Company Law Reform Bill [HL]

House of Commons

Session 2005 - 06
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Company Law Reform Bill [HL]

Company Law Reform Bill [HL]
Schedule 10 — Recognised supervisory bodies
Part 1 — Grant and revocation of recognition of a supervisory body
518


In this table “the 1985 Act” means the Companies Act 1985 (c. 6).
Schedule 10
Section 846

Recognised supervisory bodies
Part 1
Grant and revocation of recognition of a supervisory body
5
Application for recognition of supervisory body
1     (1)
A supervisory body may apply to the Secretary of State for an order
declaring it to be a recognised supervisory body for the purposes of this Part
of this Act (“a recognition order”).
      (2)
Any such application must be—
10
(a)
made in such manner as the Secretary of State may direct, and
(b)
accompanied by such information as the Secretary of State may
reasonably require for the purpose of determining the application.
      (3)
At any time after receiving an application and before determining it the
Secretary of State may require the applicant to furnish additional
15
information.
      (4)
The directions and requirements given or imposed under sub-paragraphs
(2) and (3) may differ as between different applications.
      (5)
The Secretary of State may require any information to be furnished under
this paragraph to be in such form or verified in such manner as he may
20
specify.
      (6)
Every application must be accompanied by—
(a)
a copy of the applicant’s rules, and
(b)
a copy of any guidance issued by the applicant in writing.
      (7)
The reference in sub-paragraph (6)(b) to guidance issued by the applicant is
25
a reference to any guidance or recommendation—
(a)
issued or made by it to all or any class of its members or persons
seeking to become members,
(b)
relevant for the purposes of this Part, and
(c)
intended to have continuing effect,
30

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.
Grant and refusal of recognition
2     (1)
The Secretary of State may, on an application duly made in accordance with
35
paragraph 1 and after being furnished with all such information as he may
require under that paragraph, make or refuse to make a recognition order in
respect of the applicant.

Company Law Reform Bill [HL]
Schedule 10 — Recognised supervisory bodies
Part 1 — Grant and revocation of recognition of a supervisory body
519

      (2)
The Secretary of State may make a recognition order only if it appears to
him, from the information furnished by the body and having regard to any
other information in his possession, that the requirements of Part 2 of this
Schedule are satisfied in the case of that body.
      (3)
The Secretary of State may refuse to make a recognition order in respect of a
5
body if he considers that its recognition is unnecessary having regard to the
existence of one or more other bodies which—
(a)
maintain and enforce rules as to the appointment and conduct of
statutory auditors, and
(b)
have been or are likely to be recognised.
10
      (4)
Where the Secretary of State refuses an application for a recognition order he
must give the applicant a written notice to that effect—
(a)
specifying which requirements, in the opinion of the Secretary of
State, are not satisfied, or
(b)
stating that the application is refused on the ground mentioned in
15
sub-paragraph (3).
      (5)
A recognition order must state the date on which it takes effect.
Revocation of recognition
3     (1)
A recognition order may be revoked by a further order made by the
Secretary of State if at any time it appears to him—
20
(a)
that any requirement of Part 2 of this Schedule is not satisfied in the
case of the body to which the recognition order relates (“the
recognised body”),
(b)
that the body has failed to comply with any obligation imposed on it
by or by virtue of this Part of this Act, or
25
(c)
that the continued recognition of the body is undesirable having
regard to the existence of one or more other bodies which have been
or are to be recognised.
      (2)
An order revoking a recognition order must state the date on which it takes
effect, which must be after the period of three months beginning with the
30
date on which the revocation order is made.
      (3)
Before revoking a recognition order the Secretary of State must—
(a)
give written notice of his intention to do so to the recognised body,
(b)
take such steps as he considers reasonably practicable for bringing
the notice to the attention of the members of the body, and
35
(c)
publish the notice in such manner as he thinks appropriate for
bringing it to the attention of any other persons who are in his
opinion likely to be affected.
      (4)
A notice under sub-paragraph (3) must—
(a)
state the reasons for which the Secretary of State proposes to act, and
40
(b)
give particulars of the rights conferred by sub-paragraph (5).
      (5)
A person within sub-paragraph (6) may, within the period of three months
beginning with the date of service or publication of the notice under sub-
paragraph (3) or such longer period as the Secretary of State may allow,
make written representations to the Secretary of State and, if desired, oral
45

Company Law Reform Bill [HL]
Schedule 10 — Recognised supervisory bodies
Part 1 — Grant and revocation of recognition of a supervisory body
520

