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A Consultative Document issued by the
Company Law Review Steering Group

Comments from
The Association of Chartered Certified Accountants

  Executive Summary

• The Association of Chartered Certified Accountants is pleased to have the opportunity to submit its views on this latest consultation exercise within the Company Law Review.
• One of the principles that the Steering Group identifies as guiding its work is ‘Think Small First’. We endorse this approach to the reform of company law. Unfortunately, the consultative document tends to lose its sense of direction in this regard. Rather than setting out a fully coherent statutory framework for smaller companies, it proposes a series of discrete deregulatory measures, some of which are likely to be to the detriment of accountability and business efficiency. We believe that the Steering Group should give renewed consideration to the idea of legislating separately for listed/large companies and SMEs.
• The proposed incorporation in the Companies Act of a statutory restatement of company directors’ responsibilities is welcome. It will clarify and, hopefully, strengthen the law by helping to ensure that directors are aware of their responsibilities.
• We support the proposed retention of the basic rule that directors’ responsibilities are owed to their companies, as represented by the aggregate of their members. We also support the proposals for the adoption of an objective standard of skill and care and for directors to be required to take account of specified stakeholder interests. Adoption of the latter proposal, however, must be on the understanding that directors are not to be bound to accommodate each or even any of the specified factors when making individual decisions and that they should retain the final discretion to determine what is in the best interests of their companies.
• The cost implications of introducing these ‘inclusive’ factors into the schedule of directors’ duties should not be under-estimated, however, particularly in relation to smaller companies, since directors will often feel bound to seek advice as to what issues they should take into account and the appropriate weight they should attach to relevant matters.
• Requiring companies to be mindful of the consequences of their actions for their stakeholders and the wider public interest needs to be supplemented by proportionate but meaningful rules on compliance, disclosure and verification. We support the proposals to introduce a statutory Operating and Financial Review (OFR) and to require (at least) listed companies to report on their policies and performance with regard, inter alia, to environmental and social responsibility issues.
• We find it less consistent with the moves towards ‘inclusive’ corporate responsibilities for the Steering Group to propose that the independent audit for all small companies should be discontinued. The justification given in the document for making this change is, solely, a desire to cut SMEs’ costs, although no figures are quoted or research referred to to support this line of argument; contrary to the impression given in the document, available evidence suggests that the external audit is not a major cost burden for SMEs. We recommend that the small company audit should be retained unless the proposed Independent Professional Review can be framed in such a way as to offer a meaningful level of assurance to shareholders and others, thus becoming a credible alternative to the audit.
• We welcome the steering group’s proposals for the limitation of auditors’ contractual liability and for the clarification of the law with respect to companies’ liability for the negligence, fraud and breach of duty of their directors and officers. The proposals to extend the auditor’s duties in negligence to prospective shareholders and creditors are, however, far too wide. As framed, they would leave the auditor exposed to the possibility of extensive litigation whenever the audited company under-performed. We remain in favour of a system of proportionate liability for auditors.
• The document addresses at length issues relating to corporate governance which are currently dealt with by best practice guidance. We do not consider that a single, integrated Companies Act would be the appropriate vehicle to deal with these issues.
• While the proposals to increase the accountability of companies to their stakeholders and to raise the standard of conduct expected of directors are, in themselves, very welcome, their enactment (as well as the Government’s separate proposals for the law on corporate manslaughter) would impose significant new responsibilities and liabilities on companies, their directors and possibly their auditors. Against this background, we consider that it would be logical and proportionate for the revised statute to impose a limited restriction on access to limited liability status. The correlation between lack of capital and early financial collapse is well documented, most recently in the DTI’s current consultative document on bankruptcy. We believe, therefore, that the imposition of, at least, a minimum capital test would be beneficial from the perspective of businesses and regulators alike. Other business formats, more suited to the needs of very small businesses, should be devised in conjunction with the current Review.

Our comments on specific issues and numbered questions posed by the document are set out on the following pages.

Chapter 3: Corporate Governance: Directors and Officers

We endorse the thrust of the proposals with regard to directors’ responsibilities. The proposed re-statement of responsibilities has the potential to serve a much-needed educational function, while the ‘inclusive’ range of factors of which directors should be aware in the exercise of their decision-making powers is a sensible step, provided that directors continue to enjoy the ultimate power of discretion as to what, in their honest opinion, constitutes the best interests of the company. Given the likelihood of legal arguments about what factors are to be considered, and what weight should be attached to each, the law needs to make clear that directors have this ultimate decision-making authority. On governance issues more generally, we do not consider that the argument is made for the incorporation into statute of rules which are currently laid down, in our view successfully, in statements of good practice.

