Guidance

Audit, accounting and reporting

Guidance for companies.

Introduction

It is vital that the UK economy has efficient and effective capital markets and there is confidence in the corporate framework through greater transparency.

Providing for reliable and informative reporting contributes to this commitment. It includes the implementation of international accounting standards and international standards on auditing and requires an ongoing dialogue with UK stakeholders and EU or international regulators on measures to encourage market stability.

New Audit Directive and Regulation

The new Audit Directive and Regulation have now been published in the Official Journal of the European Union. As a result they are now a part of EU law with a coming into force date of 16 June 2014.

The Regulation will apply directly as from 16 June 2016, which is also the deadline for implementation of the Directive by member states. The Directive makes amendments to the previous Audit Directive 2006/43/EC, while the Regulation (the first to apply to statutory audit) is directly applicable. Further details are available on the European Commission website.

View the ‘discussion document on the implications of the EU and wider audit reforms’. The Department for Business, Innovation and Skills intends to consult on implementing the Directive and providing for the application of the Regulation later this year. While the Directive applies to statutory audits of annual and consolidated financial statements, the Regulation applies only to statutory audits of listed companies, insurance providers, building societies and banks (‘public-interest entities’).

Competition Commission investigation into the statutory audit market for FTSE 350 companies in the UK

On 15 October 2013, the Competition Commission published the conclusions of its investigation into the statutory audit market for the FTSE 350. Details of the investigation are available on the Competition and Markets Authority (CMA) website. This includes information on the CMA’s plans to implement some of the remedies that the Competition Commission identified.

In particular, the CMA has published its Order to implement the remedies identified by the Competition Commission on the mandatory use of competitive tender processes and on responsibilities of audit committees. The Order is intended to take effect in the context of the application of the new EU Audit Regulation which also contains requirements in these areas.

Read the CMA draft Order: Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014

The Order clarifies how the CMA’s remedies would take effect given the application of the new EU Audit Regulation as from 17 June 2016. The EU Audit Regulation provides that public interest entities must not retain the same auditor for more than 10 years, but a derogation enables member states to extend the audit engagement to up to 20 years, provided that retendering takes place at least every 10 years.

The government intends, subject to consultation, to take advantage of this derogation. This is consistent with the government’s position during the negotiation of the new EU audit reforms. It is also consistent with the government’s general preference when implementing EU law, subject to consultation, to take full advantage of all the options and flexibilities provided. The CMA Order was assembled on this basis. BIS’s consultation on the transposition of the new Audit Directive and the application of the Audit Regulation will follow later this year.

On 11 January 2014, Jenny Willott, the Parliamentary Under-Secretary of State for Employment Relations and Consumer Affairs, wrote to the Competition Commission, welcoming the final report of the Commission investigation.

Read the government response to the investigation: Letter from Jenny Willott MP to Roger Witcomb, chairman of the Competition Commission, 11 January 2014.

Other remedies identified by the Competition Commission will be the subject of consultation by the Financial Reporting Council, which has also responded to the Commission’s final report.

Draft Deregulation Bill

Notices of Auditors Leaving Office and audit of charitable companies

The government’s Deregulation Bill is currently passing through Parliament. It contains provisions to amend the framework in Chapter 4 of Part 16 of the Companies Act 2006 on Notices of Auditors Leaving Office. The proposals were the subject of a consultation in 2009. The draft Deregulation Bill was the subject of consideration by a joint committee of both Houses of Parliament, which reported on 19 December 2013.

The Deregulation Bill also repeals provisions of the Companies Act 2006 on audit of charitable companies and proxy voting, which were either not commenced or commenced and then repealed shortly afterwards. The Government announced its intention not to commence provisions on proxy voting and on audit of charitable companies in Northern Ireland in a written statement to Parliament on 6 November 2008.

Audit exemptions and change of accounting framework

On 6 September 2012 the government made regulations to allow more companies to make a commercial decision about whether or not to have a statutory audit.

Read more about The Companies and Limited Liability Partnerships (Accounts and Audit Exemptions and Change of Accounting Framework) Regulations 2012.

The government has also published its response to the consultation on audit exemptions and change of accounting framework, which sets out its conclusions on the proposed changes.

Currently, to be eligible for an audit exemption in the UK, small companies must be less than a certain size in terms of balance sheet and turnover. The new regulations align mandatory audit thresholds with accounting thresholds, meaning small companies and limited liability partnerships will be able to obtain an exemption if they meet 2 out of 3 criteria relating to balance sheet total, turnover and number of employees. This change will allow 36,000 more companies to choose not to have an audit.

The 2012 regulations also exempt most subsidiary companies from mandatory audit, as long as their parent undertaking guarantees their liabilities. Dormant subsidiaries, which are already audit exempt, are also granted exemptions from preparing and filing accounts, where a parent company guarantee is in place.

The Regulatory Policy Committee has now validated the final impact assessment on the regulations, which anticipates a reduction in the cost to business resulting from all these changes as £304 million.

Companies House has now made forms available for subsidiaries to use when filing the parent guarantee that has been put in place by their parent undertaking. These are:

Guidance on the new subsidiaries exemptions is also available from Companies House as part of:

Following consultation by the Financial Reporting Council (FRC) on changes to UK Generally Accepted Accounting Principles (UK GAAP), the 2012 regulations allow companies that prepare their accounts under International Financial Reporting Standards (IFRS) to move to UK GAAP and take advantage of reduced disclosures.

