Notices of auditors leaving office - consultation on simplification for companies and auditors

Comments from ACCA to the Department for Business, Innovation and Skills (BIS), January 2010.

ACCA is pleased to comment on the consultation paper on the above. ACCA is a Recognised Supervisory Body under the Companies Act and as such is an audit authority for the purposes of the current requirements regarding this issue. The comments in this letter have been prepared from two perspectives – firstly our corporate experience of acting as an audit authority and secondly the views expressed to us by members of ACCA who work in audit firms and companies and who have their own direct responsibilities under the current rules. 

General comments

From our position as an audit authority, we would say that there is no discernable benefit to us in receiving details of auditor resignations. In the 18 months of the scheme's operation (July 2008 to December 2009) ACCA has received 511 notifications from firms and 135 notifications from companies (this tends to support the theory set out in the paper that many companies are not complying with their responsibility to notify). This is an average of 35 per month. These forms have to be reviewed, the details entered on a spread sheet which is forwarded to FRRP and BIS (up until now this has been done on a monthly basis but will change to quarterly from January 2010), scanned and stored. 

Of the 500+ notifications received only eight cited circumstances which were considered to be of interest to FRRP and BIS. The great majority of reasons given for cessation are considered to be non-suspicious, e.g. the client company has become insolvent or wishes to take advantage of audit exemption, the firm is giving up audit work, fee disputes, tender not accepted and independence issues. One other issue that BIS might wish to bear in mind in this respect is that, where private companies have dispensed with the AGM, auditors are sometimes unsure as to when their term of office expires. Where they are unsure, this can result in a notification being filed by the auditor simply in order to protect their position. This causes unnecessary work for all concerned and suggests that there is a need for further guidance to be provided to auditors as to their responsibilities in this respect.

As a general point, we very much welcome the initiative to rationalise the current collection of requirements on notifications, which are the result of imposing the recent requirements of the Statutory Audit Directive on top of the pre-existing UK provisions. We believe that the consequence has indeed been to create duplication and unnecessary bureaucracy, which we hope the current exercise will be able to remedy. On the assumption that the requirements of the Directive must be considered non-negotiable, we suggest that the focus of the exercise should be on identifying which of the UK-derived provisions can be safely deleted without removing meaningful protections. Our preference would be, in summary, for a statutory regime which included the following elements in the case of non-major companies:

  • a requirement for all resigning auditors to file a notice of resignation with the company;
  • where the auditor departs mid-term for any reason, he should file with the company a statement of reasons for his departure (to be attached to any notice of resignation);
  • an entitlement for auditors to insist that their statement of reasons be forwarded to members and/or creditors (this should be subject to the current provision for companies to petition the court);
  • a requirement for auditors to copy their statement of reasons to the audit authority;
  • a requirement for the company to do likewise. (While this is clearly duplicatory it is a requirement of the Directive and presumably must be retained); 
  • an entitlement for an auditor who ceases to hold office for any reason, at any time, i) to deposit a statement of concerns with the company which he may then insist be forwarded to members and/or creditors and ii) to  forward that statement to the audit authority if he sees fit;
  • audit authorities should be entitled to pass on information on cessation to audit authorities at their discretion.

Under this formulation there would be no requirement for the auditor or the company to inform Companies House and no standard requirement for notifications to be made the audit authorities except in the case of mid-term departures. The information required to be submitted under the Directive and under section 519 of the Companies Act would be harmonised.

Our comments on specific consultation questions are set out below. Since few of our members are involved in the audit of 'major' companies, we restrict ourselves to commenting on the questions regarding 'non-major' audits.

Question 1: Do you agree that, for non-major audits, the requirements for the statements to be sent to companies, Companies House and the audit authorities should be pared back so that:

a) They do not apply when the auditor leaves office at the end of their term of office?

b) They do not apply in some routine situations where the auditor leaves office during their term?

We agree that, where the Directive does not actually require notifications to be made, consideration should be given to whether current requirements remain necessary. Specifically, we would support the proposal to reduce the circumstances in which auditors are required to notify Companies House. We would even ask whether there should be any statutory requirements in this direction at all.

With respect to the suggestion that notifications not be required to be filed with companies and the audit authorities in some 'routine' situations, we very much sympathise with this on rational grounds – as stated above, most notifications to us are innocuous. However, we are not convinced that it would be consistent with the Directive to make such a change. The recital quoted in the paper appears to be associated specifically with article 38.1 and not article 38.2.  

Question 2: Do you agree that the requirement for the audit authorities to notify the accounting authorities in every case where it receives a statement of an auditor ceasing to hold office can be repealed? 

Yes. The audit authorities should however retain the discretion to pass on information where they consider it may be useful to the accounting authorities in carrying out their functions. 

Question 4a: What uses are you aware are you made of the information required to be provided to Companies House when auditors leave office?

Question 4b: Do you agree that there is scope for removing the requirement for the company to notify Companies House of:

(i) Resolutions for the removal of auditors?

(ii) Resignations of auditors? 

There is no stand-alone requirement for companies to notify Companies House of the name of its auditor. Users who wish to acquire that information can however access it via the company's annual accounts. As far as we are aware there has not been any significant demand on the part of shareholders or other stakeholders for company law to require separate notification. 

Unless there is a positive requirement to inform Companies House of new appointments to Companies House, it is arguably superfluous to require notification of a departure, especially since there is no associated provision to disclose, at the same time, the name of the replacement auditor (if any). As long as safeguards exist to ensure that members and creditors are informed of the concerns held by any departing auditor, and that the audit authorities are informed both of a mid-term departure and of the reasons for it (in the case of end-year departures notification should be solely at the discretion of the former auditor), we believe that there is no additional need for statutory notifications to be made to Companies House.    

Question 5: Do you support the idea of simplifying the information requirements by providing that one statement of reasons by the auditor should be required for the purposes of sending to the company and to the audit authorities?

Yes. The statement required by the Directive should be substituted for the long-standing UK statement. 

Question 6: In conclusion, do you think that the resulting framework

a) is simpler and less burdensome for non-major audits?

b) strikes the right balance between regulation and simplification for major audits?

The proposed changes would in our view be an improvement. As indicated above, however, we would favour going further and removing the requirement to notify Companies House altogether.