Shadow Directors

3.1 Any person who determines or contributes to board-level decision-making, either personally or by proxy, should be regarded by the law as being a participator in the governing body of the company. It is arguable that a person who exercises effective control over the acts of de jure directors is a director himself, on the basis that he ‘acts as a director’ by virtue of the instructions that he gives. If the separate category of ‘shadow director’ is to be retained, however, it would be logical for the definition to be extended so as to encompass those who give instructions to any de jure director. All directors owe a duty not to fetter their discretion in relation to company decision-making: any director who routinely accepts instructions from another party is delegating his authority as a director to another party, who needs to be identified and treated as, at least, a shadow director. As regards the scope of an expanded definition of ‘shadow director’, there is no reason why it either should or could be restricted to public companies. In drafting the new definition, however, consideration should be given to clarifying the position of controlling shareholders and holding companies.

Re-Statement of Directors’ Duties

We support the proposal to incorporate into the Act a statutory re-statement of directors’ duties, and to include within that statement ‘inclusive’ elements and an objective standard of skill and care.

3.2 (a) We agree with the suggested heading and preamble.

(b) Whether or not the term ‘fiduciary’ is used in the re-statement, aspects of the director’s duties will remain fiduciary in character. Provided the fiduciary nature of the director’s functions are covered in the re-statement, the term itself need not be used.

3.3 If, as we believe to be the case, the re-statement is to have an educational purpose, it would be desirable to stress that directors are required to act ‘honestly’.

3.4 We believe the proper purpose rule is adequately addressed in the draft.

3.5 We agree with the draft of paragraph 1(a), though it would be preferable, in that and the next sub-paragraph, to substitute ‘act’ for ‘exercise his powers’.

3.6-3.8 We agree with the approach taken in paragraph 1(b).

3.9 We endorse the proposal to require directors to take into account a range of factors which are considered to be relevant to good quality decision-making. It should be made clear however, given the potential for the individual factors discussed to conflict with each other, that it is for the directors to decide what weight to attach to individual factors. In this light, we suggest that the words ‘in particular’ be removed from the opening sentence of paragraph 1(c) since they suggest that the matters set out in the following three sub-paragraphs should be given prominence.

Of the matters set out in sub-paragraphs aa) -cc), we would object only to the inclusion of the reference to ‘communities affected’ [by the board’s decisions]. As drafted, this reference appears to us to be too wide and unspecific and leaves directors’ actions open to unreasonable challenges. The other proposals in paragraph 1(c), namely the requirements to take account of the interests of, inter alia, employees, suppliers, customers, the environment and the company’s reputation, are sufficient to ensure that an adequate spread of stakeholder interests are taken into account in the determination of the best interests of the company.

We would also query whether it is correct to refer in these sub-paragraphs to ‘the company’s need’ [to maintain a reputation for high standards of business conduct etc]. The text should not, we suggest, presume what a company’s actual needs are. It would be more proper for, e.g., sub-paragraph cc) to simply read ‘the maintenance of the company’s reputation for high standards of business conduct’.

3.10 We agree with the proposed treatment of conflict of interest issues. The content of paragraphs 3(a) and (b) address matters that are of great significance but which are often not understood, particularly by directors of small and close companies. We would point out that, very often, it falls to a company’s auditor to bring the attention of its directors to the legality or otherwise of such issues. If, as the Steering Group proposes (and the Government supports) the great majority of limited companies in the UK do not in future appoint auditors, there will be no external monitoring of whether directors comply with these important requirements.

3.11 We believe that the re-statement must include a reference to directors’ duties to their company’s creditors. Although creditors are mentioned in paragraph 1 c) aa) of the draft, this is only as one party among several whose interests are to be taken into account by directors in acting on behalf of the company. When a company is in a state of technical insolvency however, creditors effectively supplant the company’s shareholders as the company’s primary stakeholder. In view of this, there needs to be separate acknowledgement of the special situation that exists when a company becomes insolvent. It is not sufficient to point directors in the direction of individual provisions of the Insolvency Act.

3.13 We believe that the effect of the current s310 should be preserved.

3.14 Yes.

3.15 If the ‘circumstances’ to which the court is to refer under s727 are to encompass the new inclusive duty and the objective standard of skill and care, then we would agree that the current criterion of ‘reasonableness’ can be deleted.

3.16 (a) Yes.

(b) We believe it would be helpful, in terms of making company law more accessible, if the Companies Act were to set out the circumstances in which ratification is possible and the procedure companies should follow in order to undertake ratification.

(c) We believe that the Companies Act should make it clear that shareholders should not have the power to ratify misfeasance by directors when their company is in a state of technical insolvency.

Part X of Companies Act 1985

Our responses to individual proposals made under 3.18 are set out below.

(e) The proposal as regards s317 is problematic since it confuses criteria of subjectivity and objectivity. A director should be expected to disclose interests which are material in the context of the company.

g) A requirement for a director to disclose his interests only to those directors who attend a particular meeting would leave too much scope for abuse and dispute. Any qualifying disclosure by a director should be made to all other directors.

h) We believe that there is merit in the Law Commissions’ call for a register of directors’ interests. If there is to be a requirement for directors to disclose their interests, it would follow logically that there should be a formal record of all declared interests.

i) Yes.

k) We agree.

l) We do not consider that it would be justifiable to protect from disclosure individual directors’ remuneration packages.

n) Yes.

o) Yes.

p) We doubt whether it would be practical to for large companies to obtain the approval of shareholders at general meetings for specific credit transactions. If this line is pursued, companies should be expected to obtain a general authorisation to enter into such transactions.

