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The White Paper issued by the Department of Trade and Industry

Comments from ACCA
November 2002

Executive Summary

1. The Association of Chartered Certified Accountants (ACCA) is pleased to have the opportunity to comment on the DTI's White Paper on Modernising Company Law.
   
   
2. The new powers which are proposed in the White Paper to strengthen the information-gathering powers available to the auditor are welcome. In the listed company context, we would like to see further reinforcement of the auditor's independent position in the overall framework of corporate governance. This should happen by giving to the company's audit committee specific responsibilities and powers, including powers to propose audit appointments to shareholders on behalf of the board, agree audit fees and approve the provision of any non-audit services.
   
   
3. ACCA also welcomes the introduction of a minimum standard of skill and care for company directors and the attribution to them of specific responsibilities with regard to their companies' stakeholders. We consider that the enhanced standard of skill will have important consequences for the level of compliance among company directors with their statutory and other responsibilities, though if it contains no mention of directors' duties to their companies' creditors, the code will be incomplete in a vital respect.
   
   
4. The individual clauses appear to have been drafted in a deliberately informal style which will help to make the forthcoming Companies Bill more accessible and less needlessly complex than the current legislation. We support the approach taken with respect to the general construction of the Bill, which is to focus attention on the 99% of companies which are small, private and closely-held. In reducing compliance obligations, however, there must remain a clear distinction between the limited company and the unincorporated body.
   
   
5. We support the proposed changes to the framework of financial reporting, including the introduction of a statutory cash flow statement, the abolition of abbreviated accounts and the delegation of rule-making power to the Accounting Standards Board (ASB) or its successor body.
   
   
6. The statutory Operating & Financial Review (OFR) for large companies has great potential as a vehicle for enabling users to acquire a more rounded picture of the company's past and prospective financial position. To achieve the statement's full potential, however, the legislation must do more to acknowledge that a wider range of stakeholders than just the company's members are likely to have an interest in the information. Apart from the various interested stakeholder groups themselves, market analysts are increasingly placing great importance on matters such as companies' corporate governance policies and practices and sustainability and 'social' issues. Rather than leave the disclosure of environmental and social information to the potentially arbitrary discretion of management, the statutory OFR should take the lead in recognising the integral importance of these matters and require disclosure.
   
   
7. While companies legislation should permit the use of alternative technology, its use for statutory communications between companies and their members should be subject to express consent on both sides. We are not comfortable with the proposal that the physical certificate of incorporation be replaced with an entry on an electronic register; we consider that the physical certificate still offers positive benefits to the company and to others.
   
   
8. The White Paper proposes to exempt all private companies from the requirement to appoint company secretaries. Although the 'typical' private company is likely to be small and closely-held, many private companies share the characteristics of listed companies. Abolition of the statutory secretarial role in the private company sector would, we suspect, undermine the legal and effective position of secretaries in those private companies which choose to retain them. Abolition would not, in our view, achieve any net deregulatory benefit since the work currently associated with the post of secretary will still need to be performed - current concern over issues such as fraud and money-laundering make it likely that more, rather than less, secretarial-type work will be required of private companies in the future. Rather than downgrade the significance of the role of secretary across the whole private company sector, we consider that the DTI should consider anew the logic of total abolition of this post among private companies.
   
   
9. Our comments on the numbered consultation questions posed in the White Paper are set out on the following pages. The Appendix sets out the principal findings of a survey which ACCA conducted in October 2002; the survey sought the views of 500 ACCA members working in small companies in the UK on relevant issues raised by the White Paper.

Specific Comments

Directors' duties

Q1 (i) We consider that the draft statement of principles is generally clear and authoritative. We query, however, the use of 'Notes' within the statement. In our view, the use of these 'Notes' risks provoking uncertainty about the status of their contents: this is particularly so with respect to the 'stakeholder'-related factors set out in principle 2, where it might be construed that the need to take those factors into account is not to be an integral feature of the duty to promote the company's objectives. If the contents of the Notes are to constitute an essential part of the overall statement, as we understood was the intention, this should be made clear. We suggest, therefore, that the separate presentation of material in 'Notes' be dropped.

