Division 4 of Part XI of the Companies Act 1997 governs the audit.
Section 190 — appointment at each annual meeting
Subject to subsection (2), a company shall, at each annual meeting, appoint an auditor to —
(a) hold office from the conclusion of the meeting until the conclusion of the next annual meeting; and
(b) audit the financial statements of the company and, where group financial statements are required, those group statements, for the accounting period next after the meeting.
The auditor appointed at an annual meeting audits the accounts for the period next after the meeting. A company that has never appointed an auditor and now needs one must use section 195, which provides for the appointment of the first auditor.
Whether a company needs an auditor at all turns on whether it is an exempt company under section 171 — broadly, one that at no time in the period had assets over K5 million, more than 25 shareholders or more than 100 employees; or that exceeded one or two of those and whose shareholders have all agreed that an auditor should not be appointed. A subsidiary of a non-exempt company, of an issuer or of an overseas company is never exempt.
Where a company is required by section 190 to have its financial statements and any group financial statements audited and fails to do so, every director commits an offence, penalty under section 414(3).
And under section 215(3) a certified copy of the audited statements and the audit report must accompany the annual return; under section 183 they must be filed within 14 days after the annual meeting.
Section 193 — who may be an auditor
A person shall not be appointed or act as auditor unless the person is registered as a Registered Company Auditor under the Accountants Act 1996.
(a) a director or employee of the company;
(b) a person who is a partner, or in the employment, of a director or employee of the company;
(c) a liquidator, or a person who is a receiver in respect of the property of the company;
(d) a body corporate;
(e) a person who, by virtue of paragraph (a) or (b), may not be appointed or act as auditor of a related company.
Paragraph (e) extends the disqualification across the group: a person who could not audit the parent because they are its employee cannot audit the subsidiary either. Paragraph (c) prevents the same person acting as both liquidator or receiver and auditor.
Paragraph (d) forbids a body corporate from being appointed — but section 192 allows a partnership to be appointed by the firm name where all or some of the partners are qualified. Such an appointment is deemed to be the appointment of all the persons who are partners in the firm from time to time, and partners who are not qualified shall not act as auditors.
Section 198 adds the continuing obligation: an auditor shall ensure that his judgment is not impaired by reason of any relationship with or interest in the company or any of its subsidiaries. And under section 200(1)(c) the report must state any such relationship or interest.
Section 191 — who fixes the fees
(a) where the auditor is appointed at a meeting — by the company at the meeting, or in such manner as the company determines at the meeting; and
(b) where appointed by the directors — by the directors; and
(c) where appointed by the Registrar — by the Registrar.
Whoever appoints, fixes the fee. That keeps the audit fee out of the hands of the management being audited where the shareholders make the appointment.
Sections 194 to 197 — continuity and change
| Section | Effect |
|---|---|
| 194 | Automatic reappointment at an annual meeting — an auditor other than one appointed under section 195(1) is automatically reappointed unless the conditions in that section apply |
| 195 | Appointment of the first auditor |
| 196 | Replacement of auditor — and the auditor is entitled to be paid reasonable fees and expenses for making representations to shareholders |
| 197 | Auditor not seeking reappointment, or resigning |
Where an auditor gives the board written notice that he does not wish to be reappointed or of his resignation, the board shall, where requested by that auditor —
(a) distribute to all shareholders, at the expense of the company, a written statement of the auditor’s reasons; or
(b) permit the auditor or his representative to explain at a shareholders’ meeting the reasons.
The auditor is entitled to be paid reasonable fees and expenses for doing so.
An auditor who resigns because of a disagreement with the board can insist that the shareholders hear why — at the company’s expense. That removes the ability of a board to change auditors quietly after an awkward audit.
Read with section 203, under which the board must ensure the auditor is permitted to attend shareholders’ meetings, receives the notices a shareholder receives, and may be heard on any part of the business concerning them as auditor. An auditor is never dependent on the board for access to the shareholders.
Practical points
- Test exempt status each year. The thresholds apply to whether the company had them at any time during the accounting period — growth mid-year can end the exemption.
- If relying on shareholder agreement under section 171(1)(b), obtain and keep the agreement of every shareholder.
- Check group status. A subsidiary of a non-exempt company, an issuer, or an overseas company can never be exempt.
- Appoint at the annual meeting, and fix the fee there or set the manner of fixing it.
- Check disqualification under section 193(2) — including the group extension in paragraph (e).
- Give the auditor access. Under section 202 the board must ensure access at all times to the accounting records and other documents, and a director or employee who refuses information commits an offence.
- File on time — statements and audit report within 14 days after the annual meeting (s 183), and with the annual return (s 215(3)).
Sources
- Companies Act 1997 — ss 171, 183, 187, 190–203, 215, 414
- Accountants Act 1996
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.