Liability to Third Parties

3.19 We agree with the proposals.

3.20 The principle should be set out in statute.

Requirements for Directors’ Training etc

3.21 The Combined Code currently contains a requirement for directors to receive training on initial appointment and subsequently as necessary. This rule could be strengthened by a disclosure requirement in the Code.

3.22 No

3.23 Yes.

The Combined Code

3.24 We are not aware of any evidence to the effect that corporate governance guidance has positively assisted UK companies to generate wealth. This, we believe, is not surprising since the focus of best practice guidance from Cadbury to the Combined Code has been on questions of accountability rather than on its potential for stimulating corporate profitability.

Non-Executive Directors (NEDs)

We see difficulties in making express new statutory provision for non-executive directors, for three reasons. First, companies legislation at present recognises only one category of director. Subject to internal arrangements made by individual companies, all are deemed by the law to have essentially similar responsibilities and powers. Making specific legal provision for NEDs would risk creating two tiers of directors and, effectively, a two-tier board. We do not view this as desirable, preferring the flexibility which is afforded by non-statutory best practice guidance. Second, we consider that the importance attached to the role of the NED by best practice guidance has been substantially heeded by listed companies, and recommendations regarding numbers of NEDs and their role have become widely understood and implemented. Third, laying down rules for NEDs in a single statute would be inappropriate and impractical for smaller companies. While we fully accept that NEDs have much to offer SMEs, the latter should not be compelled to appoint NEDs; where they choose to do so, they should not be restricted as to the exact role that the NED performs for them. On these grounds, we would not favour bringing in statutory rules for NEDs.

3.25 We favour keeping material dealing with the responsibilties of NEDs within best practice guidance.

3.30 Any decision on whether to have a majority of NEDs should be a matter for the individual company in the light of the Combined Code’s call for a ‘balance’ between executive and non-executive directors.

3.31 Again, we do not see that it would be appropriate for the Companies Act to require that each individual board should be comprised of a majority of ‘independent’ NEDs, however that term is defined.

3.33 As stated above, we feel that best practice guidance is the appropriate vehicle for provisions of this kind.

3.34 No. We do not believe that it is necessarily good practice for nomination committees to be composed exclusively of NEDs. We would argue that the experience and expertise of executive directors will, as a rule, be useful in the nomination process.

3.35 We agree with the suggestion that factors that could conceivably have a bearing on NEDs’ independence should be brought to the attention of shareholders. Any requirement on this point should be left to best practice guidance.

3.36 There is already a firm recommendation in the Combined Code against combining the posts of chairman and chief executive. This, we consider, is sufficient for now.

3.37 We do not favour imposing a hard and fast rule on this matter. Whether or not it is desirable for the chairman to be a NED, or even an independent NED, will depend largely on the size and complexity of the company.

3.38 We support the current Combined Code regime.

3.39 We favour retention of the current threshold.

3.40 No.

3.41 (a) Yes.

(b) No.

3.42 We believe that there is at least a suspicion that institutional investors may be inhibited from exercising the often substantial shareholder influence at their disposal for fear of losing or failing to win business from the investee company. One means of countering this problem could be to legislate to the effect that a shareholder should have the right to suffer no detrimental or prejudicial action by the company as the direct result of the lawful exercise of his/her/its rights.

3.43 (a) Yes.

(b) Yes.

Chapter 4: Shares and Shareholders

Rights of Shareholders

4.1 In principle, our view is that, if beneficial shareholders wish to be treated as members of their company, with all the membership rights that that status conveys, they should ensure that they are listed as members on the company’s register. If a shareholder does not wish to reveal his true identity on the company’s register and that of Companies House, then there is a strong argument for saying that he should not expect to demand full membership rights by law. However, the introduction of CREST has led to a situation where increasing numbers of non-institutional investors are shareholders without full membership rights. This state of affairs can be expected to continue and grow and we acknowledge the potential this has for the quality of corporate governance in the UK, particularly when the great bulk of UK equity is held by institutions.

We do not, however, believe that companies should be obliged by law to recognise beneficial interests in shares - many shareholders clearly do not wish their details to be made known - or to compile, effectively, two lists of members. We would instead favour giving companies the right, should they wish to exercise it, to correspond directly with beneficial shareholders. There may be scope here for the development of best practice on the part of custodians and nominees with regard to communication with beneficiaries.

4.2 We endorse the proposals.

General Meetings

4.3 We support the conclusions, which to a great extent coincide with the recommendations we made in our submission to consultative document 3. As we state in our response to question 5.2, however, we would query the practicality of aligning the AGM with the accounts filing deadline if the latter were reduced to 90 days (for public companies).

