Corporate Transparency

Question 1

What are the 3 benefits of disclosure?

Answer 1

1. Potential investors are more informed
2. Shares are more accurately priced so markets operate more efficiently
3. Shareholders can hold the company and its directors to account

Question 2

What 6 registers must be kept?
Which 2 registers are optional?
Who maintains them?

Answer 2

• Certain registers must be kept (some exceptions):

1. the register of members
2. the register of directors
3. the register of directors’ residential addresses
4. the register of secretaries
5. the register of interests disclosed
6. the register of people with significant control

• The register of charges and the register of debentures may be kept if company wants to
• Secretary’s role to maintain them

Question 3

What options do private companies have in regards to keeping registers?

Answer 3

Information in registers = replicated in CHs registers

• The Small Business, Enterprise and Employment Act 2015 amended CA2006 = private companies can choose to:
1. maintain its own register; or
2. keep relevant information on the register at CH
○ Will not need to maintain the register but must inform CH of any changes

Question 4

Who must the company send a copy of the annual accounts and reports to? (3)
What must quoted companies do?
What must public companies do?
Where must the accounts and reports be filed?

Answer 4

• S.423(1) CA2006 = every company must send a copy of annual accounts and reports to every:

1. Member
2. Debenture holder
3. Person entitled to receive notice of a general meeting

• S.430 CA2006 = Quoted companies must publish on their website
• S.437 CA2006 = Plc must lay accounts and records before the general meeting (AGM)
• S441 CA2006 = must be filed with CH

Question 5

What are companies obliged to do under s.386?
When is the first accounting period?
When does subsequent accounting periods run from?
What do the annual accounts consist of? (2)

Answer 5

• S.386(1) CA2006 = companies must keep adequate accounting records
• S.381(5) CA2006 = first accounting period = incorporation to ARD
• S.391(6) CA2006 = subsequent accounting periods = day after ARD and run for 12 months
• S.471(1) CA2006 = annual accounts consist of (i) any individual accounts prepared for that year; and (ii) any group accounts prepared for that year

Question 6

What 7 things must the individual company accounts state?

What can small comapies do?

Answer 6

• S.396 CA2006 = individual accounts must state:

1. Region of UK company is registered
2. Company’s registered number
3. Whether company is public or private, limited by shares or guarantee
4. Company’s registered office address
5. If being wound-up
6. Balance sheet providing a true and fair view of company’s affairs as of the last day of the financial year
7. Profit and loss account providing a fair and true view of the profit or loss of the company

Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008, Schedule 1, para 1A = small companies may prepare abridged accounts instead of full accounts if all the members consent

Question 7

Who must prepare group accounts?

What is the information in then?

Answer 7

• S.399(2) CA2006 = parent company (except one that is small) must also prepare group accounts
• Information = same as individual accounts but accounts must cover accounts of parent and all subsidiaries (unless not material for giving a true and fair view)

Question 8

What are the 4 annual reports?
Who do they apply to?
What type of information do they contain?

Answer 8

• S.471(2) and (3) CA2006 = annual reports consist of:

1. the strategic report (small companies excluded)
2. the directors’ report
3. the auditor’s report (small companies excluded)
4. the directors’ remuneration report (quoted companies only)

• Annual reports contain financial and non-financial information
• Non-financial = narrative reporting

Question 9

When will directors be liable to the company regarding the annual reports?
When will they be liable (if they knew)?

Answer 9

• S.463(1) CA2006 = director liable to compensate the company for any loss suffered as a result of (i) untrue or misleading statements; or (ii) the omission of anything required to be in the report
• Director only be liable if they knew:

1. the statement to be untrue or misleading or were reckless as to whether it was or
2. the omission to be dishonest concealment of a material fact

Question 10

What is the purpose of the strategic report? What must it contain?
What must it include? (3)
What about if the company is quoted?
What if the company is traded?

Answer 10

• S.414C CA2006 = purpose = inform members and help them assess how directors have performed their s.172 duty
• Must contain a ‘section 172(1) statement’ = describes how directors have had regard to the matters set out in s. 172(1)(a)–(f)

• The strategic report must include:

1. A fair review of the company’s business
2. Analysis of performance and position
3. A description of the main risks/uncertainties facing the company

If company is quoted = must also provide the information listed in s.414CA(7-8)

• Traded companies must include a ‘non-financial information statement’

Question 11

What must the directors’ report include? (3)
What about for large and medium-sized companies and groups?
Which companies must provide a statement of corporate governance arrangements and what does it state?(3)
Which companies must provide a corporate governance statement and what does it state? (4)
What must premium listing companies also provide? (2)

Answer 11

• Must include:

1. The names of those that were directors during the year
2. Dividend amount directors recommend should be paid
3. A statement providing that:
   (i) as far as each director is aware, the auditor is aware of all the relevant information
   (ii) each director has taken the necessary steps to makes themselves aware of relevant information and establish the auditor is aware

Schedule 7 Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 - under miscellaneous

• If company has more than 2,000 employees, or turnover of more than £200 million and balance sheet total over £2 billion = must include a statement of corporate governance arrangements stating:
1. Which CG code the company applied
○ Or reasons for not applying a code and explanation of what CG arrangements were applied
2. How the company applied the code
3. Reasons for departing from the code

• If shares are traded on a regulated market = must provide a ‘corporate governance statement’ stating:

1. CG code the company is subject to or voluntarily applied
2. Which parts have departed from and why
3. Description of company’s internal control and risk management
4. Description of the diversity policy and implementation

• If company have premium listing must also provide:
1. How the company has applied the Principles of the UK CG Code
2. Statement of compliance for all the Provisions
○ or a statement identifying Provisions not complied with and why

Question 12

What 8 things must the auditors’ report include?

