Companies Act 2006, Part 16

Appointment of auditors (s.475)

A company’s accounts must be audited unless it is exempt or dormant.
Members may require an exempt company to have its accounts audited.

Section 485 Private companies

The company’s directors may appoint its first auditor, or its first auditor
after it ceases to be exempt or to fill a casual vacancy. In all other cases, it
is the members who appoint the auditor.

Section 487

Auditors hold office until they are replaced or they resign.

Section 489 Public companies

Auditors must be appointed for each year by directors to begin with (as
with private companies), then by ordinary resolution of the members.

Section 491

Auditors cease to hold office at the conclusion of the next accounts
meeting after their appointment unless they are re-appointed.

Remuneration (s.492)

The auditors’ remuneration is fixed by shareholders unless the auditor
was appointed by the directors or the secretary of state. The term
‘remuneration’ includes expenses and benefits in kind.
Disclosure of terms and remuneration (ss.493–4)
The secretary of state may make regulations requiring disclosure of terms
of auditors’ appointment and the nature of non-audit services provided by
the auditor.

Auditor’s duties (ss.495–8)

These sections of the Act are aimed at ensuring reporting independence.
Auditors must make a report to the company’s members on all annual
accounts sent to them. The auditors’ report must include an introduction
identifying the audited accounts and the reporting framework and a
description of the scope of the audit identifying the auditing standards.
Auditors must state clearly whether in their opinion the accounts give a
true and fair view, have been properly prepared in accordance with the
framework and prepared in accordance with the Act. The report must
be unqualified (unmodified) or qualified (modified) and must include a
reference to any matters to which the auditor wishes to draw attention
without a qualifying (modifying) report. Auditors report on whether
information in the directors’ report is consistent with the accounts. They
also report on the auditable part of the directors’ remuneration report.
Auditors must carry out investigations to determine and report (in the
negative) if adequate accounting records are not kept, if the accounts do
not agree with records or if they fail to obtain all the information and
explanations necessary for their audit.
Auditors must report if aspects of disclosure of directors’ remuneration do
not comply with the relevant regulations. They must report if the company
has prepared accounts under the small-company regime, but the auditors
consider that the company is not entitled to use this regime (for example,
because it is too large).

Auditors’ rights (ss.499–500)

These sections are to ensure investigative independence in that neither
directors nor anyone else can restrict the evidence which auditors may
require for the purposes of their audit.
• Auditors have the ‘right of access at all times to the company’s
books, accounts and vouchers and may require such information and
explanations as are necessary’.
• Auditors ‘may require a company to obtain from overseas
subsidiaries information and explanations. Company directors must
take all reasonable steps to obtain the requested information and
explanations’.

Offence (s.501)

It is a criminal offence to provide recklessly or knowingly information
which is misleading, false or deceptive in a material particular.

Meetings (s.502)

Auditors have the ‘right to be notified of any general meeting and to attend
that meeting and be heard on any matter concerning them as auditors.

Removal/resignation of auditor (ss.510–26)

Only shareholders can remove an existing auditor (by ordinary resolution)
in general meeting with special notice. Once the resolution is passed the
company must notify the Registrar of Companies within 14 days.
It is possible that auditors in some circumstances may wish to resign –
they are entitled to do this but they must deposit a written notice with the
company.
When auditors cease to continue in office, either because they have been
removed or have chosen to resign, they must make a statement containing
a description of the circumstances. The company concerned must circulate
this statement to members within 14 days (or it may apply to court for an
order to prevent the circulation on the grounds that the auditor is using
the report to secure needless publicity for a defamatory matter). For a
failed attempt to silence an auditor, see Jarvis v PwC 2000, outlined in
Gray and Manson, pp.144–45. For evidence that the market takes notice
of auditor resignations and marks down share prices accordingly, even
when auditors claim that there are no circumstances to be brought to the
shareholders’ attention, see Dunn, Hillier and Marshall (1999).
The auditors must file a statement of circumstances at Companies House
and both the auditors and the company must notify the appropriate
authorities where the appointment which has ended relates to a major
audit (a listed company or a major public interest company).

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