Action by Minority Shareholders

4.4 We support the proposals.

4.5 In our view, restricting unfair prejudice actions to the range of situations identified in O’Neill v Phillips is likely to deny the rights of shareholders in many cases where unfairly prejudicial conduct has occurred. As one example, minority shareholders in a subsidiary company could not, it seems, now seek redress under s459 where their company was being operated exclusively in the interests of the parent company, even if the board’s action was undoubtedly unfair and prejudicial. We would, therefore, favour a less restricted scope for unfair prejudice actions.

4.6 (a) With reference to the question posed in (a), we do not believe it to be feasible to provide that the right to bring a derivative action should depend on whether the views of the minority are the best available determinant of the best interests of the company. As regards the argument presented in paras 4.127-4.128, while we do not dispute that derivative actions should be possible in relation to breaches of the director’s duty of skill and care, this could well have the effect of discouraging risk-taking in the board-level decision-making process and, quite possibly, force companies to seek legal advice in many cases. The implications of this for smaller companies could be substantial, calling into question the merit of the proposals put foward elsewhere in the document to de-regulate small companies by freeing them from the obligation to appoint a company secretary and auditor.

4.9 Yes.

4.10 We are aware that institutional investors do not favour multiple voting rights but do not see it necessary for the law to restrict their creation. Where they do exist, there needs to be full disclosure.

4.11 (a) Yes, as a deterrent measure.

(b) Yes.

4.12 We see no reason to change the law relating to returns of allotments.

4.14 We believe that, where directors have refused to register a transfer of shares, they should be required to give their reasons for doing so to the transferee.

4.15 A trustee in bankruptcy should have the right to insist that he be registered as the owner of shares once they have vested in him. A private company should, additionally, have the right to buy the shares back at a fair price.

4.16 Any shorter period than three years would be unsatisfactory for the purposes of s212.

Chapter 5: Corporate Governance: Reporting and Accounting

We support the steering group’s objective of making financial reporting more informative and relevant. The new emphasis on shorter publication deadlines and electronic communication is welcome, as is the acknowledgement of the importance of the audit function in the proper financial management of companies. With regard to the auditor’s duty of care, we feel that the proposals go beyond what is reasonable even in the light of the concessions proposed on corporate and contractual liability. Extending the auditor’s duty of care to those who are not shareholders or creditors of the company at the time of the audit is not, we believe, a justifiable response to the issue of accountability. Increasing the exposure of the auditor to the level suggested by the Steering Group would, in our view, decrease the preparedness of auditors to review information in the statutory prelims and the OFR.

The Framework

5.1 (a) The basic framework for company accounting and reporting must remain statutory.

(b) Yes.

Preparation and Filing Deadlines

5.2 (a) We endorse the proposal for the Companies Act to require listed companies to publish a statutory statement of preliminary results, to be prepared and published within 70 days of the year end. In our view, this will help to enhance the credibility of financial reporting. The recommendation that companies be additionally mandated to post this statement (and its full accounts) on a web site, however, needs further consideration. We consider that technological change is likely to make an adequate long-term statutory definition of ‘web site’ problematical. The compulsion implied on this point also conflicts with questions raised later on in the document about whether electronic transmission should be made compulsory. In view of this, we feel that any recommendation in this area may be better dealt with by a code of practice. Incidentally, while we have no objection in principle to the adoption of a statutory regime for listed company reporting, it will be necessary to define exactly what ‘listed’ means in this case, i.e. whether or not the intention is to encompass only companies with a full and UK listing.

b) We do not agree with the proposal that the statutory preliminary statement should be the statement that is automatically distributed to shareholders. The information received by members should be either the company’s full, true and fair accounts or a document based on them. Accordingly, we recommend the retention of the summary financial statement as an option for shareholders.

(c) The 90 day deadline proposed for filing the annual report and accounts is feasible in itself. But the parallel proposal that the AGM be held within the same period would be difficult to comply with in practice. The necessity for companies to print and distribute large numbers of copies of the annual report and to comply with obligations regarding the giving of notice mean together that it would in practice be very difficult for them to meet that target. In view of this, we believe that the 90 day period will need to be extended to 100 days at least.

5.3 No. Companies should feel free to amplify the statutory contents of their annual report as they see fit.

5.4 Yes.

5.5 Yes.

5.6 (a) We agree with the proposed extension of the basic listed company regime to large unlisted companies. However, we see no reason why such companies should be made subject to the 90-day filing and publication rule. A more reasonable deadline for unlisted companies would be 5 months.

(b) Yes.

5.7 We agree, subject to our comments in response to 5.6(a) above.

5.8 (a) In principle, we are attracted to the idea of delegating the rules on content and format of accounts to the Accounting Standards Board (ASB). On balance however, we favour the retention of the current statute-based framework, for two reasons. Firstly, ASB’s remit is to issue guidance for adoption in respect of any set of financial statements which are intended to give a true and fair view: its activities, as they are currently structured, are not geared exclusively to serving the needs of limited companies. The assumption of a quasi-statutory role in respect of company law would cause significant problems for ASB in maintaining a coherent canon of GAAP. Secondly, ASB has, on a number of occasions, issued guidance which appears to conflict with strict legal requirements. A recent example of this is FRS 10: Accounting for Goodwill, in which ASB departs from the 4th Directive rule that fixed assets must always be depreciated. In doing this, ASB has relied on the statutory true and fair override. We doubt whether ASB itself would be comfortable in assuming a delegated statutory role of the kind suggested. We therefore recommend the retention in the Companies Act of the rules on form and content of accounts.

