Company Law Reform Bill [HL]

House of Commons

Session 2005 - 06
Internet Publications
Other Bills before Parliament

Company Law Reform Bill [HL]

Company Law Reform Bill [HL]
Part 35 — Statutory Auditors
Chapter 1 — Introductory
404

837
Interpretation

In this Part—
“business” includes a profession;
“initial” includes any recognised abbreviation of a name;
“partnership” means—
5
(a)
a partnership within the Partnership Act 1890 (c. 39), or
(b)
a limited partnership registered under the Limited Partnerships
Act 1907 (c. 24),
or a firm or entity of a similar character formed under the law of a
country or territory outside the United Kingdom;
10
“surname”, in relation to a peer or person usually known by a British title
different from his surname, means the title by which he is known.
Part 35
Statutory Auditors
Chapter 1
15
Introductory
838
Main purposes of Part
The main purposes of this Part are—
(a)
to secure that only persons who are properly supervised and
appropriately qualified are appointed as statutory auditors, and
20
(b)
to secure that audits by persons so appointed are carried out properly,
with integrity and with a proper degree of independence.
839
Meaning of “statutory auditor” etc
(1)
In this Part “statutory auditor” means—
(a)
a person appointed as auditor under Part 16 of this Act,
25
(b)
a person appointed as auditor under section 77 of or Schedule 11 to the
Building Societies Act 1986 (c. 53),
(c)
a person appointed as auditor of an insurer that is a friendly society
under section 72 of or Schedule 14 to the Friendly Societies Act 1992
(c. 40),
30
(d)
a person appointed as auditor of an insurer that is an industrial and
provident society under section 4 of the Friendly and Industrial and
Provident Societies Act 1968 (c. 55) or under section 38 of the Industrial
and Provident Societies Act (Northern Ireland) 1969 (c. 24 (N.I.)),
(e)
a person appointed as auditor for the purposes of regulation 3 of the
35
Insurance Accounts Directive (Lloyd’s Syndicate and Aggregate
Accounts) Regulations 2004 (S.I. 2004/3219) or appointed to report on
the “aggregate accounts” within the meaning of those Regulations,
(f)
a person appointed as auditor of an insurer for the purposes of
regulation 3 of the Insurance Accounts Directive (Miscellaneous
40
Insurance Undertakings) Regulations 1993 (S.I. 1993/3245),

Company Law Reform Bill [HL]
Part 35 — Statutory Auditors
Chapter 1 — Introductory
405

(g)
a person appointed as auditor of a bank for the purposes of regulation
4 of the Bank Accounts Directive (Miscellaneous Banks) Regulations
1991 (S.I. 1991/2704), and
(h)
a person appointed as auditor of a prescribed person under a
prescribed enactment authorising or requiring the appointment;
5

and the expressions “statutory audit” and “statutory audit work” are to be
construed accordingly.
(2)
In this Part “audited person” means the person in respect of whom a statutory
audit is conducted.
(3)
In subsection (1)—
10
“bank” means a person who—
(a)
is a credit institution within the meaning given by Article 1.1 of
Directive 2000/12/EC of the European Parliament and of the
Council relating to the taking up and pursuit of the business of
credit institutions, and
15
(b)
is a company or a firm as defined in Article 48 of the Treaty
establishing the European Community;
“friendly society” means a friendly society within the meaning of the
Friendly Societies Act 1992 (c. 40);
“industrial and provident society” means—
20
(a)
a society registered under the Industrial and Provident Societies
Act 1965 (c. 12) or a society deemed by virtue of section 4 of that
Act to be so registered, or
(b)
a society registered under the Industrial and Provident Societies
Act (Northern Ireland) 1969 or a society deemed by virtue of
25
section 4 of that Act to be so registered;
“insurer” means a person who is an insurance undertaking within the
meaning given by Article 2.1 of Council Directive 1991/674/EEC on
the annual accounts and consolidated accounts of insurance
undertakings;
30
“prescribed” means prescribed, or of a description prescribed, by order
made by the Secretary of State for the purposes of subsection (1)(h).
(4)
An order under this section is subject to negative resolution procedure.
840
Eligibility for appointment as a statutory auditor: overview
A person is eligible for appointment as a statutory auditor only if the person is
35
so eligible—
(a)
by virtue of Chapter 2 (individuals and firms), or
(b)
by virtue of Chapter 3 (Comptroller and Auditor General, etc).