Also, in affirming current principles, the statement uses technical terms such as 'proper purpose' and 'opportunity of the company'. If the statement is to succeed in its mission to 'educate' directors about their responsibilities, it is essential that separate guidance be given on such terms.

(ii) Yes.

Q2 Given that the draft statement of directors' responsibilities amounts for the most part to a re-statement of current fundamental principles, we suggest that it would be incomplete if it did not address additionally directors' duties with respect to their companies' creditors.

We appreciate that s214 of the Insolvency Act provides separately for directors to take steps to minimise creditors' losses and that this will continue to apply regardless of the provisions of the new Companies Act. But whether or not it is accepted that the common law currently places a general duty on a company's directors to protect creditor interests in anticipation of their company's insolvency, s214 unarguably imposes an express duty on directors to protect creditors' interests in prescribed circumstances during the life of the company. Given that this duty applies in the pre-insolvency situation, it appears to us reasonable that it should be addressed as part of the general statement of principles. If it is not included, we consider that the statement of principles should be presented as having application only as long as the company remains solvent.

Q3 In principle, we agree that it should not be possible for a limited company to act as a director of another limited company and we support the proposal to abolish the so-called 'corporate directorship'. Although it can be convenient to appoint a nominee company as director of multiple other companies, we accept that only if the office of director is held by an individual can the law apply and enforce the more stringent rules on directors' responsibilities and conduct which are envisaged by the White Paper.

There should, however, be an exemption from any new ruling on this matter for initial appointments of directors made by company formation agents. It is invariably the case that, when new companies are set up by formation agents, either as 'shelf' companies for future sale or in accordance with specific client instructions, the first director (and secretary) is recorded as being the formation agent itself. In the interests of business flexibility, it is highly desirable that this practice be allowed to continue.

We recommend, therefore, that corporate directorships should be prohibited except where appointments are made on a purely nominal basis in the circumstances outlined above. The exemption could be effected by means of a specific reference to initial appointments where the appointing company remains dormant during the first director's term of office, i.e. where no significant accounting transactions are carried out and where the only relevant activity undertaken by the director is the transfer of his/her interest in the company.

We also support the proposal to subject the abolition of the corporate director to a transitional period, so as to allow companies time to adapt to the change.

Q4 The White Paper endorses the recommendation of the Company Law Review Steering Group that the entitlement of 'medium-sized' companies to file abbreviated accounts should be abolished. That entitlement was the sole practical purpose of the 'medium-sized' category for single companies. We believe that it would be logical to extend the thinking behind that recommendation so as to abolish the current exemption of 'medium-sized' groups from the requirement to prepare group accounts. We support the proposal to limit that exemption to groups which meet the proposed new qualification thresholds for 'small' groups.

The register of members

Q5 We agree that companies should be required to keep registers of their members and to make these available for inspection to members and others. But it is an abuse of these provisions for third parties to be able to obtain membership details for purposes which are unrelated to the interests of individual members in their companies. We believe that there should be restrictions on the ability of non-members to access this information. Any non-member should be required to specify the purposes to which the membership details are to be put, and the company should in turn be entitled to reject the application if it considers that the given purpose is improper. The applicant would be able to appeal to the courts in the event of a rejection. We consider that the introduction of such a right would be consistent with the second principle of Schedule 1 to the Data Protection Act 1998, viz 'Personal data shall be obtained only for one or more specified purposes, and shall not be further processed in any manner incompatible with that purpose or those purposes'.

Disclosure of convictions

Q6 (i) We consider that the public disclosure of convictions would help to increase the level of compliance by directors with their statutory responsibilities.

(ii) Whether the convictions are disclosed by companies themselves or at the initiative of Companies House, disclosure should be made on the company's public file. In this way, searchers of a particular company's file should be made aware of offences committed by that company. One user-friendly alternative would be to add a section to the company's file listing individual offences recorded as having been committed by that company or its directors.

Transitional provisions

Q7 Yes. Arrangements must be made to apply new provisions to existing companies as smoothly as is practicable.

Q8 (i) Yes (see above).