(c) (i) Yes, although the offence should relate only to the publication of misleading accounts, not their preparation.

(ii) There is no need to strengthen the powers of the Secretary of State and the FRRP in relation to the correction of accounts. The FRRP has, so far, been able to achieve its goals without, yet, going to court.

5.9 Yes.

5.10 (a) Yes.

(b) The Steering Group presents the OFR as the primary vehicle through which the listed company is to fulfil the overriding goal of reporting in a transparent and ‘inclusive’ way on its activities. We support the development of a new statement of this kind. Given this remit, and the explicit reference in the proposed statement of directors’ responsibilities to the recognition of stakeholder interests, it is correct that the OFR should feature all information, in appropriate depth, that the company’s identifiable stakeholders can be expected to find useful and which is not likely to be found elsewhere in the annual report.

If the OFR is adopted on these terms, we believe that the Companies Act should lay down, at least, its core elements. They should include the fair review of the company’s performance, the description of the company’s purpose and strategy and statements of the company’s policy and performance on environmental and social responsibility issues. Further detail, and other disclosure items, should be the subject of supplementary recommendation by ASB. While we believe that it is essential that at least listed companies should be required to disclose new information on environmental and social responsibility issues, we would be content for this information to be reported in a separate ‘accountability’-focused statement rather than in an OFR which, at least at present, is intended to give an understanding of the dynamics underpinning performance in a strictly financial sense.

We believe that, whether disclosed in the OFR or elsewhere, the Review offers the opportunity for significant progress to be made in the area of environmental and social responsibility reporting. The Government has already reflected on the variable extent and quality of environmental reports by raising the possibility of making environment-related disclosures mandatory. We agree that this approach is likely to be necessary. While private sector encouragement for companies to address and report on theses issues has had considerable success in recent years terms of influencing corporate disclosure policy, it has still not attained the depth and spread that we think it should. We believe therefore that, as far as listed companies at least are concerned, there is now sufficient recognition of the economic and political importance of these issues, to companies and their stakeholders alike, for environmental and social responsibility disclosures to be made mandatory, and not conditional on a subjective assessment by the directors of ‘materiality’.

We set out below a suggested list of core disclosure items, which could either appear in a revised Companies Act, in secondary legislation or in an accounting standard. They constitute a synthesis of the recommendations made by ACCA in its report to the UN UNCTAD working group of experts on international standards of accounting and reporting (ISAR) in February 1998, and by PIRC (also 1998) flowing from the latter’s survey of the social and environmental disclosure practices of the FTSE 350 companies. There is considerable commonality between these specific disclosure recommendations and the general criteria used by Business in the Environment in its annual ranking of “corporate environmental engagement”.

• does the reporting entity have an environmental policy?
• who – at board level – has responsibility for environmental issues?
• a general description of what management views as the key environmental impacts of the organisation
• does the organisation have a formal environmental management system (EMS)?
• is this EMS accredited in any way?
• quantitative data regarding fines, penalties, reportable incidents, complaints etc and how these have been resolved
• a general statement that there are no undisclosed environmental liabilities and that existing environmental remediation provisions (if any) are adequate
• a cross-reference to any more detailed environmental communications (separate reports, web sites etc)

(These disclosures should be viewed as being additional to those disclosures already required by generally accepted accounting practice (“UK GAAP”)).

5.13/5.14 We refer to our response to question 5.28 below.

5.15 Yes.

5.16 We believe that, where an intermediate GB-based holding company has a parent company that prepares an OFR, the GB company should be exempt from preparing its own. If the ultimate parent does not prepare an OFR, then the GB company should be required to prepare its own.

5.17 (a) Yes.

(b) Yes.

5.18 Yes.

5.20 We suggest the issue of standard electronic formats needs to given further consideration.

5.21 No.

Non-Statutory Information

5.27 We do not believe that there should be a statutory requirement for companies to provide an auditor’s report concerning the consistency of information published with their annual reports. The reference in paragraph 5.131 to “verification of non-statutory information” implies a more detailed examination than would be necessary to check for consistency with information that had been audited. We are concerned that a statutory requirement may be unduly onerous. We consider that a professional requirement, developed through the Auditing Practices Board, will be both more appropriate and flexible enough to cover changes in reporting practice. It follows that we do not believe there should be a similar obligation for statutory prelims and/or the SFS.

