Commentary on Sections
Part 1: Auditors, Accounts, Directors' Liabilities and Investigations
Chapter 1: Auditors.Summary and Background
Services provided by auditors
Section 7 - Disclosure of services provided by auditors and related remuneration
32.Section 7 replaces sections 390A(3) and 390B of the Companies Act 1985 with a new section 390B and makes a number of related amendments to the Act. The purpose of this section is to enable the Secretary of State, by regulations, to require companies to publish more information about the types of services they and their associates have purchased from their auditors and their associates. Section 390B in its previous form gave the Secretary of State power to require companies to disclose the total value of their non-audit services (that is to say, services not related to the audit which an auditor provides to the company it is auditing). Under previous section 390A(3) companies were required to disclose the amount of remuneration paid for audit services. The effect of this section is to widen the Secretary of State’s regulation-making power, so that regulations can also require disclosure differentiating between audit and non-audit services and between different types of non-audit service, with a breakdown of the costs of each. Examples of non-audit services include tax advice, valuations, actuarial work, litigation support , IT and legal advice.
33.The aim is to address concerns about possible conflicts of interest between the audit firm in its role as auditor and in its role as provider of other services to the company. More detailed disclosure requirements should allow stakeholders and others to identify particular features of the company/auditor relationship that may raise concerns over the auditor's independence.
34.Subsection (1) replaces existing section 390B of the Companies Act 1985.
35.Subsection (1) of new section 390B enables the Secretary of State to make regulations requiring disclosure by companies of (a) the nature of the services provided to a company by its auditors and their associates, and (b) the amount of remuneration to be paid for those services. The effect of new subsection (1) is also to replace existing section 390A(3) which, under subsection (2)(a) of section 7, ceases to have effect.
36.Subsection (2) of new section 390B enables regulations under new subsection (1) to be flexible in how they classify the services provided by auditors and their associates for which disclosure is required. The effect, for example, is that the regulations could differentiate between a particular service which was considered so important that it should be disclosed separately (no matter how relatively small the amount paid for it) and other services considered less important from the perspective of ensuring auditor independence and which would thus not require separate identification at all, or not below a certain amount. The subsection also enables the audit or non-audit fees to be broken down so that, for example, it will be possible to require separate disclosure of amounts paid in respect of tax advice by each company in a group or an aggregate figure for tax advice for the group as a whole.
37.Subsection (3) of new section 390B provides further powers to require disclosure of auditors' remuneration to include "expenses", benefits in kind, and services provided to associates of the company; and to define what is meant by "associate" of an auditor or a company.
38.Subsection (3)(d) enables disclosure to be required in the case of services provided to "associates" of a company. This enables the broadening of the definition of an "associated undertaking" of a company contained in Regulation 2 of the Companies Act 1985 (Disclosure of Remuneration for Non-Audit Work) Regulations 1991 (SI 1991/2128). will mean that services provided, for example, to pension funds (which are not "undertakings") may be included in the regulations, as part of any disclosure.
39.Subsection (4) of new section 390B is concerned with the location of the required disclosures. Previously, the disclosure of audit services required by section 390A(3) had to be made in the notes to the company’s individual or group accounts; and disclosures of non-audit services required by regulations under previous section 390B could be required to be made in the auditors’ report or in the notes to the company’s individual or group accounts. Subsection (4) is drafted flexibly to allow the regulations to require the disclosure to be made in the notes to the company's individual or group accounts; in the directors' report; or in the auditors' report.
40.Under subsection (5) of new section 390B, if directors are required by the regulations to make the disclosures in the notes to the accounts or the directors’ report, the regulations may also require the auditors to supply the directors with any information necessary to enable them to make the disclosure. This re-enacts the latter part of the previous section 390B(3). In addition, new subsections (5)(b) and (6) enable the regulations to apply, as appropriate, the criminal penalties in sections 233(5) (approval of defective annual accounts) and 234(5) (preparation of defective directors' report) of the Companies Act 1985. They also enable the existing administrative arrangements under sections 245 to 245C of the Act on the voluntary revision, or compulsory revision through application to the court, of accounts and reports to be applied. Non-compliance by an auditor with the requirement to supply the directors with the information they need will be dealt with by disciplinary action by the relevant supervisory body.
41.Subsection (7) of new section 390B re-enacts previous section 390B(4). It enables the regulations to differentiate, for example, between larger and smaller companies. It is not currently intended to apply the detailed disclosure requirements for non-audit services to companies qualifying as small or medium-sized (SMEs) under the 1985 Act. SMEs will, however, have to continue to disclose the audit fee itself where relevant. In January 2004 the Government increased the qualifying conditions for SMEs for company law purposes. To qualify as an SME, a company must satisfy two or more of the following requirements: turnover of not more than £22.8 million; balance sheet total of not more than £11.4 million; and no more than 250 employees.
42.Subsection (2)(a) and (3) of section 7 repeal the provisions in section 390A and in Schedule 4A of the Companies Act 1985 relating to disclosure of remuneration for audit services, so that all the requirements relating to disclosures about services provided by auditors are located in one place under the new section 390B. Subsection (2)(b) updates the reference to "payments in cash" in section 390A(5), by changing it to "payments of money".
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