The certificate of incorporation

Q9 We believe that there is a strong case for retaining the physical certificate of incorporation. The certificate is frequently consulted by third parties, e.g. banks and auditors, and used by them for evidential purposes. Companies wanting to do business overseas are frequently asked by local authorities and prospective business partners to provide their certificates as proof of their corporate status. The fact that only one certificate is ever issued to an individual company also helps to combat fraud: if a company is able to produce its physical certificate, third parties can be satisfied as to the identity of a company. Further, the certificate has an intangible value in the sense that it helps to emphasise to incorporators the fact that they have entered into a substantial commitment.

In the event that the certificate of incorporation were to be discontinued, new companies would still need to be provided with some form of hard copy confirmation of the incorporation details, on the lines of that currently provided by the Charities Commission. In the light of this, we suggest that it would be preferable to retain the certificate of incorporation.

Q10 Yes. Only the directors are entitled to exercise the company's powers, including its borrowing powers, so it is right that they alone be held responsible for contravention of the rule prohibiting trading before receipt of a trading certificate.

Q11 As we said in our response to question 7, we believe that the physical certificate of incorporation should be retained. We consider also that public companies will wish to receive some official notification that they have met the requirements for the issue of a trading certificate. We accept, however, that this need only be a letter of confirmation that there has been an appropriate entry made on the company's file at Companies House.

Issue expenses

Q12 Since it has not given rise to significant problems in practice, it is appropriate to retain a generic basis for defining the expenses of issue of shares for the share premium account. Withdrawing the entitlement to set off expenses on the issue of debentures is an improvement which is more consistent with the clear separation of elements of equity from liabilities in ASB's Statement of Principles for Financial Reporting. We suggest however that the term 'debenture' be defined in the forthcoming legislation.

Q13 In regard to defining expenses, company law should take much the same line as accounting standards (specifically FRS 4). Expenses should amount only to expenditure which is directly connected to the issue concerned and which would not have been incurred had the issue not taken place.

Reduction of capital

Q14 We agree that the proposed streamlined procedure for reducing capital is likely to be attractive to private companies.

Q15 Yes, provided the required formalities are observed.

Q16 Yes.

Q17 A reduction should be capable of being challenged if there have been procedural irregularities.

Q18 The requirement to deliver a compliance statement should serve to concentrate the minds of directors on the required procedure they need to follow. Where the statement is inaccurate, however, there needs to be scope for creditors to object.

Q19 N/A

Q20 Yes. Any agreed reduction of capital should be definitive, subject to standard rights to object.

Appointment of auditors

Q21 We see no reason to impose a two year prohibition on directors appointing an auditor who has recently been rejected by their company's members. The company's membership is always liable to change, whether as the result of take-over or some other major shareholder movement, and the company's future membership should not be tied as the result of a past vote. We query also why a decision on the appointment of a company's auditor should be singled out for this form of restriction.

The wording of draft clause 96 is inappropriate as the basis for the statutory appointment of auditors, since it appears to be associated specifically with the matter of whether or not a company needs to prepare an OFR. Also, with respect to clause 107(2), we suggest that a company's previous auditors should be added to the categories of person listed (of persons required to provide information to the auditor). This would smooth the process of change of auditor appointments and enhance the information available to a new auditor. Similar extensions should be made in respect of subsidiary company auditors under clause 108.

Q22 Clause 102 addresses the problem caused by the technical cessation of partnerships when partners join or leave. But the Bill should additionally clarify the situation where one firm takes over another firm. Even if the acquiring firm is a registered auditor and is qualified to take over the auditing appointment, it may well not satisfy the tests set out in sub-clause 4(a) and (b), thereby necessitating a formal appointment. The Bill should expressly cover the position of the acquiring partnership.

General meetings

Q23 Yes, provided that the courts, if they consider fit, can order company boards to convene AGMs under clause 147.

Q24 There must be provision in the Bill for minority shareholders to call for matters related to the company's annual accounts to be discussed at a General Meeting. Allowing individual members unrestricted freedom to require 'exempt' companies to convene AGMs would, however, have the potential to undermine the deregulatory benefits of the proposed private company regime. Companies should also be able to resist demands which they consider to be vexatious and where they believe that no constructive purpose would be served by convening meetings.

We suggest that the problem could be addressed in one of two ways.

• First, the standard business to be transacted at the AGM could be set out in the Bill. In order for a requisition to be valid, it would have to be accompanied by a statement of the intended purpose of the meeting. If the directors considered that the purpose was not related to the standard business of AGMs, they would be entitled to reject the requisition and the member could be invited to call a general meeting under the separate provisions of clauses 143 and 144.
  