The new regulations remove EU gold-plating and ensure UK SMEs are not at a disadvantage compared to their European competitors. These changes are part of the government’s wider drive to reduce unnecessary burdens and make the UK one of the best places in the world to start, finance and grow a business.

Company reporting

The new EU Accounting Directive (2013/34/EU) which replaces and adds to Council Directives 78/660/EEC and 83/349/EEC (the former 4th and 7th Company Law Directives) requires member states to establish a legal framework for producing annual accounts and consolidated accounts for limited companies and certain other entities. The Directive also includes reporting requirements in respect of corporate governance and new provisions on payments to governments made by companies in the extractives industries. The Directive was formally adopted on 26 June 2013. Further information is available from the European Commission website.

Definition of ‘qualifying partnership’

The Companies and Partnerships (Accounts and Audit) Regulations 2013 (SI 2013/2005), commenced on 1 October for accounting years beginning on or after that date. This is intended to address an issue with the definition of ‘qualifying partnership’ in The Partnership (Accounts) Regulations 2008 (SI 2008/569) and relating to certain unlimited companies under the Companies Act 2006. These entities are required to prepare accounts under the accounting Directives.

Guidance on the changes made to the definition of a ‘qualifying partnership’ is now available from Companies House as part of its general guidance to companies.

Audit Directive and Regulation

Directive 2006/43/EC on Statutory Audits of Annual and Consolidated Accounts

The EU Audit Directive is implemented in relation to companies through Parts 16 and 42 of the Companies Act 2006, as amended by the Statutory Auditors and Third Country Auditors Regulations 2007 (SI 2007/3494).

Other regulations implementing the Audit Directive have been made by other government and regulatory bodies, including:

Further information about the Directive is available on the European Commission website.

For more information on the implementation of Articles 45, 46 and 47 of the Audit Directive, see the section below on Relations with third countries. This includes information on recent Commission Decisions issued under Articles 46 and 47 of the Audit Directive.

Disclosure of non-audit services provided to large companies by their auditors

The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011 (SI 2011/2198) provide a new classification of non-audit services to large companies, intended to clear up the potential questions around the auditor’s independence and link more clearly to the classification of non-audit services under Article 49 of the Audit Directive.

The changes are in line with changes to the Financial Reporting Council’s Ethical Standards for Auditors which set out the principles to be followed by auditors in order to maintain their independence.

The draft regulations below were published for comment for a period beginning on Thursday 7 April 2011 and ending on Thursday 30 June 2011. BIS has published a report of the comments made on the draft regulations explaining the changes that have been made in response to comments received.

Explanatory Text: Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011

Draft Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011

Relations with third countries

Third-country auditors

The Audit Directive requires the registration and regulation of auditors that audit the accounts of companies from outside the EEA and that issue securities on regulated markets in the EEA (‘third country auditors’).

The European Commission Decision (2011/30/EU), as amended by Decision (2013/288/EU) sets out a framework on the equivalence of certain third country public oversight, quality assurance and investigation and penalty systems for auditors and a transitional period for audit activities of certain third country auditors in the EU. A separate Decision (2013/281/EU) determines the equivalence of the United States of America on a time limited basis. Further details are available on the European Commission website.

The government has made regulations to enable the implementation of the Commission Decision and to consolidate the framework for registration of third country auditors in the UK. It is contained in the Statutory Auditors and Third Country Auditors Regulations 2013 (SI 2013/1672). Other aspects of the implementation of the framework are contained in Part 42 of the Companies Act 2006 and in the direction given by the Financial Reporting Council using powers in that legislation. Under the framework the registration and regulation of third country auditors in the UK is the responsibility of the Financial Reporting Council (FRC). Further information is available on the FRC website.

Transfer of audit working papers

The Audit Directive also introduced provisions to control the transfer of auditors’ working papers to the audit authorities of countries outside the EEA. The Directive allows transfers of papers to those third countries whose audit regulatory authorities are approved as ‘adequate’ by the European Commission, where those authorities have entered into working arrangements with EEA authorities.

On 5 February 2010 the European Commission issued the first determination of adequacy under the Directive, by issuing a Decision (2010/64/EU) (‘the first Decision’) in favour of the audit authorities of Canada, Japan and Switzerland. A second Decision (2010/485/EU) was issued on 1 September 2010 covering the authorities of the United States of America (on a time limited basis) and of Australia. Following the expiry of the original Decision on the United States, a new time limited Decision (2013/280/EU) was issued on 11 June 2013.

BIS has implemented the Commission Decisions by amending Part 42 of the Companies Act 2006.

Audit offence

Section 507 of the Companies Act 2006 created new offences relating to reports on company audits. It is possible that behaviour by auditors that could involve committing one of these offences could also be pursued by the auditors’ regulatory authorities.

The Secretary of State has issued guidance under section 508 to help regulatory and prosecuting authorities to determining how they should carry out their functions in these circumstances.

Companies Act 2006, section 508. Guidance for regulatory and prosecuting authorities in England, Wales and Northern Ireland: offences in connection with auditors’ reports (section 507).