Company Law Reform Bill [HL]
Part 35 — Statutory Auditors
Chapter 2 — Individuals and firms
406

Chapter 2
Individuals and firms
Eligibility for appointment
841
Individuals and firms: eligibility for appointment as a statutory auditor
(1)
An individual or firm is eligible for appointment as a statutory auditor if the
5
individual or firm—
(a)
is a member of a recognised supervisory body, and
(b)
is eligible for appointment under the rules of that body.
(2)
In the cases to which section 851 applies (individuals retaining only 1967 Act
authorisation) a person’s eligibility for appointment as a statutory auditor is
10
restricted as mentioned in that section.
842
Effect of ineligibility
(1)
No person may act as statutory auditor of an audited person if he is ineligible
for appointment as a statutory auditor.
(2)
If at any time during his term of office a statutory auditor becomes ineligible
15
for appointment as a statutory auditor, he must immediately—
(a)
resign his office (with immediate effect), and
(b)
give notice in writing to the audited person that he has resigned by
reason of his becoming ineligible for appointment.
(3)
A person is guilty of an offence if—
20
(a)
he acts as a statutory auditor in contravention of subsection (1), or
(b)
he fails to give the notice mentioned in paragraph (b) of subsection (2)
in accordance with that subsection.
(4)
A person guilty of an offence under subsection (3) is liable—
(a)
on conviction on indictment, to a fine, and
25
(b)
on summary conviction, to a fine not exceeding the statutory
maximum.
(5)
A person is guilty of an offence if—
(a)
he has been convicted of an offence under subsection (3)(a) or this
subsection, and
30
(b)
he continues to act as a statutory auditor in contravention of subsection
(1) after the conviction.
(6)
A person is guilty of an offence if—
(a)
he has been convicted of an offence under subsection (3)(b) or this
subsection, and
35
(b)
he continues, after the conviction, to fail to give the notice mentioned in
subsection (2)(b).
(7)
A person guilty of an offence under subsection (5) or (6) is liable—
(a)
on conviction on indictment, to a fine, and

Company Law Reform Bill [HL]
Part 35 — Statutory Auditors
Chapter 2 — Individuals and firms
407

(b)
on summary conviction, to a fine not exceeding one-tenth of the
statutory maximum for each day on which the act or the failure
continues.
(8)
In proceedings against a person for an offence under this section it is a defence
for him to show that he did not know and had no reason to believe that he was,
5
or had become, ineligible for appointment as a statutory auditor.
Independence requirement
843
Independence requirement
(1)
A person may not act as statutory auditor of an audited person if one or more
of subsections (2), (3) and (4) apply to him.
10
(2)
This subsection applies if the person is—
(a)
an officer or employee of the audited person, or
(b)
a partner or employee of such a person, or a partnership of which such
a person is a partner.
(3)
This subsection applies if the person is—
15
(a)
an officer or employee of an associated undertaking of the audited
person, or
(b)
a partner or employee of such a person, or a partnership of which such
a person is a partner.
(4)
This subsection applies if there exists, between—
20
(a)
the person or an associate of his, and
(b)
the audited person or an associated undertaking of the audited person,

a connection of any such description as may be specified by regulations made
by the Secretary of State.
(5)
An auditor of an audited person is not to be regarded as an officer or employee
25
of the person for the purposes of subsections (2) and (3).
(6)
In this section “associated undertaking”, in relation to an audited person,
means—
(a)
a parent undertaking or subsidiary undertaking of the audited person,
or
30
(b)
a subsidiary undertaking of a parent undertaking of the audited
person.
(7)
Regulations under subsection (4) are subject to negative resolution procedure.
844
Effect of lack of independence
(1)
If at any time during his term of office a statutory auditor becomes prohibited
35
from acting by section 843(1), he must immediately—
(a)
resign his office (with immediate effect), and
(b)
give notice in writing to the audited person that he has resigned by
reason of his lack of independence.
(2)
A person is guilty of an offence if—
40
(a)
he acts as a statutory auditor in contravention of section 843(1), or

Company Law Reform Bill [HL]
Part 35 — Statutory Auditors
Chapter 2 — Individuals and firms
408

(b)
he fails to give the notice mentioned in paragraph (b) of subsection (1)
in accordance with that subsection.
(3)
A person guilty of an offence under subsection (2) is liable—
(a)
on conviction on indictment, to a fine, and
(b)
on summary conviction, to a fine not exceeding the statutory
5
maximum.
(4)
A person is guilty of an offence if—
(a)
he has been convicted of an offence under subsection (2)(a) or this
subsection, and
(b)
he continues to act as a statutory auditor in contravention of section
10
843(1) after the conviction.
(5)
A person is guilty of an offence if—
(a)
he has been convicted of an offence under subsection (2)(b) or this
subsection, and
(b)
after the conviction, he continues to fail to give the notice mentioned in
15
subsection (1)(b).
(6)
A person guilty of an offence under subsection (4) or (5) is liable—
(a)
on conviction on indictment, to a fine, and
(b)
on summary conviction, to a fine not exceeding one-tenth of the
statutory maximum for each day on which the act or the failure
20
continues.
(7)
In proceedings against a person for an offence under this section it is a defence
for him to show that he did not know and had no reason to believe that he was,
or had become, prohibited from acting as statutory auditor of the audited
person by section 843(1).
25
Effect of appointment of a partnership
845
Effect of appointment of a partnership
(1)
This section applies where a partnership constituted under the law of—
(a)
England and Wales,
(b)
Northern Ireland, or
30
(c)
any other country or territory in which a partnership is not a legal
person,

is by virtue of this Chapter appointed as statutory auditor of an audited
person.
(2)
Unless a contrary intention appears, the appointment is an appointment of the
35
partnership as such and not of the partners.
(3)
Where the partnership ceases, the appointment is to be treated as extending
to—
(a)
any appropriate partnership which succeeds to the practice of that
partnership, or
40
(b)
any other appropriate person who succeeds to that practice having
previously carried it on in partnership.
(4)
For the purposes of subsection (3)—