  
• Alternatively, the individual member could be required to put forward reasonable costs with his application, with the resulting AGM being entitled to vote on whether the member should be reimbursed out of company funds. A condition of this nature already applies in relation to the circulation of members' statements and is provided for in clauses 150(5) and 158(6) of the draft Bill. In the case of the small, closely-held companies which are most likely to benefit from the new regime, we do not see that a requirement to provide costs in advance would be prohibitive.

Q25 The auditor's right to requisition an AGM should be unfettered. But he might wish to requisition a General Meeting in the case of a failure on the part of directors or employees to provide him with information, or where there were problems regarding the treatment of minority shareholders which the auditor considered needed to be aired at a formal meeting.

Q26 Allowing separate written requisitions to be submitted to a company over a period of six months is unrealistic, especially when members will be able to submit their individual requisitions in electronic form. Minority shareholders are likely to act in concert in the making of these requisitions and so allowing for such a long period as six months is probably unnecessary. It also seems inappropriate in the context of a measure designed to allow members to raise pressing, urgent business. We suggest that a maximum of two months should be allowed for this purpose.

Q27 The same notice period which applies to limited companies should apply to unlimited companies.

We query, however, the proposal to reduce the standard notice period for General Meetings from 21 days to 15 days. We accept that, given the recognition of electronic means of communication, assumed transmission times will come down. Against this, however, individuals and companies still need sufficient time to consider the notices, to read the meeting documentation, to consult with other members and (if appropriate) to make arrangements to attend the meeting. It should be borne in mind that people today are likely to take longer holidays and cannot always be expected to access communications and make arrangements to attend meetings within a period as short as 15 days. We think that there is a strong argument for retaining the current 21 day notice period.

Q28 If the intention is to help requisitionists avoid being put to personal expense, clause 150(3)(c) should require their statements to be submitted much earlier than eight days before the date of the meeting, as provided in the draft.

Q29 There should be a basic right for any member of a company to appoint a proxy, though in the special case of companies limited by guarantee, most of which are 'membership-based' clubs and associations, there should be provision for this basic right to be excluded by their individual constitutions. In the absence of any such exclusion, the basic right would apply.

Q30 While it may be rare for a member to be in arrears on payments due to the company in respect of his shares, it should not be considered permissible for any member to vote when he has not paid monies called up by the company. We would, therefore, favour the retention of the current reference to this matter in s373 CA 85.

Q31 Given that some private companies have large numbers of members, we do not consider it justifiable to restrict to public companies the proposed right of members to commission a scrutiny report on a poll. If this proposal is enacted, it should be made generally available to members in all companies.

Q32 Yes. If a resolution is tabled as a special resolution, it must satisfy the approval conditions attached to special resolutions.

Alternative technologies

Q33 In our view, the draft definition adequately covers the alternative technology issue.

Q34 We believe that the consent of the individual member should be essential for any use of alternative technology for statutory communications. In view of this, we suggest that the definition makes it clear that the express prior consent of the member is a condition for any use of 'a permitted alternative form' of communication. This is in order to ensure that neither party considers it acceptable to use such forms as a default method. The term current used in the definition, viz 'agreement', should be reinforced.

Q35 We do not consider that braillle, audio tapes or the like would fall within the current draft definition of 'legible'. For these to be covered, the definition in clause 201(2)(b) would need to be extended. For example, sub-clause (ii) could be expanded to become an 'either/or' clause, with a new option added along the lines of:

'is such that the documents sent in that form can be interpreted and understood by the recipient following their receipt in non-legible form'.

Q36 The condition of consent for the use of alternative media should ensure that any use made of them is acceptable to both parties. But the overriding principle must be that companies should not be expected to absorb unreasonable expense and effort with regard to the range of permissible communications media.

Q37 No.

Q38 We query whether a document should be regarded as being received by a company only when it is received by a director of the company. It is probable that directors themselves will not need to see the actual document (or a print out of it) sent to the company; where they do not see it themselves, this should not mean that the document should not be regarded as having been received by the company. It would be fairer to determine receipt by reference to a document's physical delivery at the company's address or by proof of electronic delivery. Alternatively, if individuals are to be involved in the determination of receipts, it would be better to make use of the proposed new term 'responsible office holder'.