The Auditor and the OFR

5.28 (a) This is a practical question. The response of auditors will depend on the risks involved and how the words ‘properly prepared’ are to be interpreted in relation to the Operating and Financial Review (OFR) (paragraph 5.140, last bullet point). The Statement issued by the Accounting Standards Board in 1993 states in an introductory paragraph that the OFR should “give users of the annual report a more consistent foundation on which to make investment decisions regarding the company”. Paragraphs 5.146 to 5.155 discuss proposals for extending the duty of care owed by the statutory auditor to persons other than the shareholders as a body. With this context in mind, we do not consider that auditors will wish to take on the new role proposed in relation to the OFR. On the other hand, if auditors are required simply to report on the consistency of the OFR with other, audited information, and to report only by exception, they may accept the proposed extension of their role. Such a requirement would be similar to the provisions of section 235, Companies Act 1985.

b) If a new role in respect of the OFR is imposed on auditors, we agree that a body such as the Auditing Practices Board (APB) should have the power to lay down the standards by which the work is to be performed.

c) (i) Yes – the standards making body should be able to provide ‘safe harbour’ rules.

(ii) We are not sure what is meant by delegation of responsibility of auditing aspects of the OFR. It is normal practice for auditors to include specialists such as engineers or environmental experts in their teams to cover aspects of the evidence gathering process where the auditors do not have the necessary training. SAS 520: Using the Work of an Expert, sets out the basic principles and essential procedures which apply to such arrangements. What should not be allowed, is the delegation of responsibility for the report that is eventually issued, unless the auditor and the expert issue separate reports in which their respective responsibilities are clearly set out.

5.29 (a) We do not agree that the auditors’ duties should be so extended, for the reasons that we have given in the first part of our response to question 5.28 (a) above. A review of the new OFR and statutory prelims for accuracy, consistency and compliance could impose an unacceptable burden on the auditor because it is open-ended. Similarly, we do not consider that a statutory obligation to review the ‘surround’ of the full annual report and the statutory prelims for consistency with the statutory material is appropriate.

b) No. The riders offer no protection to the auditors, who could as a result be exposed to extensive litigation every time an audit client under-performed in the market.

c) Contractual limitation should be allowed. In practice, however, shareholders may not allow a limit to be set unless such a limit will be in their interests, for example by resulting in a lower audit fee, or at least preventing a large increase in fees as the auditor takes steps to reduce audit risk. A system of full proportionate liability would be preferable.

d) The problem with empowering APB to set or adopt guidelines as to the level and mode of limitation of liability is that APB may not be seen by critics of the profession as sufficiently independent, even after the new regulatory structure is introduced later this year. Statutory provision would be better, as being seen to be independent of the accountancy profession.

e) Yes.

f) Yes.

g) Yes.

h) Yes.

Chapter 7: Small and Private Companies: Proposed Simplifications

Notice

7.1 We believe that, as a rule, 14 days may not be sufficient in all cases to ensure that adequate notice is given to all members. We suggest that the 21 day period with respect to AGMs be retained. Those companies with few members will still be able to circumvent the notice requirement should they wish.

Written Resolutions

7.2 The present requirement for unanimity in written resolutions provides an important defence for minorities and it should be retained. If a figure less than unanimity was to be permitted, the majority required should be the majority which would be required to pass the resolution concerned at a formal meeting. We suggest that this figure should be calculated by reference to the total of votes eligible to be cast.

7.3 No: the auditors should be given notice of all resolutions that are being considered by the company.

Capital Maintenance

7.4 Yes.

7.5 We do not believe that the case is made for the abolition of the existing requirement for the directors’ declaration of solvency under s155 to be supported by a report from the company’s auditors. Although the existing provisions are not very strong, they do provide some defence against the erosion of capital of smaller companies. If the statutory audit is to be abolished for ‘small’ companies - the expanded definition will encompass companies of material size - , then there should still be some form of external review of the directors’ statement.

7.6 Yes.

Authority to Allot Shares

7.7 No. Shareholder authorisation should still be allowed for directors to allot shares.

Pre-Emption

7.10 Yes.

The Company Secretary

7.11 The current requirement for all companies to have a secretary is at least a gesture towards the encouragement of good standards of corporate administration. We favour the retention of the current requirement, in the interests of responsible governance. In the event that the blanket requirement for companies to have a secretary was discontinued, the criterion for exemption should be the same as that proposed for determining exemption from the statutory audit, i.e. the small company threshold. We would also suggest that, where a company was exempt from the requirement to appoint a secretary, it should be required to have at least two directors.

7.12 In respect of all cases where companies are required to have a secretary, the law should require the secretary to be appropriately qualified. At the same time, the law should correct the anomaly in the present Companies Act whereby there is no reference to the secretary’s function and duties. The Steering Group has already suggested clarifying the law in the interests of all parties by incorporating a statutory statement of directors’ duties. A similar course should be adopted with regard to the secretary by incorporating within the Act a list of functions to be performed by the secretary. An obvious new potential role for the company secretary is to ensure that directors are mindful of their statutory responsibilities, including their duties to take stakeholder interests into account. A statutory list of functions would also serve as a reference point for smaller private companies, whether or not the current requirement to appoint a secretary was retained.

Part X

7.13 No.

7.14 Where there is a single director, the requirement to disclose an interest in a contract or a proposed contract to the board should be replaced by a requirement to record the interest concerned in writing. In respect of all directors, there should be a requirement to disclose interests to shareholders (where the interests concerned are not identified as related party transactions in the notes to the company’s accounts).