representations to a person appointed for that purpose by the Secretary of
State.
      (6)
The persons within this sub-paragraph are—
(a)
the recognised body on which a notice is served under sub-
paragraph (3),
5
(b)
any member of the body, and
(c)
any other person who appears to the Secretary of State to be affected.
      (7)
The Secretary of State must have regard to any representations made in
accordance with sub-paragraph (5) in determining whether to revoke the
recognition order.
10
      (8)
If in any case the Secretary of State considers it essential to do so in the public
interest he may revoke a recognition order without regard to the restriction
imposed by sub-paragraph (2), even if—
(a)
no notice has been given or published under sub-paragraph (3), or
(b)
the period of time for making representations in pursuance of such a
15
notice has not expired.
      (9)
An order revoking a recognition order may contain such transitional
provision as the Secretary of State thinks necessary or expedient.
     (10)
A recognition order may be revoked at the request or with the consent of the
recognised body and any such revocation is not subject to—
20
(a)
the restrictions imposed by sub-paragraphs (1) and (2), or
(b)
the requirements of sub-paragraphs (3) to (5) and (7).
     (11)
On making an order revoking a recognition order in respect of a body the
Secretary of State must—
(a)
give written notice of the making of the order to the body,
25
(b)
take such steps as he considers reasonably practicable for bringing
the making of the order to the attention of the members of the body,
and
(c)
publish a notice of the making of the order in such manner as he
thinks appropriate for bringing it to the attention of any other
30
persons who are in his opinion likely to be affected.
Transitional provision
4
A recognition order made and not revoked under—
(a)
paragraph 2(1) of Schedule 11 to the Companies Act 1989 (c. 40), or
(b)
paragraph 2(1) of Schedule 11 to the Companies (Northern Ireland)
35
Order 1990 (S.I. 1990/593 (N.I. 5)),

before the commencement of this Chapter of this Part of this Act is to have
effect after the commencement of this Chapter as a recognition order made
under paragraph 2(1) of this Schedule.
Orders not statutory instruments
40
5
Orders under this Part of this Schedule shall not be made by statutory
instrument.

Company Law Reform Bill [HL]
Schedule 10 — Recognised supervisory bodies
Part 2 — Requirements for recognition of a supervisory body
521

Part 2
Requirements for recognition of a supervisory body
Holding of appropriate qualification
6     (1)
The body must have rules to the effect that a person is not eligible for
appointment as a statutory auditor unless—
5
(a)
in the case of an individual, he holds an appropriate qualification,
(b)
in the case of a firm—
(i)
each individual responsible for statutory audit work on
behalf of the firm is eligible for appointment as a statutory
auditor, and
10
(ii)
the firm is controlled by qualified persons (see paragraph 7
below).
      (2)
Sub-paragraph (1) does not prevent the body from imposing more stringent
requirements.
      (3)
A firm which has ceased to comply with the conditions mentioned in sub-
15
paragraph (1)(b) may be permitted to remain eligible for appointment as a
statutory auditor for a period of not more than three months.
7     (1)
This paragraph explains what is meant in paragraph 6(1)(b) by a firm being
“controlled by qualified persons”.
      (2)
In this paragraph references to a person being qualified are—
20
(a)
in relation to an individual, to his holding—
(i)
an appropriate qualification, or
(ii)
a corresponding qualification to audit accounts under the
law of a member State, or part of a member State, other than
the United Kingdom;
25
(b)
in relation to a firm, to its—
(i)
being eligible for appointment as a statutory auditor, or
(ii)
being eligible for a corresponding appointment as an auditor
under the law of a member State, or part of a member State,
other than the United Kingdom.
30
      (3)
A firm is to be treated as controlled by qualified persons if, and only if—
(a)
a majority of the members of the firm are qualified persons, and
(b)
where the firm’s affairs are managed by a board of directors,
committee or other management body, a majority of that body are
qualified persons or, if the body consists of two persons only, at least
35
one of them is a qualified person.
      (4)
A majority of the members of a firm means—
(a)
where under the firm’s constitution matters are decided upon by the
exercise of voting rights, members holding a majority of the rights to
vote on all, or substantially all, matters;
40
(b)
in any other case, members having such rights under the constitution
of the firm as enable them to direct its overall policy or alter its
constitution.
      (5)
A majority of the members of the management body of a firm means—

Company Law Reform Bill [HL]
Schedule 10 — Recognised supervisory bodies
Part 2 — Requirements for recognition of a supervisory body
522

(a)
where matters are decided at meetings of the management body by
the exercise of voting rights, members holding a majority of the
rights to vote on all, or substantially all, matters at such meetings;
(b)
in any other case, members having such rights under the constitution
of the firm as enable them to direct its overall policy or alter its
5
constitution.
      (6)
Paragraphs 5 to 11 of Schedule 8 to this Act (rights to be taken into account
and attribution of rights) apply for the purposes of this paragraph.
Auditors to be fit and proper persons
8     (1)
The body must have adequate rules and practices designed to ensure that
10
the persons eligible under its rules for appointment as a statutory auditor are
fit and proper persons to be so appointed.
      (2)
The matters which the body may take into account for this purpose in
relation to a person must include—
(a)
any matter relating to any person who is or will be employed by or
15
associated with him for the purposes of or in connection with
statutory audit work;
(b)
in the case of a body corporate, any matter relating to—
(i)
any director or controller of the body,
(ii)
any other body corporate in the same group, or
20
(iii)
any director or controller of any such other body; and
(c)
in the case of a partnership, any matter relating to—
(i)
any of the partners,
(ii)
any director or controller of any of the partners,
(iii)
any body corporate in the same group as any of the partners,
25
or
(iv)
any director or controller of any such other body.
      (3)
Where the person is a limited liability partnership, in sub-paragraph (2)(b)
“director” is to be read as “member”.
      (4)
In sub-paragraph (2)(b) and (c) “controller”, in relation to a body corporate,
30
means a person who either alone or with an associate or associates is entitled
to exercise or control the exercise of 15% or more of the rights to vote on all,
or substantially all, matters at general meetings of the body or another body
corporate of which it is a subsidiary.
Professional integrity and independence
35
9     (1)
The body must have adequate rules and practices designed to ensure that—
(a)
statutory audit work is conducted properly and with integrity, and
(b)
persons are not appointed as statutory auditors in circumstances in
which they have an interest likely to conflict with the proper conduct
of the audit.
40
      (2)
The body must participate in arrangements within paragraph 21, and the
rules and practices mentioned in sub-paragraph (1) must include provision
requiring compliance with any standards for the time being determined
under such arrangements.