There is an added complication to the determination of time of receipt of electronic messages. Just because an electronic document is delivered to an address, it does not necessarily mean that it can be immediately read by its recipient. Documents may be delivered in 'zipped' form or equivalent, and the opening of the document depends on the recipient having available the software necessary to do this: this may not be available immediately or without additional cost. We suggest that this complication should be dealt with by making it clear in clause 201, or in guidance under it, that, to be effective, agreement of alternative forms between company and member should involve mutual agreement on the software to be used. If sender and recipient are aware of the allowable means of communication, proof of delivery should be sufficient to determine time of legal receipt.

With respect to the specific questions posed under Q38, we respond that:

(a) the company should not be responsible for a communication being lost or delayed in transit to it

(b) this should be the company, provided the document has in fact been 'received'

(c) this should be the address most recently given by the company for receipt of electronic statutory communications.

'Responsible office holders', etc

Q39 We query the proposal to assign liability for the company's contravention of Companies Act requirements to 'responsible office holders' and 'responsible delegates'. Directors are certainly entitled under the law to delegate selected functions to other persons, including employees. But we see a problem in their being allowed to delegate, along with these functions, their ultimate responsibility for the exercise of their responsibilities. In our view, directors must assume final responsibility for all their acts, including the consequences of their delegation of specific functions. If directors were entitled to delegate legal liability as well as operational responsibility, this would risk clouding what the Combined Code identifies as the foundation of corporate governance, viz 'every … company should be headed by an effective board which should lead and control the company'.

Sanctions

Q40 Yes.

Q41 Yes.

Q42 Yes.

The Operating and Financial Review (OFR)

Q43 The content of a statutory OFR should aim to produce a single base for providing information to all shareholders, rather than a particular group of them. The needs of analysts (for instance) will probably be different, but they are likely to get further briefing material from the company in any case.

Much more significant than this question is the definition of users/audience of the statutory OFR. The draft clauses refer only to members of the company and yet, by virtue of requiring an OFR to be prepared by large private companies, the implied intention is that it should incorporate the information needs of a wider audience. We suggest that consideration needs to be given to widening the range of potential users acknowledged in clause 73(3).

Apart from the various interested stakeholder groups themselves, market analysts are increasingly placing great importance on issues such as companies' corporate governance policies and practices and environmental and social issues. Rather than leave the disclosure of such matters to the potentially arbitrary discretion of management, the statutory OFR should require their disclosure.

Q44 Yes. A high-level objective for the OFR seems essential:

• given that the Act will only contain an outline of the compulsory content
• in order to guide directors on how much to include from the 'other' matters set out under draft clause 75(2)
  and
• as a framework for the more detailed guidance to be issued by ASB/the Standards Board.

Q45 In our view, clause 73(3) does not capture the objectives of an OFR as well as the ASB does in its recent revision document. It does not, for example, set out what we understand to be the intended relationship between the OFR and the rest of the financial statements, i.e. the OFR is to provide, in part, an extension and further analysis of subjects dealt with in the performance statement and balance sheet, through the eyes of management. Further, it has not fully carried across the objectives set out in the Company Law Review's (CLR) Final Report and quoted in paragraph 3 of Annex D, which we much prefer.

The content of clause 73(3)(b) - "information ….. to make an informed assessment of its financial position" sounds little different from the objective of the balance sheet.

Clause 73(3)(c) would read better as "its business strategies and future prospects".

Q46 Yes.

Q47 Yes.

Q48 We think that it is very important that an integrated OFR is provided to members and others as a complete package, for users' information and for compliance purposes. If companies wish to circulate part of it separately for other purposes then there should be no restriction on this.

Q49 Clause 74(2) is not sufficient. Significant elements of the CLR's proposals, reproduced in paragraph 10 of Annex D, have been lost on translation, particularly the disclosure of objectives, strategies and drivers of performance discussed under (a) therein. The existing words in clause 74(2)(c) seem much more likely to lead to 'boilerplate' statements than the corresponding text in the CLR Final Report. It is difficult to judge the extent to which the rules from the Standards Board will remedy these deficiencies, since no draft rules are likely to be available for some time.

