Company Law Reform Bill [HL] (669-675)

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Company Law Reform Bill [HL] (669-675)

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Schedule 10 — Recognised supervisory bodies
Part 2 — Requirements for recognition of a supervisory body
669

Orders not statutory instruments
5
Orders under this Part of this Schedule shall not be made by statutory
instrument.
Part 2
Requirements for recognition of a supervisory body
5
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—
(a)
in the case of an individual, he holds an appropriate qualification,
(b)
in the case of a firm—
10
(i)
each individual responsible for statutory audit work on
behalf of the firm is eligible for appointment as a statutory
auditor, and
(ii)
the firm is controlled by qualified persons (see paragraph 7
below).
15
      (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-
paragraph (1)(b) may be permitted to remain eligible for appointment as a
statutory auditor for a period of not more than three months.
20
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—
(a)
in relation to an individual, to his holding—
(i)
an appropriate qualification, or
25
(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;
(b)
in relation to a firm, to its—
(i)
being eligible for appointment as a statutory auditor, or
30
(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.
      (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
35
(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
one of them is a qualified person.
      (4)
A majority of the members of a firm means—
40
(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;

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Schedule 10 — Recognised supervisory bodies
Part 2 — Requirements for recognition of a supervisory body
670

(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—
(a)
where matters are decided at meetings of the management body by
5
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
constitution.
10
      (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
the persons eligible under its rules for appointment as a statutory auditor are
15
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
associated with him for the purposes of or in connection with
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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
(iii)
any director or controller of any such other body; and
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(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,
or
30
(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,
means a person who either alone or with an associate or associates is entitled
35
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
9     (1)
The body must have adequate rules and practices designed to ensure that—
40
(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.

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Schedule 10 — Recognised supervisory bodies
Part 2 — Requirements for recognition of a supervisory body
671

      (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.
      (3)
The body must also have adequate rules and practices designed to ensure
5
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
influence would be likely to affect the independence or integrity of the audit.
10
      (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.
Technical standards
15
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
rules and practices mentioned in sub-paragraph (1) must include provision
20
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
eligible under its rules for appointment as a statutory auditor continue to
25
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
monitoring and enforcement of compliance with its rules.
30
      (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
13    (1)
The body must—
35
(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
performance of any such functions to be monitored by means of
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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

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Schedule 10 — Recognised supervisory bodies
Part 2 — Requirements for recognition of a supervisory body
672

audits is concerned) as monitoring of compliance with the body’s rules for
the purposes of paragraph 12(1).
      (3)
In this paragraph—
“major audit” means a statutory audit conducted in respect of—
(a)
a company any of whose securities have been admitted to the
5
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;
“statutory audit function” means any function performed as a statutory
10
auditor.
Membership, eligibility and discipline
14
The rules and practices of the body relating to—
(a)
the admission and expulsion of members,
(b)
the grant and withdrawal of eligibility for appointment as a statutory
15
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    (1)
The body must have effective arrangements for the investigation of
20
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
supervisory body.
25
      (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
16    (1)
The body must—
30
(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
conclusion of an investigation under such arrangements, that
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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,
what) disciplinary action should be taken against a member of the body in
40
the light of an investigation carried out under the arrangements.

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Schedule 10 — Recognised supervisory bodies
Part 3 — Arrangements in which recognised supervisory bodies are required to participate
673

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
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.
5
      (2)
This may be achieved by professional indemnity insurance or other
appropriate arrangements.
Register of auditors and other information to be made available
18
The body must have rules requiring persons eligible under its rules for
appointment as a statutory auditor to comply with any obligations imposed
10
on them by—
(a)
requirements under section 1188 (Secretary of State’s power to call
for information);
(b)
regulations under section 1203 (the register of auditors);
(c)
regulations under section 1204 (information to be made available to
15
the public).
Taking account of costs of compliance
19
The body must have satisfactory arrangements for taking account, in
framing its rules, of the cost to those to whom the rules would apply of
complying with those rules and any other controls to which they are subject.
20
Promotion and maintenance of standards
20
The body must be able and willing—
(a)
to promote and maintain high standards of integrity in the conduct
of statutory audit work, and
(b)
to co-operate, by the sharing of information and otherwise, with the
25
Secretary of State and any other authority, body or person having
responsibility in the United Kingdom for the qualification,
supervision or regulation of auditors.
Part 3
Arrangements in which recognised supervisory bodies are required to
30
participate
Arrangements for setting standards relating to professional integrity and independence
21
The arrangements referred to in paragraph 9(2) are appropriate
arrangements—
(a)
for the determining of standards for the purposes of the rules and
35
practices mentioned in paragraph 9(1), and
(b)
for ensuring that the determination of those standards is done
independently of the body.

