14 - Corporate Transparency

Question 1

What constitutes a company’s annual accounts and reports?

Answer 1

Section 471 of CA2006 provides that a company’s annual accounts and reports consist of:

• the annual accounts;
• the strategic report;
• the directors’ report;
• the auditor’s report; and
• the directors’ remuneration report (only quoted companies need prepare this report).

Not all companies need prepare all the above reports (e.g. a small company need not prepare a strategic report).

Question 2

Explain the difference between individual accounts and group accounts.

Answer 2

The directors of a company (except a dormant subsidiary) are under a duty to prepare accounts for that company for each of its financial years. These are referred to as the company’s individual accounts (ss. 394 and 394A).

A parent company (except one that is small, s. 399(2A)) must also prepare group accounts for each financial year (s. 399(2)). The information contained in the group accounts is largely the same as that found in the individual accounts, except that the group accounts need to cover the accounts of the parent and all of its subsidiaries (ss. 404 and 405(1)).

Question 3

What is ‘narrative reporting’?

Answer 3

Narrative reporting refers to the inclusion of non-financial information in a company’s annual reports and other reports (except financial reports).

Question 4

Are all companies required to prepare a strategic report and a directors’ remuneration report?

Answer 4

All companies, except small companies, are required to prepare a strategic report. Only quoted companies are required to prepare a directors’ remuneration report.

Question 5

Explain the difference between a statutory audit and an internal audit.

Answer 5

The legally mandated auditing of the company’s accounts is known as a ‘statutory audit’ and the auditor performing this audit is known as the ‘statutory auditor’. Companies may also undertake an ‘internal audit’, which is essentially an audit of the company’s processes and systems that aims to determine how effectively the company manages risk, whether the company’s internal control systems are operating well, and whether the company is complying with the relevant laws and best practice recommendations.

Question 6

Do all companies need to appoint an auditor?

Answer 6

An auditor 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 (CA2006, ss. 485(1) and 489(1). In other words, a company must appoint an auditor unless it does not need to have its accounts audited.

Question 7

Which types of person may not be appointed as a company’s auditor?

Answer 7

Before appointing an auditor, the company must make sure that they are eligible to act as auditor, because a person who is not so eligible cannot act as a company’s statutory auditor (s. 1213(1)) and will commit a criminal offence (s. 1213(3)). Section 1212(1) of CA2006 provides that a person is eligible to act as auditor if they satisfy the following two conditions:

1. The proposed auditor is a member of s recognised supervisory body (e.g. the Institute of Chartered Accountants in England and Wales); and
2. The proposed auditor is eligible for appointment under the rules of the supervisory body to which they belong.

Question 8

Does an auditor owe a duty of care to third parties (for example members of a company)?

Answer 8

An auditor will only owe a duty to third parties if the third party can show that the auditor assumed a responsibility to them (such as where a third party specifically asks an auditor to value a company’s shares and the auditor knows that the information they provide will be used by the third party when deciding whether to buy the shares or not).

Question 9

What are the four ways by which an auditor can vacate office?

Answer 9

1. Resignation;
2. Removal;
3. Replacement; and
4. Rotation.