Q50 Yes.

Q51 No. We suggest that the distinction between the compulsory and other elements of an OFR is not necessary. The contents of clauses 74 and 75 should be merged, retaining the existing 'sweeper' provisions of clauses 75(2)(g) and 75(3). Any material matters in the merged list should be included in the OFR.

Q52 As with other aspects of these clauses, the further guidance to be provided by the Standards Board in due course will be very important. It is difficult to judge whether there is, in the draft alone, sufficient guidance to avoid 'boilerplate' statements. It would be helpful if ASB could offer some illustration of what such supplementary guidance might look like.

Q53 The content of clause 75(2)(b) should be reconsidered to ensure that there is no duplication with what is already required in the financial statements themselves. The facts of what distributions have taken place would be better dealt with there or in a supplementary statement of the type envisaged for companies not producing an OFR.

Q54 Such cases need to be considered carefully. For example, an obligation to disclose the details of products under development might prejudice the interests of the company, providing information which is more useful to competitors than to members. But provided that the references in such cases can be disclosed in very broad terms, there are no issues which should be excluded entirely.

Q55 There should be a straightforward disclosure of the fact that particular material had been omitted.

Q56 Any decision to exclude material on the grounds of confidentiality could be left to the directors. Given that we have managed up to now with no mandatory OFR, the omission of information would seem unlikely to produce a seriously misleading impression of the company's performance and position. The OFR is, after all, concerned essentially with providing material to supplement the main financial statements.

Q57 Yes, we agree that no specific 'safe harbour' protection is needed. It would, however, be helpful to provide for a form of 'health warning' about the forward looking information contained in the OFR.

Q58 In clause 77(1), the proposed exclusion of subsidiaries of EEA parent undertakings seems to us odd, given that there may be no requirement for the parent to produce any equivalent to the OFR. This leads us back to the issue of why an OFR is being required of non-listed private companies - is it for the benefit of their shareholders or is it for the benefit of other stakeholders? If it is the latter, this needs to be reflected among the objectives in clause 73, and the exclusion in clause 77(1) is unjustified. If it is for the former, we pose the question of why the exclusion is restricted to EEA subsidiaries and not, say, subsidiaries of US-listed parents, which would have to produce an equivalent MD&A.

Additional Points

We set out below additional comments on matters on which the White Paper does not specifically consult.

The AGM



1. The DTI intends to introduce a 'default' regime for private companies which is based on the current Elective Regime. This will involve, in particular, exemption for private companies from the requirement to hold AGMs. We support this but we are not comfortable with the proposal to extend to public companies the entitlement to 'opt-out' of the AGM. The proposed new regime for private companies is, we understand, based on an assumption about the essential character of the private company, viz that the private company is, typically, owned and controlled by a small, connected group of persons. By implication, it is reasonable to make another assumption, i.e. that the ownership/control structure of the 'typical' public company is or should be markedly different from that of the private company, and to conclude that the law should make different provision for it accordingly. In our view, those companies which wish to reduce their compliance obligations to the minimum should be directed towards the new private company option (or even the LLP or the partnership). Public companies - which currently constitute only a small fraction of the companies on the register at Companies House - should be required to accept the full range of public company compliance obligations: this should include the requirement to hold AGMs.
   
   
2. An entitlement for public companies to opt out of the AGM might, in fact, turn out to be used more widely than the White Paper appears to assume, given that elsewhere in the document the DTI proposes that public companies should be able to be formed with only one member.
   
   The Company Secretary
   
   
3. The White Paper endorses the recommendation of the CLR that private companies should not be required to appoint company secretaries. We suspect that, if it is carried through, the deregulatory benefits of this policy will turn out to be wholly illusory. This is because the functions which are usually associated with the post of secretary - maintenance of registers, preparation and filing of returns, resolutions and notices, statutory compliance and general administrative work - will still need to be carried out. Where the post of secretary is currently held by an external adviser, or where the secretarial work itself is performed by an external adviser on the company's behalf, the companies affected will not stand to make any savings since, notwithstanding the reform, they will still need to 'contract out' those same services. The only difference will be that the person carrying out the functions concerned will not be an officer of the company with on-going responsibilities to that company.
   
