Audit, accounting and reporting: guidance for UK companies
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.
Audit exemptions and change of accounting framework
On 6 September 2012 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.
We 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 to Medium Enterprises (SMEs) will be able to obtain an exemption if they meet two out of three 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 regulations also exempt most subsidiary companies from mandatory audit, as long as their parent undertaking guarantees their liabilities. A further 83,000 subsidiary companies could benefit. 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:
In addition, another 67,000 dormant subsidiaries will no longer need to prepare and file annual accounts, provided they are subject to a similar guarantee, which they have filed using the same forms. Guidance on the new subsidiaries exemptions is also available from Companies House as part of:
- its general guidance to companies (see Chapter 8 - Dormant Company Accounts and Chapter 11: Audit Exemption for Subsidiaries)
- its guidance to LLPs (see Chapter 11 - Dormant LLP Accounts and Chapter 12: Audit Exemption for Subsidiaries)
Following consultation by the Financial Reporting Council (FRC) on changes to UK Generally Accepted Accounting Principles (UK GAAP), the government has also decided to 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.
Fourth and seventh company law directives: company reporting
Council Directives 78/660/EEC (4th Directive) and 83/349/EEC (7th Directive) require member states to establish a legal framework for producing annual accounts and consolidated accounts, for limited companies. These Directives also include reporting requirements in respect of corporate governance.
The 4th and 7th Directives also set the thresholds which determine whether a company is large, medium or small for reporting and audit purposes.
Further information is available from the European Commission website.
Preparation of accounts other than by reference to UK GAAP or IFRS
A letter requesting views on whether there are any circumstances when the use of non-UK and IFRS accountancy framework for UK incorporated companies would be sensible. Responses should be sent to Margaret.Sutherland@bis.gsi.gov.uk.
The Partnerships (Accounts) regulations 2008 (SI 2008/569): technical defect in definition of ‘qualifying partnership’
The government is currently considering responses to the letter dated 13 April 2010 and draft regulations sent to interested parties on the technical defect in the definition of ‘Qualifying Partnership’ in The Partnership (Accounts) Regulations 2008 (SI 2008/569). The period for comment on this closed on 6 July 2010. Though earlier commencement dates have previously been considered, it is now likely that any new regulations will apply to financial years beginning on or after 1 October 2011.
International standards (accounting)
European law requires listed companies to use International Accounting Standards (IAS) from 1 January 2005 when preparing their consolidated accounts. The relevant law is Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of International Accounting Standards.
The International Accounting Standards Board (IASB) is responsible for writing accounting standards to be used by all listed groups. The standards are also called International Financial Reporting Standards (IFRS) and the terms are often used interchangeably.
Before standards as written by the IASB can be used by European companies they are required to be adopted for use in the European Union. The Accounting Regulatory Committee (ARC) is composed of representatives from Member States and chaired by the Commission. The function of the Committee is a regulatory one and consists of providing an opinion on Commission proposals to adopt (endorse) an international accounting standard or an interpretation as envisaged under Article 3 of the IAS Regulation. The Committee has been set up by the Commission in accordance with the requirements contained in Article 6 of the IAS Regulation.
In the UK, the use of IAS has been extended so that:
- publicly traded companies in the UK are also permitted to use IAS in their individual accounts from the same date
- other companies and limited liability partnerships in the UK are permitted to use IAS in both their individual and consolidated accounts from the same date
Further information can be found in ‘Guidance for UK companies on accounting and reporting: requirements under the Companies Act 2006 and the application of the IAS Regulation’.
Directive 2006/43/EC on Statutory Audits of Annual and Consolidated Accounts
The previous government held two public consultations on the implementation of the Audit Directive on 5 March 2007 and 19 July 2007 (including draft regulations). On 17 December 2007 it published a summary of the comments on the Draft Regulations and the government’s conclusions.
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 (SATCAR) and other related regulations. Most aspects of this amended regulatory framework are applicable to company reporting periods beginning on or after 6 April 2008.
Other regulations implementing the Audit Directive have been made by other government and regulatory bodies, including:
- HM Treasury, which has implemented parts of the Audit Directive for Building Societies, Friendly Societies and Lloyds syndicates. The Regulations have commenced for reporting periods beginning on or after 29 June 2008
- the Financial Services Authority, which has implemented certain requirements on listed companies, through the listing rules. The amended rules have commenced for reporting periods beginning on or after 29 June 2008
- the Professional Oversight Board of the Financial Reporting Council (POB) has made regulations, which commenced on 6 April 2008 as part of the implementation of the Companies Act - these regulations on transparency reports, the register of auditors and examination requirements also implement parts of the Audit Directive
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, and on publication of draft regulations for comment by the Department for Business, Innovation and Skills (BIS).
Disclosure of non-audit services provided to large companies by their auditors
BIS has now replaced Schedule 2 to the Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 to provide a new classification of non-audit services to large companies, intended to improve insight into 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 recent changes to the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors which set out the principles to be followed by auditors in order to maintain their independence. The APB completed a review of the Ethical Standards on 17 December 2010.
The regulations are available on the Companies Act 2006 Regulations and Commencement Orders page.
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.
Relations with third countries
The Audit Directive requires the registration and regulation of auditors that audit the accounts of companies from outside the EEA, which issue securities on regulated markets in the EEA (‘third country auditors’).
On 19 January 2011, the European Commission issued a Decision (2011/30/EU) on the equivalence of certain third country public oversight, quality assurance and, investigation and penalty system for auditors and audit entities and a transitional period for audit activities of certain third country auditors and audit entities in the EU. Further details are available on the Commission website.
The government has now made regulations to implement the Commission Decision by amending the Statutory Auditors and Third Country Auditors Regulations 2007 (SI 2007/3494) and Part 42 of, and Schedule 10 to, the Companies Act 2006 via regulations under section 2(2) of the European Communities Act 1972. The Statutory Auditors and Third Country Auditors (Amendment) Regulations 2011 (SI 2011/1856) are available on the Companies Act 2006 Regulations and Commencement Orders page.
BIS issued draft regulations implementing the Decision, in relation to third country auditors registered or domiciled outside the EEA, for comment for a period beginning on Thursday 7 April 2011 and ending on Thursday 19 May 2011.
Draft Statutory Auditors and Third Country Auditors (Amendment) Regulations 2011](http://www.bis.gov.uk/assets/biscore/business-law/docs/e/11-807-explanatory-text-draft-statutory-third-country-auditors.pdf) (PDF, 53 Kb)
The final regulations also implement the Decision for Statutory Auditors in respect of any audits which they conduct of UK-traded non-EEA companies. As a result, statutory auditors will continue to be exempted from the requirements of the Disclosure and Transparency Rules implementing Article 45 of the Audit Directive (DTR 4.1.7(R)).
The new Commission Decision has replaced Decision (2008/627/EC), which allowed the introduction of provisions on the registration and regulation of third-country auditors.
The registration and regulation of third country auditors in the UK is the responsibility of the Professional Oversight Board of the Financial Reporting Council. Further information is available on the POB 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. BIS has made regulations to implement the Commission Decisions by amending Part 42 of the Companies Act 2006 via regulations under section 2(2) of the European Communities Act 1972. The Companies Act 2006 (Transfer of Audit Working Papers to Third Countries) Regulations 2010 (SI 2010/2537) are available on the the Companies Act 2006 Regulations and Commencement Orders page
This follows the publication of draft regulations to implement the first Decision for comment for a period of consultation which ended on Friday 28 May 2010. 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, as well as to implement the second Decision.
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.
The guidance refers to:
Background note: audit and auditors (PDF, 29 Kb)