The Professional Oversight Board for Accountancy (“POBA”) was set up pursuant to the Companies (Audit, Investigations and Community Enterprise) Act 2004, itself the Government’s response to a series of corporate scandals that shook investor confidence in company reporting and enforcement. The Government has delegated to POBA its own powers to oversee and monitor audit regulation in the UK and POBA has a free hand in determining the most effective methods for fulfilling its oversight of audit practice across the full size spectrum.
Last summer, while still feeling its way into this critical role, POBA reported its findings on a numerical sample of 350 randomly selected accounts on public file. The sample reflected the facts that (i) 90% of all companies are “small”; (ii) 90% of those are exempt from audit; and (iii) 90% of exempt companies take advantage of that exemption.
The findings, briefly stated, were that a majority of the accounts examined contained errors; and that a “sizeable minority” were compromised by serious errors, such as balance sheets that don’t actually balance; or showing issued share capital that exceeds authorised capital. A surprising number even included prior year adjustments in their first year of trading!
Only two years have passed since the exemption threshold was raised from turnover of £1 million to the EU-set maximum of £5.6 million, with a patently debilitating impact on the quality of accounts on public record. Yet the EU’s 4th and 7th Company Law Directives now apparently allow the threshold to be raised by a further 20% to over £6.7 million subject, as ever, to “due consultation”.
Who needs consultation on future change when past change amply reflects its own folly? In any case, if past efforts at consultation are anything to go by, the DTI will raise the threshold if it wants to even if the exact opposite view is expressed by the professional bodies it consults.
What will the new Act achieve?
As I write, the new Companies Act, having received Royal Assent, awaits its formal bookshop/website reception. If the latter, take care before you press the “print” button – the Bill was the longest placed before Parliament in the history of UK statute law at around 800 pages and close to 1300 clauses. And that does not even cover the form and content of accounts, yet to be dealt with in regulations issued by the Secretary of State.
Given the possibility that transition from Bill to Act might have occasioned yet further changes, it may be safer for me to await sight of the monster in its full glory before passing comment. I have in any case written already on such features as the list of pious platitudes that now pass for new law on directors’ duties, notably the “duty to promote the success of the company” (as opposed to …… what?) and the litigators’ dream-list of things directors should think about, such as the “the likely consequences of any decision in the long term”, and “the desirability of ….. maintaining a reputation for high standards of business conduct”.
This twaddle may answer the prayers of a destitute lawyer (if you can imagine such a thing) but it masks the Act’s astonishing dereliction of responsibility for governance of small companies.
Audit, of course, has already become little more than a memory for about a million companies, but what about the Act’s downgrading of even the accounting records requirement from “proper” to “adequate”? Or, worse, abolishing the prohibition of loans to directors? Or abolishing the prohibition of companies giving financial assistance for purchase of their own shares?
So: we have any number of worthless accounts on file, no audit or any obligatory professional input, a free hand with the company’s dosh – no doubt maintaining high standards of business conduct with the other hand! Welcome to 21st Century company law.