   
4. The current, separate consultation on the disclosure of beneficial ownership in unlisted companies suggests that the amount of company secretarial-type work which private companies will need to carry out might even rise significantly in the near future. This is in addition to the guidance which directors will almost certainly be seeking, from either company secretaries or external advisers, in relation to their newly-codified legal responsibilities. If there are to be no cost savings, and no reduction in the work involved, the net deregulatory benefits of abolition must be questioned. Given that the Combined Code recognises the significance of the role of the company secretary in the framework of corporate governance, and that the Fraud Advisory Panel has acknowledged the contribution that the company secretary can make towards combatting fraud and irregularities, the DTI should consider afresh whether statute law can afford to make no provision at all for company secretaries in private companies.
   
   Auditor's powers
   
   
5. We welcome the proposed new powers for auditors to demand information from employees and others, and the new duty for directors to volunteer information to the auditor where they have information which is material to the audit. These provisions will improve the ability of the auditor to exercise his functions. It is not clear from the draft clauses, however, whether it is the DTI's intention to adopt the recommendation of the Steering Group that failure on the part of directors to comply with these proposed duties should be taken into account in the process of determining the extent of an auditor's responsibility for defective financial statements. We believe that it should be recognised that civil as well as criminal consequences should ensue for breaches of these duties.
   
   Company Law and Reporting Commission
   
   
6. ACCA had supported the Steering Group's idea of establishing an infrastructure for keeping company law under continuous review. We acknowledge the DTI's intention to frame the new legislation so that it is sufficiently flexible to accommodate developments in technology, etc. and more easily updated where this is appropriate. Those, though, are safeguards which relate to matters of detail. We suggest that there remains merit in the idea of having a residual body which is able to monitor the operation of company law from a strategic standpoint and to keep under review how it co-exists with other areas of the law and developments in business practice. For example, we are likely, in the near future, to see changes in the business environment involving partnerships with legal personality, cross-border corporate entities in the EU for both public and private companies, and further growth of the LLP. It would, we suggest, be helpful if there were some set mechanism by which the implications of such developments for company law could be addressed.
   
   Terminology
   
   
7. Although the draft clauses refer in many places to 'the board of directors', this term - not used in the present Companies Act - is not defined. In other places, reference is made simply to 'the directors'. In order to reduce the potential for misunderstanding when referring to the directors collectively, only one of those two terms should be used. If some particular significance is envisaged for an act of the 'board of directors', vis-à-vis the acts of 'directors', the former term must be defined.

Appendix

In October 2002, ACCA conducted a postal survey of 500 of its members working in UK small companies. Its purpose was to gauge their views on those issues covered by the White Paper which were considered to be most relevant to small and private companies.

The full results of the survey are still being collated but the main findings are as follows.

• 51% of members do not support the White Paper 's proposed reduction in the filing period for the annual accounts of private companies from ten months to seven months.
• 63% of members are not likely to make use of the new entitlement to produce a summary financial statement.
• It is proposed that the statutory requirements on the form and content of small company accounts, and the technical requirements set out in accounting standards, should be merged into one combined set of guidance. 76% of members think that this is likely to be a beneficial development for small companies.
• 60% of members are in favour of retaining the certificate of incorporation. The most common practical benefits cited for the certificate are that it provides physical and visual proof of incorporation, that banks, foreign authorities and suppliers require copies of it, and that not all small businesses have internet access.
• 78% of members do not believe that there would be any practical benefits to small companies in retaining the 'corporate director'.
• 50% of members think that the DTI's proposal to abolish the office of company secretary will be beneficial to private companies, while 50% do not. 79% of members claim that, if the requirement for private companies to appoint a company secretary is abolished, they would not need to buy in secretarial services from an external source.
• If the proposal to exempt private companies from these requirements is enacted, 70% of members are not likely to continue convening AGMs and presenting accounts to shareholders.
• 57% of members are likely to make use of the new entitlement for companies to use electronic means for communications with shareholders.
• 50% of members are likely to take advantage of an extension to provide a general right for directors to file only a service address on the public record at Companies House.
• 88% of members think that directors of small companies will not be able to cope with their new legal responsibilities without external advice.
• 75% of members think that the measures outlined in the White Paper are not likely to reduce the overall administrative burden on private companies.

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