Companies Act 2006: Accounts, auditors and websites

In this briefing, we consider some of the main changes the 2006 Act will make in relation to company auditors and company accounts, including the use of websites to publish accounts or related member concerns. These changes will come into effect on either 1 October 2007 or 6 April 2008, except for the provisions already in force as noted below.

This note covers only the legal side of company accounts; companies will need guidance from their auditors on any changes in detailed accounting. It should be read in conjunction with our earlier briefing, Companies Act 2006: Introduction and background.

Personal liability of directors

As of 20 January 2007, directors may be personally liable for any loss arising from statements or omissions in the directors' report (including business review, as to which see further below), the directors' remuneration report and any summary financial statements derived from them. However, note that liability arises:

• to the company only, not to third parties; and
• only if the relevant statement is untrue or misleading and is made deliberately or recklessly, or the relevant omission is a deliberate and dishonest concealment of material facts.

The original Bill was amended during its passage through Parliament to make clear that directors would not be liable to third parties for statements or omissions in the annual accounts. This reflects the existing law, developed by the courts in decided cases.

Some commentators see these developments as welcome, in that directors have a "safe harbour" against liability so long as they neither actually know a statement to be untrue etc nor are reckless as to whether or not it is so. However, the safe harbour does not extend to statements in other documents - such as a chairman's letter accompanying the accounts - nor would it affect any related criminal liability, such as for fraudulent accounting.

Business review

Much debate surrounded the Government's original proposals requiring the accounts of listed companies to include an operating and financial review (OFR). This would have been a very wideranging and forward-looking review of the company's activities and performance including objectives, strategies, future development, risks, uncertainties and relationships. After prolonged and vigorous lobbying, it was announced that the OFR would no longer be required.

However, from 1 October 2007, all companies, listed or not, except those subject to the small companies accounts regime, will have to include a business review in their directors' report. The business review will have to include information intended to allow members to assess directors' compliance with their duties to promote the success of their companies. It must contain a "fair review" of the company's business and the principal risks and uncertainties facing the company. The review requires a "balanced and comprehensive analysis" of the development and performance of the business during the relevant period and its position at the year-end.

Quoted companies will have to include additional specific details, including:

• details of the main trends and factors likely to affect future development and performance; note these will be forwardlooking statements;
• details about environmental matters, employees and social and community issues; and
• information regarding the company's key contractual arrangements such as those with major customers and essential suppliers.

There are exemptions, for instance in relation to commercially sensitive information and information which might seriously prejudice a third party.

Note that the business review will be required for every individual company in a group, and will have to be specific to that company. It will not be possible to write a single group review or exclude wholly owned subsidiaries, unless they qualify as small companies for accounting purposes. A huge amount of work, particularly for larger groups and their advisers, seems inevitable.

Appointing and removing auditors

From 1 October 2007, new rules will apply to the appointment and removal of auditors. The directors of a private company will have power to appoint a company's first auditors (and to fill casual vacancies). If the auditors are appointed by the directors, then when the auditors' first period of office expires, the members must reappoint them by ordinary resolution, but the auditors will then be deemed to be reappointed for each succeeding year (subject to any provisions in the relevant articles of association). The deemed reappointment will not take place:

• if the company's articles require actual reappointment;
• if members representing at least 5 per cent of the voting rights give notice excluding the deemed reappointment (the company's articles may provide for a lower but not a higher percentage of members to have this right);
• if the members resolve not to reappoint; or
• if the directors resolve not to appoint auditors for the relevant period (ie the company will be dormant).

Public companies will still have to appoint auditors by resolution each year at a meeting at which accounts are laid before members. Auditors leaving office from companies with shares quoted on public markets will in all cases have to make a statement of the circumstances in which they do so. Auditors of other public and private companies will not need to make such a statement if they do not believe the circumstances need to be brought to the attention of members.

There will be a new duty on all companies from 6 April 2008 to notify "the appropriate audit authority" when an auditor leaves office before the end of his or her term. Failure to do so will be an offence. This will need to be taken into account on company acquisitions where there is a change of auditor.

Otherwise, the procedure for removal of an auditor before the expiry of his or her term of office will be largely unchanged. It will still require a resolution to be passed at a meeting, not in writing, and 28 days' special notice of the resolution to the company will be needed.

Filing and circulation of accounts

The following changes will come into force from 6 April 2008.

The time limits for filing accounts will be shortened. Public companies will have to file their accounts at Companies House within six months of the relevant financial year-end. Private companies will have to file within nine months (not seven months, as initially proposed) of the end of the relevant financial year.

In relation to the filing of accounts, the existing "corresponding date rule" is reversed, so that in calculating a period of, say, six months from the end of a month, the period ends on the last day of the sixth month. So, for example, six months from 30 June would be 31 December, not 30 December.

Private companies will have to send out accounts to members by the earlier of the actual date of delivery to the Registrar and the deadline for delivery. Public companies will still have to send out accounts no later than 21 days before the date of the general meeting at which they are to be laid before members. The difference results from the fact that private companies will no longer be required to lay accounts before members in general meeting.

True and fair view

The Act will require, as from 6 April 2008, that the directors of a company must not approve annual accounts unless they are satisfied that they give a true and fair view of the company's assets, liabilities, financial position, profit or loss. The auditors must have regard to that directors' duty in carrying out their functions in relation to the company's annual accounts. This will be in addition to their obligations to express their opinions on whether the accounts give a true and fair view in relation to the state of affairs of the company and the profit and loss of the company.

Limiting auditor liability

From 6 April 2008, companies will be able to agree to limit the liability of auditors, with the approval of members. Limitations will be valid only insofar as they are "fair and reasonable" and cannot cover more than one financial year. Limitation agreements will have to be disclosed in the company's accounts. Members may resolve to withdraw their approval, either before the agreement is made or before the start of the financial year to which the agreement relates, notwithstanding the terms of the agreement.

Quoted companies: use of websites

The following changes will apply to quoted companies.

Quoted companies will be obliged to publish on their websites:

• results of polls taken at meetings of members (from 1 October 2007); and
• annual accounts and reports (from 6 April 2008).

The websites used must be accessible to anyone, not just to members, without charge.

Members of quoted companies holding 5 per cent of the voting rights, or who are at least 100 in number and hold an average of £100 paid up capital, will be entitled to require publication on a website of statements raising concerns about the company's accounts or about the departure of an auditor.

Miscellaneous

Finally, the following changes will come into force on 6 April 2008. Balance sheets delivered to Companies House will no longer need to be signed by a director, in order to facilitate electronic delivery. They will, however, need to state the name of the director who has signed the original copy.

Companies will no longer need to send copies of accounts to members for whom they have no current valid address.

The existing exemption from preparing group accounts for parent companies of medium sized groups will be abolished. Parent companies which qualify as small for accounting purposes will continue to benefit from an exemption, although they may still choose to produce group accounts.

Useful links

Companies Act 2006.

Or perhaps more useful, the related DTI guidance notes (which do not have legal effect):