Company Law Reform Bill [HL]
Part 35 — Statutory Auditors
Chapter 2 — Individuals and firms
409

(a)
a partnership is to be regarded as succeeding to the practice of another
partnership only if the members of the successor partnership are
substantially the same as those of the former partnership, and
(b)
a partnership or other person is to be regarded as succeeding to the
practice of a partnership only if it or he succeeds to the whole or
5
substantially the whole of the business of the former partnership.
(5)
Where the partnership ceases and the appointment is not treated under
subsection (3) as extending to any partnership or other person, the
appointment may with the consent of the audited person be treated as
extending to an appropriate partnership, or other appropriate person, who
10
succeeds to—
(a)
the business of the former partnership, or
(b)
such part of it as is agreed by the audited person is to be treated as
comprising the appointment.
(6)
For the purposes of this section, a partnership or other person is “appropriate”
15
if it or he—
(a)
is eligible for appointment as a statutory auditor by virtue of this
Chapter, and
(b)
is not prohibited by section 843(1) from acting as statutory auditor of
the audited person.
20
Supervisory bodies
846
Supervisory bodies
(1)
In this Part a “supervisory body” means a body established in the United
Kingdom (whether a body corporate or an unincorporated association) which
maintains and enforces rules as to—
25
(a)
the eligibility of persons for appointment as a statutory auditor, and
(b)
the conduct of statutory audit work,

which are binding on persons seeking appointment or acting as a statutory
auditor either because they are members of that body or because they are
otherwise subject to its control.
30
(2)
In this Part references to the members of a supervisory body are to the persons
who, whether or not members of the body, are subject to its rules in seeking
appointment or acting as a statutory auditor.
(3)
In this Part references to the rules of a supervisory body are to the rules
(whether or not laid down by the body itself) which the body has power to
35
enforce and which are relevant for the purposes of this Part.

This includes rules relating to the admission or expulsion of members of the
body, so far as relevant for the purposes of this Part.
(4)
Schedule 10 has effect with respect to the recognition of supervisory bodies for
the purposes of this Part.
40
847
Exemption from liability for damages
(1)
No person within subsection (2) is to be liable in damages for anything done or
omitted in the discharge or purported discharge of functions to which this
subsection applies.

Company Law Reform Bill [HL]
Part 35 — Statutory Auditors
Chapter 2 — Individuals and firms
410

(2)
The persons within this subsection are—
(a)
any recognised supervisory body,
(b)
any officer or employee of a recognised supervisory body, and
(c)
any member of the governing body of a recognised supervisory body.
(3)
Subsection (1) applies to the functions of a recognised supervisory body so far
5
as relating to, or to matters arising out of, any of the following—
(a)
rules, practices, powers and arrangements of the body to which the
requirements of Part 2 of Schedule 10 apply;
(b)
the obligations with which paragraph 20 of that Schedule requires the
body to comply;
10
(c)
any guidance issued by the body;
(d)
the obligations imposed on the body by or by virtue of this Part.
(4)
The reference in subsection (3)(c) to guidance issued by a recognised
supervisory body is a reference to any guidance or recommendation which is—
(a)
issued or made by it to all or any class of its members or persons
15
seeking to become members, and
(b)
relevant for the purposes of this Part,

including any guidance or recommendation relating to the admission or
expulsion of members of the body, so far as relevant for the purposes of this
Part.
20
(5)
Subsection (1) does not apply—
(a)
if the act or omission is shown to have been in bad faith, or
(b)
so as to prevent an award of damages in respect of the act or omission
on the ground that it was unlawful as a result of section 6(1) of the
Human Rights Act 1998 (c. 42) (acts of public authorities incompatible
25
with Convention rights).
Professional qualifications
848
Appropriate qualifications
(1)
A person holds an appropriate qualification for the purposes of this Chapter if
and only if—
30
(a)
he holds a recognised professional qualification obtained in the United
Kingdom,
(b)
immediately before the commencement of this Chapter, he—
(i)
held an appropriate qualification for the purposes of Part 2 of
the Companies Act 1989 (c. 40) (eligibility for appointment as
35
company auditor) by virtue of section 31(1)(a) or (c) of that Act,
or
(ii)
was treated as holding an appropriate qualification for those
purposes by virtue of section 31(2), (3) or (4) of that Act,
(c)
immediately before the commencement of this Chapter, he—
40
(i)
held an appropriate qualification for the purposes of Part III of
the Companies (Northern Ireland) Order 1990 (S.I. 1990/593
(N.I. 5)) by virtue of Article 34(1)(a) or (c) of that Order, or
(ii)
was treated as holding an appropriate qualification for those
purposes by virtue of Article 34(2), (3) or (4) of that Order,
45
(d)
he is within subsection (2),