Changing Auditors
A process, which for over thirty years has operated with adequate protection for shareholders and creditors of companies, has, since 6th April 2008, been made a lot more complicated by the Companies Act 2006, a statute which was allegedly designed by Government to “think small first” when it came to companies and has also been trumpeted by them as “a bonfire of red tape for companies”.
Since 1976, there has been an obligation on auditors when they leave office, now enshrined in the Companies Act 2006, to make a statement to the company of any circumstances which ought to be brought to the attention of the company's shareholders or creditors (or, more often, that there are no circumstances), in connection with the auditors ceasing to hold office, which need to be brought to their attention. Most commonly, this happens:
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when a Company has been purchased or sold, when a change of auditors is achieved by means of one set of auditors resigning and the directors of the company appointing new auditors – probably those who also audit the purchaser
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in the process of good corporate governance (which, again, the 2006 Act is supposed to promote) which recommends that, to prevent over-familiarity, a company changes its auditors every five years.
From 6 April 2008, there are now additional requirements contained in the Act associated with a change in the auditors of any company, which, respectively, require the auditors and the company to notify the change in auditors to the appropriate audit authority. This is defined in the Act as a body to whom the Government has delegated functions in respect of "major audits", including companies admitted to the official list on the London Stock Exchange or "any other person in whose financial condition there is a major public interest".
For ‘major audits’, the appropriate audit authority is the Professional Oversight Board (“POB”) which is part of the Financial Reporting Council, the UK’s independent and unified regulator for corporate reporting and governance, which has as one of its main reasons to exist the promotion of good corporate governance – indeed, it promotes the five yearly change in auditors.
So complex has the new process of notifying any change in auditors now become that the POB has issued guidance in the form of two flow charts, one for audit firms and the other for companies, found at www.frc.org.uk/pob/regulation/companies.cfm. From these, it can be seen that major audit includes, in addition to listed companies, companies whose shares are traded on AIM or on the independent secondary PLUS Market, larger unquoted companies and some subsidiaries of foreign parent companies.
For all other audits (which will be, by far, the majority) the notification of a change in auditors should be reported to the auditors' supervisory body, defined in the 2006 Act as “a body established in the UK which maintains and enforces rules for eligibility of individuals and firms for appointment as statutory auditors” and also fulfils the conditions set out in Schedule 10 to the Act, to become a “Recognised Supervisory Body” (“RSB”) e.g. The Institutes of Chartered Accountants in Scotland or in England and Wales (ICAS and ICAEW).
The obligation of reporting any change in auditors, either to the POB or to the appropriate RSB, is both for the firm of auditors and the company concerned. Failure to do this could mean that a company incurs an unlimited fine. So check the flowcharts carefully as you think wistfully of that “bonfire of red tape”.