Company Law Reform Bill [HL]

The change that we are making in the requirements on auditors who are leaving companies is an important one, and I am happy to have the opportunity to explain it. It has to do with whether shareholders and creditors are given an explanation of why an auditor is no longer going to audit their company. Under Section 394 of the Companies Act 1985, an auditor who ceases to hold office, for any reason, is required to make a statement of the circumstances only if he positively considers that there are circumstances that should be brought to the attention of the members or creditors of the company he is leaving. By contrast, for unquoted companies, Clause 506 of the Bill requires the auditor to make a statement as the general rule, with the exception that he need not make a statement if he positively decides there are no circumstances to be brought to the attention of the members or creditors. We are making these changes because of the importance of ensuring that whenever auditors are leaving because they believe there is a problem with the accounts, or with the management of the company, they should make this known to the shareholders and to the public. The change from the 1985 Act shifts the balance in favour of disclosure. An undecided auditor at present might persuade himself that there are no circumstances that he considers should be brought to the attention of the members or creditors. He may find it more difficult to persuade himself that there are no circumstances that need be brought to their attention. Amendments Nos. 324 and 325 would together revert the Bill to the existing position under the Act but I hope that I have persuaded the noble Baronesses that the change is a useful improvement. Amendment No. 326 relates to quoted companies. Instead of just tipping the balance for quoted companies, auditors who are leaving are required to make a statement of circumstances in all cases, without any option. The amendment would change the content of the statement from,"““circumstances connected with his ceasing to hold office””," to,"““circumstances which he considers are connected with his ceasing to hold office””." This seems to me to weaken the requirement. Perhaps the noble Baronesses feel that it is necessary to protect the auditor from possible prosecution if he fails to record the absolutely correct circumstances, and so want to introduce an element of subjectivity. I do not believe that concern is justified. Subsection 506(6) provides that it is a defence for any ex-auditor to show that he took all reasonable steps and exercised all due diligence. I believe that this should be sufficient comfort for the auditor who is considering what circumstances to include in his statement.