Arbitration

7.15 We would encourage the recourse by companies to arbitration procedures in the resolution of disputes. The Companies Act is not, however, the appropriate vehicle for regulating matters of arbitration. Cost sanctions in particular should be a matter for the courts and not legislation.

Model Constitution

7.19 We support, in principle, the proposal to devise a new model constitution tailored to the requirements of small private companies. We have the following comments on individual elements of this:

•

• Reg 2 – As already stated, we do not think it would be beneficial to disapply s80 to small companies so we favour the substantial retention of the current reg 2.
• Reg 12-22 – If the model constitution is to delete all references to partly-paid shares, then there will need to be a statutory requirement for all shares in companies covered by the constitution to be fully paid.
• Reg 38 – As already stated, we believe that 14 days notice is, as a rule, insufficient for general meetings.
• Reg 42/43 – We query whether it is practical for the Companies Act to apply, by default, a provision of a constitution which is designed only for a particular stratum of companies.
• Reg 50 – We are not aware of any problem with the adoption by Table A of the provision whereby the chairman has a casting vote, and would favour its retention.
• Reg 64 – As already stated, we believe that, if a company does not appoint a company secretary, it should be required to have at least two directors. Provision for this should be made in any revision to reg 64.
• Reg 73-80 – Deletion of the requirement for directors of small private companies to retire by rotation would be particularly welcome.
• Reg 87 – We believe it to be good practice that non-executive directors should not receive any additional financial benefit apart from the fees they are paid directly for their services. This principle should hold true for small as well as large companies. Accordingly, there should be no empowerment for companies to pay pensions to their retired non-executive directors.
• Reg 115 – This provision needs to be up-dated to take into account of the E-Commerce Order.

Small Private Companies

7.20 Yes.

7.21 We do not favour allowing private companies to pass written resolutions by a lesser majority than unanimity and would not support its adoption as the norm.

7.22 No.

Chapter 8: Reports and Accounts of Small Companies

The process of consultation on this Chapter has been undermined by the decision announced by the Government in April to implement the proposals of the Steering Group with regard to the audit exemption regime for smaller companies. The document presents no evidence to explain why the steering group’s preference for increasing the audit exemption threshold to the maximum allowed under the EU Fourth Directive would serve the interests of small companies themselves or their stakeholders: on the contrary, surveys have shown that the cost of the audit, the sole criterion presented for justifying abolition, is not a major concern of the companies affected. The dismissal in the document of any value that the audit might have for stakeholders does not sit easily with the emphasis given elsewhere of the importance of companies acting in accordance with those external interests. Particularly in view of the proposed expansion of directors’ responsibilities of skill and care, we regret that the auditor’s assurance as to the truth and fairness and proper preparation of the annual accounts is not acknowledged in the document as being a practically useful business tool and safeguard for directors and their company’s stakeholders. The proportion of directors who understand the concept of true and fair accounting is very small, and we do not believe that allowing the great majority of companies to prepare unaudited true and fair accounts, particularly when the proposed change is justified on unsubstantiated grounds, is reasonable. We urge that the small company audit be retained until such time as the proposed Independent Professional Review is developed into a procedure which is likely to enjoy the confidence of accountants, businesspeople and stakeholders alike.

Our responses to the questions posed on this Chapter are as follows:

8.1 (a) There is already a distinction between the accounting requirements of large and small companies, by virtue of Schedule 8 of the Companies Act and the FRSSE. As for the upgrade to the maximum Fourth Directive level, the decision appears already to have been taken.

(b) We have reservations about the proposal to raise the audit exemption turnover threshold to £1m, particularly given the brief and disputable reasoning for the proposals with regard to audit set out in para 8.42. We recognise, however, that this proposal is already being implemented by the DTI so is a fait accompli.

(c) As with the previous question, the Government has already pre-empted consultation on its subject matter by opening the way for an Independent Professional Review for companies in the £1m-4.8m turnover band. This seems to us to be precipitate action, particularly since the IPR has so far only been sketched out in outline terms and work on developing it into a credible procedure is only just starting. We would refer back to the benefits of the external audit as listed by the Steering Group in para 5.129 - viz the audit is fundamental in ensuring truth and comprehensiveness in reporting and in ensuring the accountability of management; it also encourages good corporate governance. It appears to us incongruous in principle that the the benefits of the audit can be deemed to be of ‘fundamental’ significance to companies in general terms but dismissed, in the case of smaller companies, on the basis that those same benefits are outweighed by costs, an argument which is not supported in the document by any evidence.

We do not regard it as good policy to allow smaller companies to reduce their direct compliance costs at the expense of a reduction in the quality and reliability of published accounting information, in accountability and in standards of corporate governance overall. Neither will it be in the interests of directors of smaller companies for the law to give any encouragement to a further deterioration of standards in these respects. The Steering Group is proposing elsewhere in the document that directors of all companies should be judged in accordance with an objective standard of skill and care. It is also proposed that derivative actions by shareholders should be permitted with regard to breaches of the duty of skill and care. If these changes are introduced, directors will in fact assume a significantly increased responsibility to ensure that their company’s accounts comply with the Act and give a true and fair view. In developing the IPR, its drafters must be allowed to devise a procedure that offers the prospect of a meaningful level of assurance and should not be constrained by a remit to keep costs to a bare minimum.

