Companies Act 2006 – Section 507

Section 507: Offences in connection with auditors’ report

768. This section creates a new criminal offence in relation to inaccurate auditors’ reports.
The offence consists of knowingly or recklessly causing a report to include anything that is
misleading, false or deceptive, or omitting a required statement of a problem with the
accounts or audit.

769. Subsection (1) sets out the offence of commission, and subsection (2) that of
omission. The items whose omission can be an offence are listed in paragraphs (a) to (c) of
subsection (2): statements about accounting records not being properly reflected in the
accounts, about the auditor having been unable to obtain all necessary information and
explanations, and about the directors wrongly claiming the company is exempt from the
requirement for group accounts.

770. Subsection (3) defines the individuals potentially caught by the offence as the auditor,
if a sole practitioner, and his employees and agents; and the directors, members, employees
and agents of an audit firm. But the offence only applies to such an individual if he is an
accountant who would be qualified to act as auditor of the company in his own right.
Subsection (4) sets out the maximum penalty as an unlimited fine.

Section 508: Guidance for regulatory and prosecuting authorities: England, Wales and
Northern Ireland

771. This section enables the Secretary of State to issue guidance about handling matters
where the same behaviour by an auditor could give rise both to disciplinary proceedings by a
regulatory body, and to prosecution for the new offence. Subsection (2) requires the Secretary
of State to obtain the Attorney’s General agreement to any guidance. Subsection (3) lists the
regulatory and prosecuting authorities the guidance would be intended to help. The list
comprises the accountancy supervisory bodies, recipients of grants under section 16 of the
Companies (Audit, Investigations and Community Enterprise) Act 2004) (currently the
Financial Reporting Council and its subsidiaries), the Director of the Serious Fraud Office
and the Director of Public Prosecutions, as well as the Secretary of State himself. Under
subsection (4), the Secretary of State’s guidance is limited to England, Wales and Northern
Ireland.

772. It is likely that one of the most important aspects of the guidance would be to enable
prosecutors to decide not to prosecute in a particular case that would be better handled
through disciplinary proceedings.

Section 509: Guidance for regulatory authorities: Scotland

773. This section enables the Lord Advocate to issue guidance about handling matters in
Scotland where the same auditor’s report could give rise both to disciplinary proceedings by a
regulatory body, and to prosecution for the new offence. Subsection (2) requires the Lord
Advocate to consult the Secretary of State before issuing guidance. Subsection (3) lists the
regulatory bodies the guidance is intended to help. The list comprises the accountancy
supervisory bodies, recipients of grants under section 16 of the C(AICE) Act 2004) (currently
the Financial Reporting Council and its subsidiaries) and the Secretary of State.

CHAPTER 4: REMOVAL, RESIGNATION, ETC OF AUDITORS

774. This Chapter restates the law on the ways in which auditors can cease to hold office.
The current provisions are in section 388 and sections 391 to 394A of the 1985 Act. There are
some changes to the existing law resulting from the changes elsewhere in the Act relating to
written resolutions of private companies. There are also changes in the requirements when
auditors leave office: increasing the range of cases in which there is a requirement for a
statement explaining why they are leaving, and for copies of any statement to be sent to
shareholders and to appropriate regulators.

Section 510: Resolution removing auditor from office

775. This section restates the rule that the shareholders in a company always have the right
to dismiss its auditor by ordinary resolution. As at present, to remove the auditor before the
end of his term of office, even a private company will need to hold a general meeting to pass
such a resolution.

776. Subsection (2) requires special notice of the resolution (see note on section 511).
Subsection (3) provides that shareholders’ right provided by this section does not prevent the
auditor being entitled to being compensated for termination of his appointment. Subsection
(4) specifies that the resolution described here is the only way in which an auditor can be
removed before the end of his term of office.

Section 511: Special notice required for resolution removing auditor from office

777. This section restates the requirement that a resolution to dismiss an auditor needs
special notice (i.e. 28 days before the general meeting, as provided in section 312). The
company must send a copy to the auditor it is proposed to dismiss, and he has the right to
make a statement of his case. The company then has to circulate his statement to the
shareholders (or if time does not allow, the statement can be read out at the meeting).

778. Subsection (6) provides protection if the auditor it is proposed to dismiss is using the
provision to have a statement circulated to secure needless publicity for defamatory material.
It enables the company, or anyone else who is aggrieved by the statement, to apply to the
court, and the court can then determine whether the auditor is using the provision in that way,
in which case the company is not obliged to circulate the statement. The court can order the
auditor to pay some or all of the costs of the proceedings.

Section 512: Notice to registrar of resolution removing auditor from office

779. This section restates the obligation on a company that has decided to dismiss its
auditor to inform the registrar within 14 days.

Section 513: Rights of auditor who has been removed from office

780. This section restates the right of a dismissed auditor to attend certain meetings,
namely, any meeting at which his term of office would have expired (i.e. a public company’s
accounts meeting) and any meeting at which it is proposed to replace him.

Section 514: Failure to re-appoint auditor: special procedure required for written
resolution

781. This section sets out the procedure for changing auditor from one financial year to the
next by written resolution (a procedure only available to private companies). This may be
done (i) during the term of office of the outgoing auditor, or (ii) afterwards, if no replacement
has been appointed. But case (ii) will arise only if there is no automatic deemed
reappointment for one of the five reasons in section 487(2).

782. Subsection (3) provides that the company must send a copy of the proposed resolution
both to the outgoing auditor and to his proposed replacement; and subsection (4) provides
that the former then has 14 days to make a statement setting out his views. Subsection (5)
then provides that the company must send, to its shareholders, the resolution together with
any statement from the outgoing auditor. Subsection (6) specifies how the general rules on
written resolutions are to apply in this case.

783. Subsection (7) provides protection if the outgoing auditor is using the provision to
have a statement circulated to secure needless publicity for defamatory material. It enables
the company, or anyone else who is aggrieved by the statement, to apply to the court, and the
court can then determine whether the auditor is using the provision in that way, in which case
the company is not obliged to circulate the auditor’s representations. The court can order the
auditor to pay some or all of the costs of the proceedings.

784. Subsection (8) provides that failure to comply with the rules in this section will make
the resolution ineffective.

Section 515: Failure to re-appoint auditor: special notice required for resolution at
general meeting

785. This section sets out the procedure for changing auditor between one financial year
and the next at a general meeting. This may be done by resolution at the meeting, but special
notice is required if no deadline for appointing auditors has passed since the outgoing auditor
left, or if the deadline has passed when an auditor should have been appointed without one
being appointed. So, for example, if a public company intends not to re-appoint an auditor at
its accounts meeting, it would need to give special notice of the meeting to be able to appoint
replacement auditors.

786. Subsection (3) provides that immediately it receives a proposed resolution for
changing auditor, the company should send a copy of it both to the outgoing auditor and to
his proposed replacement; and subsection (4) provides that the former may then send the
company a written statement setting out his views. Subsections (5) and (6) provide that the
company must send its shareholders any statement from the outgoing auditor, and that if it is
received to late for this it should be read out at the meeting.

787. Subsection (7) provides protection if the outgoing auditor is using the provision to
have a statement circulated to secure needless publicity for defamatory material. It enables
the company, or anyone else who is aggrieved by the statement, to apply to the court, and the
court can then determine whether the auditor is using the provision in that way, in which case
the company is not obliged to circulate the auditor’s representations, nor need they be read
out at the meeting. The court can order the auditor to pay some or all of the costs of the
proceedings.