In the UK legal landscape, the role of the auditor has a particularly important and specific role – not to aid efficient trading markets – but to support the stewardship of the company. With the increased regulatory focus on the role of shareholders in the stewardship process it is particularly apt timing that the UK’s Department of Business, Innovation & Skills wants to know what shareholders think about the information provided to them when auditors leave office.
After 18 months of operation of the current system the Government’s view is that the overall arrangements may be more complex than necessary and are potentially duplicatory. With this in mind the consultation identifies areas for possible simplification and streamlining, while still meeting the UK’s obligations under the EU Audit Directive and the underlying policy goals.
The document seeks views on:
- removing the duty to notify audit authorities of an auditor’s departure in some cases where it is of little interest to those authorities;
- removing the duty on the audit authorities to notify the accounting authorities of all auditor departures of which they are informed;
- whether there should be any changes to requirements for information to be provided to investors when auditors leave listed companies;
- removing the need for companies to notify Companies House in certain cases of auditor departure;
- simplifying the legislation by clarifying definitions.
While the broad thrust of the Government’s approach is to leave the requirements for so-called “major audits” (i.e. listed company audits) unchanged, there appears to be some concern that this approach could be challenged. Question 3 in particular asks for opinions on two issues pertinent to the quoted/listed framework:
(a) Do you consider that the current regulatory framework for notifications of auditors ceasing to hold office, as it applies to auditors for major audits, should be maintained in its current form or is there scope for change?
(b) Do you consider that the current framework, as it applies to companies subject to major audit, should be amended to reduce the regulatory burden?
During the 2005 consultation stakeholders make it clear that, in the case of major audits, it was important for shareholders and creditors of a company always to receive the statement from the auditor as to the circumstances around their departure. This is a requirement additional to notifying the audit authority and goes beyond what is required by the EU Audit Directive. At present, where the auditor sends a statement of circumstances to the company, the company is required to circulate it to its members (i.e. shareholders) and others entitled to receive the annual accounts.
The Government is now be interested in whether the 2005 view has changed. From a responsible investor perspecitive, commentators are suggesting that the industry needs to respond to this consultation to positively re-affirm that it remains important for shareholders and creditors to continue to always receive both the statement from the auditor and from the company as to the circumstances surrounding their departure, particularly in respect of listed companies or those quoted on publicly traded markets such as AIM.
For the present there are no proposals for paring the requirements back, beyond some minor adjustments which would relieve particular requirements on companies. If the proposals in section 3 of this chapter were accepted, for non-major audits the statement would also say (i.e. at the auditor’s option) whether the reasons should be drawn to the attention of shareholders and creditors. For major audits the statement would have to be circulated to shareholders and creditors in all cases, as at present.
Investors have until 20th January 2010 to present their views underpinning the need for full disclosure on auditor departures.