Company Law Reform Bill [HL]
Schedule 10 — Recognised supervisory bodies
Part 2 — Requirements for recognition of a supervisory body
523

      (3)
The body must also have adequate rules and practices designed to ensure
that no firm is eligible under its rules for appointment as a statutory auditor
unless the firm has arrangements to prevent a person to whom sub-
paragraph (4) applies from being able to exert any influence over the way in
which a statutory audit is conducted in circumstances in which that
5
influence would be likely to affect the independence or integrity of the audit.
      (4)
This sub-paragraph applies to—
(a)
any individual who is not a qualified person within the meaning of
paragraph 7, and
(b)
any person who is not a member of the firm.
10
Technical standards
10    (1)
The body must have rules and practices as to—
(a)
the technical standards to be applied in statutory audit work, and
(b)
the manner in which those standards are to be applied in practice.
      (2)
The body must participate in arrangements within paragraph 22, and the
15
rules and practices mentioned in sub-paragraph (1) must include provision
requiring compliance with any standards for the time being determined
under such arrangements.
Procedures for maintaining competence
11
The body must have rules and practices designed to ensure that persons
20
eligible under its rules for appointment as a statutory auditor continue to
maintain an appropriate level of competence in the conduct of statutory
audits.
Monitoring and enforcement
12    (1)
The body must have adequate arrangements and resources for the effective
25
monitoring and enforcement of compliance with its rules.
      (2)
The arrangements for monitoring may make provision for that function to
be performed on behalf of the body (and without affecting its responsibility)
by any other body or person who is able and willing to perform it.
Independent monitoring of audits of listed companies and other major bodies
30
13    (1)
The body must—
(a)
participate in arrangements within paragraph 23(1), and
(b)
have rules designed to ensure that members of the body who
perform any statutory audit functions in respect of major audits take
such steps as may be reasonably required of them to enable their
35
performance of any such functions to be monitored by means of
inspections carried out under the arrangements.
      (2)
Any monitoring of such persons under the arrangements is to be regarded
(so far as their performance of statutory audit functions in respect of major
audits is concerned) as monitoring of compliance with the body’s rules for
40
the purposes of paragraph 12(1).
      (3)
In this paragraph—
“major audit” means a statutory audit conducted in respect of—

Company Law Reform Bill [HL]
Schedule 10 — Recognised supervisory bodies
Part 2 — Requirements for recognition of a supervisory body
524

(a)
a company any of whose securities have been admitted to the
official list (within the meaning of Part 6 of the Financial
Services and Markets Act 2000 (c. 8)), or
(b)
any other person in whose financial condition there is a major
public interest;
5
“statutory audit function” means any function performed as a statutory
auditor.
Membership, eligibility and discipline
14
The rules and practices of the body relating to—
(a)
the admission and expulsion of members,
10
(b)
the grant and withdrawal of eligibility for appointment as a statutory
auditor, and
(c)
the discipline it exercises over its members,

must be fair and reasonable and include adequate provision for appeals.
Investigation of complaints
15
15    (1)
The body must have effective arrangements for the investigation of
complaints against—
(a)
persons who are eligible under its rules for appointment as a
statutory auditor, and
(b)
the body in respect of matters arising out of its functions as a
20
supervisory body.
      (2)
The arrangements mentioned in sub-paragraph (1) may make provision for
the whole or part of that function to be performed by and to be the
responsibility of a body or person independent of the body itself.
Independent investigation for disciplinary purposes of public interest cases
25
16    (1)
The body must—
(a)
participate in arrangements within paragraph 24(1), and
(b)
have rules and practices designed to ensure that, where the
designated persons have decided that any particular disciplinary
action should be taken against a member of the body following the
30
conclusion of an investigation under such arrangements, that
decision is to be treated as if it were a decision made by the body in
disciplinary proceedings against the member.
      (2)
In sub-paragraph (1) “the designated persons” means the persons who,
under the arrangements, have the function of deciding whether (and if so,
35
what) disciplinary action should be taken against a member of the body in
the light of an investigation carried out under the arrangements.
Meeting of claims arising out of audit work
17    (1)
The body must have adequate rules or arrangements designed to ensure that
persons eligible under its rules for appointment as a statutory auditor take
40
such steps as may reasonably be expected of them to secure that they are able
to meet claims against them arising out of statutory audit work.