Answer 12

• s.495-498 CA2006 = Must include:

1. name of company whose accounts are being audited
2. a description of the annual accounts and the period covered
3. a description of the financial reporting framework used to prepare the accounts
4. a clear statement as to whether, in the auditor’s opinion, the annual accounts:
   a. give a fair and true view
   b. have been prepared in accordance with the relevant financial reporting framework
   c. have been prepared in accordance with the requirements of the CA2006
5. a statement on any material uncertainty
6. a clear statement as to whether, in the auditor’s opinion, the strategic report and directors’ report:
   a. Are consistent with the accounts
   b. have been prepared in accordance relevant legal requirements
   c. Contain any material misstatement
7. a clear statement as to whether, in the auditor’s opinion, the directors’ remuneration report and CG statement:
   a. Comply with the CA2006 and DTRs
   b. Contain any material misstatements
8. A statement whether adequate accounting records have been kept and if they agree with the individual accounts

Question 13

Which companies must provide a directors’ remuneration report?
What information is contained in it for large and medium-sized companies? (7)
How often must the remuneration policy be approved?

Answer 13

• S.420(1) CA2006 = directors of a quoted company must prepare a directors’ remuneration report for each financial year
• Schedule 8 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 = must include information on:

1. Remuneration pay
2. Pension entitlements
3. Payments to past directors
4. Directors’ shareholdings and share interests
5. Company performance graph for the last 5 years
6. % change in CEO’s remuneration
7. Remuneration policy and implementation

• At least every 3 years an ordinary resolution must be passed to approve the remuneration policy
• This vote is binding
• Payments made outside approval have no effect
• Every year the remuneration report must be tabled at the AGM for approval
• Vote is advisory and not binding

Question 14

Which companies are exempt from having their annual accounts audited? (4)

Answer 14

• S.475(1) CA2006 = annual accounts must be audited, unless:

1. the company is a small company
2. the company is a subsidiary
3. the company is dormant
4. it is a non-profit-making company that is subject to a public sector audit

Question 15

What 2 conditions must be satisfied for a person to be able to act as an auditor? What are the consequence of acting if not eligible?
What must the auditor be and therefore who cannot be an auditor?
When must an auditor resign?

Answer 15

• S.1212(1) CA2006 = a person is eligible to act as auditor if they:
1. Are a member of a recognised supervisory body e.g. ICAEW; and
2. Are eligible for appointment under the rules of its supervisory body
• Cannot act as auditor if not eligible = criminal offence to do so

• S.1214 CA2006 = auditor must be independent
• Prohibited persons:
• (a) An officer or employee of the company
• (b) A partner or employee of person (a), or a partnership where (a) is a partner
• (c) Lack of independence

• S.1215(2) CA2006 = criminal offence to not resign immediately and inform company due to lack of independence

Question 16

How is an auditor appointed in a private company? (First year and subsequent years)

Answer 16

• In first financial year = within 28 days of the previous financial year’s annual accounts and reports being sent out
• In subsequent years = pass an ordinary resolution before the end of the period for appointing auditors
• There is an automatic re-appointment process

Question 17

How is an auditor appointed in a public company?

Answer 17

• In first financial year = appointed by the directors before the first accounts meeting (AGM)
• In subsequent years = passing an ordinary resolution before the end of the accounts meeting
• No automatic re-appointment process (there is for private companies)

Question 18

Who decides the auditors’ remuneration?
What are the 2 issues of this?
What does the UK CG Code recommend?

Answer 18

• Remuneration is fixed by those who appointed the auditor

• In larger companies this gives rise to 2 concerns: Independence might be compromised:
1. Where auditor is overly reliant on the fee income the audit generates
○ Art.4(3) EU Audit Regulation = if audit fees exceed 15% of auditor’s total fee income in 3 previous consecutive years = must disclose to audit committee who decide independence safeguards
2. Where auditor also provides non-audit services
○ Art. 5 EU Audit Regulation = auditor of a public interest entity will be prohibited from providing certain non-audit services

Prov.25 UK CG Code = audit committee should develop and implement a policy on the engagement of the external auditor to provide non-audit services.

Question 19

What are the duties of the auditor? (3)
What are the auditors’ rights? (2)
Who do they owe a duty to and in what?