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Schedule 10 — Recognised supervisory bodies
Part 3 — Arrangements in which recognised supervisory bodies are required to participate
674

Arrangements for setting technical standards
22
The arrangements referred to in paragraph 10(2) are appropriate
arrangements—
(a)
for the determining of standards for the purposes of the rules and
practices mentioned in paragraph 10(1), and
5
(b)
for ensuring that the determination of those standards is done
independently of the body.
Arrangements for independent monitoring of audits of listed companies and other major bodies
23    (1)
The arrangements referred to in paragraph 13(1) are appropriate
arrangements—
10
(a)
for enabling the performance by members of the body of statutory
audit functions in respect of major audits to be monitored by means
of inspections carried out under the arrangements, and
(b)
for ensuring that the carrying out of such monitoring and inspections
is done independently of the body.
15
      (2)
In this paragraph “major audit” and “statutory audit function” have the
same meaning as in paragraph 13.
Arrangements for independent investigation for disciplinary purposes of public interest cases
24    (1)
The arrangements referred to in paragraph 16(1) are appropriate
arrangements—
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(a)
for the carrying out of investigations into public interest cases arising
in connection with the performance of statutory audit functions by
members of the body,
(b)
for the holding of disciplinary hearings relating to members of the
body which appear to be desirable following the conclusion of such
25
investigations,
(c)
for requiring such hearings to be held in public except where the
interests of justice otherwise require,
(d)
for the persons before whom such hearings have taken place to
decide whether (and, if so, what) disciplinary action should be taken
30
against the members to whom the hearings related, and
(e)
for ensuring that the carrying out of those investigations, the holding
of those hearings and the taking of those decisions are done
independently of the body.
      (2)
In this paragraph—
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“public interest cases” means matters which raise or appear to raise
important issues affecting the public interest;
“statutory audit function” means any function performed as a statutory
auditor.
Supplementary: arrangements to operate independently of body
40
25    (1)
This paragraph applies for the purposes of—
(a)
paragraph 21(b),
(b)
paragraph 22(b),
(c)
paragraph 23(1)(b), or

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Schedule 11 — Recognised professional qualifications
Part 1 — Grant and revocation of recognition of a professional qualification
675

(d)
paragraph 24(1)(e).
      (2)
Arrangements are not to be regarded as appropriate for the purpose of
ensuring that a thing is done independently of the body unless they are
designed to ensure that the body—
(a)
will have no involvement in the appointment or selection of any of
5
the persons who are to be responsible for doing that thing, and
(b)
will not otherwise be involved in the doing of that thing.
      (3)
Sub-paragraph (2) imposes a minimum requirement and does not preclude
the possibility that additional criteria may need to be satisfied in order for
the arrangements to be regarded as appropriate for the purpose in question.
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Supplementary: funding of arrangements
26
The body must pay any of the costs of maintaining any arrangements within
paragraph 21, 22, 23 or 24 which the arrangements provide are to be paid by
it.
Supplementary: scope of arrangement
15
27
Arrangements may qualify as arrangements within any of paragraphs 21,
22, 23 and 24 even though the matters for which they provide are more
extensive in any respect than those mentioned in the applicable paragraph.
Schedule 11
Section 1184

Recognised professional qualifications
20
Part 1
Grant and revocation of recognition of a professional qualification
Application for recognition of professional qualification
1     (1)
A qualifying body may apply to the Secretary of State for an order declaring
a qualification offered by it to be a recognised professional qualification for
25
the purposes of this Part of this Act (“a recognition order”).
      (2)
In this Part of this Act “a recognised qualifying body” means a qualifying
body offering a recognised professional qualification.
      (3)
Any application must be—
(a)
made in such manner as the Secretary of State may direct, and
30
(b)
accompanied by such information as the Secretary of State may
reasonably require for the purpose of determining the application.
      (4)
At any time after receiving an application and before determining it the
Secretary of State may require the applicant to furnish additional
information.
35
      (5)
The directions and requirements given or imposed under sub-paragraphs
(3) and (4) may differ as between different applications.