A history leading to the Modernising of UK company law.
The Companies (Audit, Investigations and Community Enterprise) Act 2004, contained measures to extend the powers for auditors to obtain information from employees, and a requirement for Directors not to withhold information from their company's auditors, which will assist auditors in their work.
The Company Law Reform Bill was published on 1 November 2005, the original text is available on the House of Lords website.
The ICAEW White Paper as a significant step towards much needed company law reform and towards enhancing the UK's competitiveness. The Company Law Review ('CLR') represented a significant undertaking on the part of industry, Government and the accounting profession, and we are pleased to see that this effort has now culminated in this White Paper. Existing company law has become outdated and in need of reform and so the Government should ensure legislative time is put aside early in the new Parliament to enshrine these measures in Statute.
The White Paper looks to enshrine in law a 'Think Small First' approach, starting with the small privately owned company, making it easier to set-up and run an enterprise. For public companies, there are a number of proposals to enhance shareholder rights and ensure a strong, competitive and high quality audit market. For all companies, directors would be given a clearer lead on their duties and important shifts in their liability regime are proposed. The government also proposes to allow company law to be updated more easily in the future.
We welcome the Government's proposals to make the law simpler and more accessible, in particular for smaller private companies. A major proportion of current company law dates back to the mid-nineteenth century and is mostly written for large public companies. However, the great majority of companies are private and well over 90 per cent are also small. We therefore agree that the starting point should be with smaller companies, with the introduction of additional provisions for public companies where necessary. This should serve to reduce the regulatory burden on smaller companies whilst retaining suitable safeguards in respect of larger public companies.
There is a strong and urgent case for reforming the complex capital maintenance rules, which currently impose a rigid link between company balance sheets and the amount of company distributions, especially in light of recent accounting developments. The current rules in many cases fail to achieve the objective of protecting creditors, impose unwarranted burdens on business and impede the development of financial reporting,. We believe a solvency-based regime, under which distributions would be determined by reference to the effect on company solvency and the need to preserve the company as a going concern, would be simpler and more cost effective, whilst also protecting creditors and allowing investors appropriate returns. The DTI should call for more urgent reform of EU legislation affecting public companies, and should take the opportunity in the forthcoming Bill to effect this reform for private companies.
The Audit Quality Forum was established by the Institute at the behest of Government as a body that brings together industry, investors, regulators and the auditing profession to identify proposals to enhance confidence in the high quality of UK audit. We welcome the four policy proposals that have been identified in the White Paper on the back of the Forum?s recommendations, and our detailed comments are set out in the body of this submission. We believe these measures will enhance confidence in the independent audit, though as explained in further detail in this memorandum, there are some particularly complex issues that need to be resolved in order to achieve a workable and useful framework for the questioning of auditors by shareholders.
We are pleased to see that Government has been persuaded of the case for change to the current auditor liability regime. Allowing for proportionality by contract is not designed to absolve those who are at fault from responsibility. It is about ensuring that this liability is in proportion to the level of fault. It does not solve the issue of catastrophic large claims from major organisations. The potential amount of such claims cannot be capital-backed and there is a possible negative impact on competition on the audit market for large entities. However, proportionate liability by contract will help the situation.
We agree that a new criminal offence for auditors who have acted dishonestly in giving an audit opinion could assist in providing comfort to shareholders. However, as we explain in more detail in the body of this submission, it is important that such an offence is linked to dishonest or fraudulent behaviour so that the offending activity has a criminal character and does not extend to negligence.
Again, we agree with the principle behind the proposal but are concerned that, unless the provision is appropriately limited and the intent clarified, a culture of deliberate delegation to avoid penalties could develop, there could be an unjustified transfer of work abroad, damaging the economy, and/or the provisions could clash with contractual terms agreed with third parties.
In July the Government consulted on some additional draft clauses for the Bill, which we responded to ahead of the Bill's introduction to Parliament in the autumn. This document (TECH 53/05) is no longer available on this site, but you can request it from the Library by phone: +44 (0)20 7920 8620, fax: +44 (0)20 7920 8621, email:firstname.lastname@example.org, or search ICAEW's Library online for the archive copy.
The proposals, especially Part Q relating to auditor liability and offences, will have an important impact across the profession. In particular, the Institute has concerns over the clauses relating to criminal recklessness. We support the principle of an offence for criminal behaviour by auditors but we have major reservations about the inclusion of the concept of 'recklessness', which we are concerned could result in criminal charges being brought against auditors where the behaviour was an honest make or at worst negligent. We believe introducing this offence as drafted would compromise the Government's stated aim of delivering a high quality audit market. The audit profession would become more risk averse, and we fear that small and medium-sized firms may leave the audit market given the added risks involved for their partners and staff. This would reduce quality, add to the costs of the audit process and reduce choice in the market - all bad consequences for the UK economy.