prepared in accordance with the Act.
Section 498 provides that a company’s auditor in preparing his report must carry out such investigations as will enable him to form an opinion as to:
(a) whether adequate accounting records have been kept by the company and returns adequate for their audit have been received from branches not visited by him;
(b) whether the company’s individual accounts are in agreement with the accounting records and returns; and
(c) in the case of a quoted company, whether the auditable part of the directors’ remuneration report is in agreement with the accounting records and returns.
If the auditor is of the opinion that adequate records have not been kept or that the company’s individual accounts are not in agreement with the records and returns, or in the case of a quoted company that the auditable part of the directors’ remuneration report is not in agreement with the accounting records and returns, the auditor shall state that fact in his report (s 498(3) CA 2006).
Section 499 provides for the auditor’s general right to information from the company in relation to the company’s books, accounts and vouchers, and his right to require any officer or employee or person accountable for any of the company’s books, accounts or vouchers, any subsidiary undertaking, any officer, employee or auditor of a subsidiary undertaking, or anybody who fell within the previous categories at a time to which the information or explanations required by the auditor relates or relate, to provide him with such information or explanations as he thinks necessary for the performance of his duties as auditor.
Section 500 deals with the auditor’s right to information from overseas subsidiaries. Section 501 deals with offences. A person commits an offence who knowingly or recklessly makes to an auditor of a company a statement that conveys or purports to convey information that is misleading, false or deceptive in a material particular.
Section 502 provides for auditor’s rights in relation to resolutions and meetings. In relation to a written resolution proposed to be agreed by a private company, the company’s auditor is entitled to receive all such communications relating to the resolution, as are required to be supplied to a member of the company.
The company’s auditor is entitled to receive all notices and other communications relating to general meetings which a member of a company is entitled to receive, and is entitled to attend any general meeting of the company and to be heard at any general meeting that he attends on any part of the business of the meeting that concerns him as auditor.
The senior statutory auditor must sign the report in his own name on behalf of the audit firm (if it is an audit firm) (s 503 CA 2006).
The name of the individual who is the senior statutory auditor, as well as the name of the firm, must appear in all copies of the audit report (s 505 CA 2006).
There is an exemption from disclosing the name of the person who signed as senior statutory auditor if the company, on reasonable grounds, believes that a statement of the name would create, or be likely to create, a serious risk that the auditor or senior statutory auditor or any other person would be subject to violence or intimidation. If this is the case, the company must resolve that the name should not be stated and must give notice of the resolution to the Secretary of State, disclosing who the senior statutory auditor is.
Section 507 provides that in relation to any matter that is misleading, false or deceptive in a material particular, or where the company’s report omits a statement that is required, then the auditor is guilty of an offence under this section.
This is a new criminal offence.
The starting point of any survey of auditor’s liability is the famous dictum of Lopes LJ in Re Kingston Cotton Mill  Ch 279, that ‘an auditor is not bound to be a detective … he is a watchdog but not a bloodhound’. The auditors in this case had taken on trust a management assessment of the amount of yarn in stock, failing to make a physical check themselves. The assessments were frauds, which had been perpetrated by a manager to make the company appear to flourish by exaggerating the quantity and value of cotton and yarn in the company’s mills.
The auditors took the entry of the stock in trade at the beginning of the year from the last preceding balance sheet, and they took the values of the stock in trade at the end of the year from the stock journal.
The book contained a series of accounts under various heads purporting to show the quantities and values of the company’s stock in trade at the end of each year and a summary of the accounts which was adopted by the auditors.
The auditors always ensured that the summary corresponded with the accounts but they did not enquire into the accuracy of the accounts. The auditors were held not liable; the court concluded they were entitled to accept the certificate of a responsible official. This is a decision that would almost certainly be reversed today. The dictum of Lopes LJ, however, still finds approval and has fossilised into an immovable principle of law, though it is now generally accepted that an auditor is a watchdog which must bark loudly and relentlessly at any suspicious circumstance. Professional standards have advanced and duties have become stricter since the 1890s.
At the outset of the audit, an auditor must familiarise himself with the company’s articles of association, so that he can ensure that payments shown in the accounts have been properly incurred. It will be no defence to assert that he has not read the company’s constitution.
In Leeds Estate Building and Investment Co v Shepherd (1887) 36 ChD 787, the terms of the articles had not been carried out, and it was held that it was no excuse that the auditor had not seen them. As a result of this neglect, dividends, directors’ fees and bonuses were improperly paid and the auditor was therefore held liable for damages.