(d) The proposal to legislate for a new format for small company accounts does not accord with the proposal elsewhere in the document to defer responsibility for form and content of accounts to ASB. As we said in response to question 5.8(a), however, we would prefer these rules to be retained within the Companies Act. The draft format in Annex E appears to us to be generally satisfactory, apart from the omission, from the p&l account, of any provision for exceptional items.

(e) We support the proposal to reduce the accounts filing period from 10 to 7 months. We sympathise with the suggestion that the deadline might be reduced even further, to 5 months from the balance sheet date, but that is likely to prove difficult in practice for small companies to meet. For this reason we consider that 7 months would be a reasonable figure.

(f) Yes. Abbreviated accounts currently provide little meaningful, usable information and complicate the reporting framework.

(g) Yes.

(h) Yes.

Chapter 9: Alternative Vehicles and Access to Limited Liability

Charitable Companies

9.1 We agree that the Review is a suitable point to consider the position of charitable companies. We do not believe that the present law has presented any great difficulties to charities but, should certain of the proposals in the consultative document - for example those with regard to directors’ duties - be implemented, it would appear to be appropriate to consider an alternative structure for charities that is more suited to their distinct character. The title ‘charitable incorporated institution’ appears to us, though, rather cumbersome: we suggest ‘incorporated charity’ instead.

9.2 Yes.

9.3 We suggest it would assist the objective of creating a simple regulatory regime to prescribe that charities that wish to incorporate should adopt the new ‘incorporated charity’ format.

9.4 If it can be demonstrated, in the course of assessing the merits of any new regime, that the new format would be more appropriate to the needs of incorporated charities, then we would favour requiring existing charitable companies to adopt the new format. There would need to be a transitional period but, in the interests of regulatory simplicity, we believe this should be kept reasonably short.

Access to Limited Liability

While the Steering Group dismisses the case for imposing any restrictions on access to limited liability status, we believe that this policy should be reconsidered. While it is reasonable for the Group to argue in favour of high standards of governance and accountability in the case of substantial, well-structured companies, it is more difficult to sustain this in the case of micro companies. We believe that, rather than pursuing the large-scale de-regulation of the small company sector, the better approach would be to encourage very small businesses to adopt an alternative format more suited to their needs.

Chapter 10: Registration and Information Provisions

Information Held by Companies

10.1 (a) Yes.

(b) Yes.

10.2 (a) We believe that companies should be entitled to levy a commercial charge for the provision of a copy of its register.

(b) Yes.

10.3 (a) Yes.

(b) Yes.

(c) Yes.

10.4 (a) & (b) Yes: both are officers of the company and their personal details could be prove useful information to liquidators and prosecuting authorities.

10.5 No. This would infringe on directors’ delegated rights of management and stewardship.

10.6 Yes.

Information Held by Companies House

10.7 (a) & (b) No. We believe that there is increasing and justified concern among many directors that they are or may be the subject of personal attention by elements in society who are hostile to their companies’ activities. Even notwithstanding this state of affairs, we do not believe that the public interest warrants directors’ or secretaries’ home addresses being published. Provided directors’ personal details are available on the company’s own register, and are thereby available to those with a legitimate interest in the information, there should be no need for Companies House to record and publish it. We do, nonetheless, see a stakeholder interest in the indication, on the company’s file, of the country of residence of a director, if other than the UK.

10.8 We agree that the relevant rules in England and Scotland should be harmonised.

10.9 (a) We do not consider that the proposal put forward is a meaningful deregulation measure. Only a small minority of private companies has more than 20 shareholders, so the proposal would not make any significant impact on corporate administration.

(b) We do not believe that public companies experience any difficulty with the current arrangements with regard to disclosure of shareholdings.

10.10 (a) We do not consider that any benefit to third parties would justify the cost of disclosing details of a company’s public liability insurance policy. We believe that the objective would be better pursued by widening the scope of the current voluntary Code in respect of employers’ liability policies. This would have the added advantage of encompassing all employers, not solely corporate bodies.

10.11 We agree that the information that is carried in the Gazette should be made more accessible. Any new medium chosen to carry the information should be given appropriate publicity.

10.12 Yes.

10.13 Yes.

10.15 Yes.

10.16 We agree that it is desirable to address abuses of the registration process. The Registrar should have the power to commence proceedings on this ground.

10.17 Yes.

10.18 Yes.

10.19 The period should be five years, subject to court discretion to allow a valid older application.

10.20 As stated earlier, we favour the deletion of the requirement for directors to lodge details of their residential addresses.

10.21 Yes.

10.22 Given that, where a company is struck off the register it is no longer subject to the scope of the late filing regime as it is currently set out, we believe that the correct approach would be to levy a restoration fee rather than later filing penalties.

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