Answer 19

• S.498(1) CA2006 = auditor must carry out investigations to enable them to form an opinion as to whether:

1. Adequate accounting records have been kept and received
2. Individual accounts agree with the accounting records and returns
3. Directors’ remuneration report agrees with the accounting records and returns (quoted companies only)

• S.499 CA2006 = auditors rights:

1. Free access to books, accounts and vouchers; and
2. Demand any relevant information and explanations from company officers and employees

• Auditors owe a duty to the company in contract and tort
• Required to act honestly and with reasonable care and skill in discharging their duties
• Must perform duties with an inquiring mind

Question 20

What are the 3 types of liability an auditor can face?
How might they try to avoid civil liability?
When will this be restricted?
What are the 2 exceptions to this restriction?

Answer 20

• An auditor can face contractual, tortious and criminal liability.
• Might try to avoid civil liability by placing an exclusion or limitation clause in the audit contract
• S.532 CA2006 = void if exempts from liability of negligence, default, breach of duty, or breach of trust
• Subject to 2 exceptions:

1. S.533 CA2006 = Company can indemnity for costs of successfully defending proceedings
2. If the auditor enters a liability limitation agreement with the company that complies with s.534-538

Question 21

How can an auditor be liable contractually?
How can an auditor be liable in tort?
Do they owe a duty to 3rd parties?
Can a potential investor sue?
What are the 2 criminal offences an auditor can be guilty of?

Answer 21

Contractual Liability:
• Company may sue the auditor if they breach the contract
• Can be sued if do not perform their duties with reasonable care and skill

Tortious liability:
• Can sue auditor in tort if they make a statement they know to be false, or they provide a negligent audit
• An auditor owes a duty to the company alone and not to individual shareholders
• Only owes a duty of care to 3rd party if 3rd party can show the auditor assumed responsibility to them
• Caparo Industries plc v Dickman [1990] = for a potential investor to impose liability there must be a ‘special relationship’. This arises when:
1. The auditor’s advice is required for a known purpose
2. The auditor knows his advice will be communicated and used for that purpose
3. It is know the advice is likely to be acted upon for that purpose
4. The advice is acted upon to detriment

Criminal Liability:
• 2 offences:
1. S.507 CA2006 = auditor knowingly or recklessly causes an audit report to include misleading, false or deceptive matter, or omit certain information.
2. S.17 Theft Act 1968 = auditor dishonestly:
a. Destroys, defaces, conceals or falsifies any account, records, or document; or
b. Produces any account, record, or document that he knows may be misleading, false, or deceptive

Question 22

What are the 4 ways an auditor vacates office?

Provide details of each

Answer 22

1. Resignation
   • S.516(1) CA2006 = Auditor may resign by giving notice to the company and explaining reason(s)
2. Removal
   • S.510 CA2006 = Members can pass an ordinary resolution at a meeting at any time
   • WR cannot be used and special notice of the resolution must be provided
3. Replacement
   • 2 ways:
   a. S.514(1) CA2006 = Private company can pass a WR to appoint a new auditor when term of office expiries
   b. S.515 CA2006 = By passing a resolution at a general meeting
   (Special notice must be given unless auditor resigned or was removed)
4. Rotation
   • Auditing Practices Board’s Ethical Standard 3 = listed companies must change their audit partner every 7 years
   • FTSE 350 companies must put their audit out to tender at least every 10 years

Question 23

Which companies must report periodically?
When must the annual report be published and how long must it be available for?
What information must it include? (3)
What information must the half-yearly annual report include? (3)
When must the half-yearly financial report be published and how long must it be available for?

Answer 23

• If trade securities on a regulated market, must report periodically

• Disclosure Guidance and Transparency Rule 4 = must publish an annual financial report and a half-yearly financial report
• Disclosure Guidance and Transparency Rule 4.1 = must publish an annual financial report within 4 months of financial year end and it must be available for at least 10 years

• The annual financial report must include:

1. The audited financial statements;
2. a management report = fair review of company’s business and description of risks/uncertainties
3. responsibility statement.

• DTR 4.2 = must publish a half-yearly financial report covering the first six months of the financial year
• The report must contain:
a. a condensed set of financial statements
b. an interim management report = events that affected the company and risks/uncertainties
c. responsibility statement

• Must be made public asap and no later than 3 months after the report period end date
• Must remain available to the public for 10 years

Question 24

Prior to The Small Business, Enterprise and Employment Act 2015 amendment, what did companies have to submit and what do they submit now?
What is a confirmation statement?
What is the required information? (4)
When is the first confirmation period and when are subsequent confirmation periods?
When must to be delivered to Companies House?
How can liability be avoided?

Answer 24

• The Small Business, Enterprise and Employment Act 2015 amended the CA2006 = must submit an annual confirmation statement to CH not an annual return
• s. 853A CA2006 = confirmation statement = a statement confirming that all required information has been delivered or will be delivered at the same time as the confirmation statement
• Required information includes:

1. Change of registered address
2. Change of principle business activities
3. A statement of capital if any information within it has changed since the last CS
4. Change in trading status of shares

• First confirmation period = from incorporation to confirmation date (12 months later)
• Subsequent periods = day after last CS to the confirmation date
• Must deliver to CH within 14 days of the review period
• S.853L CA2006 = Failure to deliver is a criminal offence
• Can avoid liability if show they took all reasonable steps to avoid the commission or continuation of the offence