Auditing of accounts
43.The purpose ofsections 8 and 9 is to strengthen the rights of company auditors, by entitling them to require information and explanations from a wider group of people than previously; and by requiring the directors’ report to contain a statement that the directors are not aware of relevant information which has not been disclosed to the company's auditors.
Section 8 - Auditors' rights to information
44.Under previous legislation (section 389A of the Companies Act 1985) a company's auditors were entitled to require from the company's officers such information and explanations as they thought necessary for the performance of their duties as auditors. It was a criminal offence for an officer of the company to provide misleading, false or deceptive information or explanations. However, it was not an offence for them to fail to provide any information or explanation that the auditors required of them.
45.This section is intended to help auditors to carry out their duties by strengthening their right to require information or explanations, with the aim of increasing the reliability of, and confidence in, company accounts.
46.It does this in two ways:
it entitles the auditor to require information and explanations from a wider group of people. Specifically, it reflects a recommendation in the Company Law Review that those required to provide information and explanations to auditors should include employees (Modern Company Law for a Competitive Economy, Final Report July 2001, URN 01/942, paragraph 8.119 first bullet);
it makes it a criminal offence to fail to provide information or explanations required by the auditor.
47.Section 8 substitutes new sections 389A and 389B for the previous section 389A in the Companies Act 1985.
48.In new section 389A, subsections (1) and (2):
re-enact the auditor’s right to access relevant material; and
add to the category of people from whom the auditor may require information. Auditors previously had the right to require "officers" of the company (which includes directors, managers and company secretaries) to provide information and explanations necessary for their work. However, others, in particular employees who are not “managers”, may hold relevant information. Those to whom the requirement to provide information applies are set out in subsection (2).
49.Subsections (3)-(5) in new section 389A re-enact previous provisions dealing with information and explanations concerning non-GB subsidiaries, extended to include employees and certain others. It is neither desirable nor effective to place a direct responsibility on a non-GB subsidiary and those associated with it to give information and explanations to a UK auditor. The responsibility is therefore placed on the parent company to do what is reasonable to obtain the required information and explanations from the subsidiaries.
50.New section 389B sets out criminal offences relating to the provision of information to auditors. Subsection (1) re-enacts the previous offence in section 389A(2) of the Companies Act 1985 of providing false or misleading information or explanations to an auditor. The subsection also applies this offence to the new categories of people from whom the auditor may require information under new section 389A.
51.There has previously been no criminal sanction where an officer of the company is required to give information but fails to do so altogether. Subsection (2) of new section 389B therefore introduces a new criminal offence for such a failure by an officer of the company or by the other persons from whom the auditor is entitled to require information or explanations.
52.Subsection (3) of new section 389B provides a person with a defence if he can prove that it was not reasonably practicable to provide the information or explanations required. Subsection (4) makes it an offence for a parent company to fail to take all steps reasonably open to it to obtain the information or explanations which the auditor has required it to obtain from its non-GB subsidiary and those associated with it; and the offence applies also to any officer of the company who knowingly and wilfully authorises or permits the failure.
Section 9 - Statement in directors' report as to disclosure of information to auditors
53.Section 9 complements the auditors' rights to information provided by section 8. It requires the directors' report to contain a statement that so far as each director is aware, there is no relevant audit information of which the auditors are unaware; and that the director has taken all the steps he should have taken as a director to make himself aware of such information and to establish that the auditors are aware of it.
54.The aim of section 9 is to ensure that each director will have to think hard about whether there is any information that he knows about or could ascertain which is needed by the auditors in connection with preparing their report. This derives from a recommendation in the Company Law Review (Modern Company Law for a Competitive Economy, Final Report July 2001, URN 01/942, paragraph 8.119 second bullet) that directors should be required to volunteer information to the auditors in certain circumstances.
55.Subsection (2) establishes the basic requirement for the new statement in the directors' report. It applies to all companies whose accounts have been subject to a statutory audit for that financial year. Under the law as amended by the Companies Act 1985 (Accounts of Small and Medium-Sized Enterprises and Audit Exemption) (Amendment) Regulations 2004 (SI 2004/16), most small companies with a turnover of £5.6 million or less and a balance sheet total of £2.8 million or less are exempt from the requirement to have their accounts audited.
56.Subsection (3) inserts a new section 234ZA into the Companies Act 1985. This sets out the content of the statement. The statement must confirm that each individual director is not aware of any relevant audit information of which the auditors are unaware (new section 234ZA(2)(a)); and that each individual director has taken steps to ascertain relevant audit information and establish whether the auditors are aware of it (new section 234ZA(2)(b)). Taken with new sections 234ZA(4) and (5), new section 234ZA(2)(b) provides that the steps which the statement confirms have been taken by each director to make himself aware of relevant audit information and to ascertain the auditors' awareness of it are those required by the directors' existing common law duty to exercise due care, skill and diligence. New section 234ZA(3) defines "relevant audit information."
57.New section 234ZA(6) sets out the offence and sanctions that apply if a false statement is made. (If the statement is not made at all, the existing offence in section 234(5) of the 1985 Act - failure to comply with the provisions of Part 7 of the Act as to the contents of the directors' report - will apply.) The offence applies to each individual director who knew that the statement was false, or was reckless as to whether it was false, and who did not take reasonable steps to prevent the report from being approved. A person found guilty on indictment will be liable to imprisonment for up to two years and/or an unlimited fine, and on summary conviction to up to twelve months' imprisonment and/or a fine up to the statutory maximum (£5,000).
