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Company Law Reform Bill [HL]

Clause 359 sets out the general duty to keep accounting records. Such records must be sufficient to show and explain the company’s transactions, so as to disclose with reasonable accuracy at any time the financial position of the company. They must also be sufficient to ensure that accounts are properly prepared under the Act or under the IAS regulation. Amendment No. 301E would delete the first two planks of these requirements, so that the only requirement would be that accounting records are sufficiently adequate to ensure that accounts are properly prepared under the Act or the IAS regulation. The noble Baroness, Lady Noakes, has explained that the amendment arises out of the concerns of the Institute of Chartered Accountants of England and Wales in the light of Clause 486, but it is Clause 494 where the liabilities arise which provide for new offences in connection with the auditor’s report. We shall come to these matters at a later stage. I think that it can see a connection between the auditor’s responsibilities and this clause. The institute considers that Clause 494 is bound to cause auditors to perform additional work, to reduce the risk of being accused of recklessly issuing an audit report which has to be proved to be incorrect through, for example, omitting to make statements that proper accounting records or returns are kept or received, or are not properly reflected in the accounts. It believes that Clauses 359 and 494 taken together will result in increases in detailed transaction testing. The first point I should make is that Clause 359 creates no new obligations for the company or its auditors and is simply a re-enactment of Section 221 of the 1985 Act. Moreover, as I shall explain in more detail when we come to Part 16, Clause 494 imposes no greater obligations on them, but merely ensures that they do not knowingly or recklessly cause misleading, false or deceptive audit reports to be given, something which they ought not to be doing already. The noble Baroness also referred to the concerns about the wording of the Explanatory Notes to this clause. As she instanced, they describe ““accounting record”” as a broad term and gave, as examples, bank statements, purchase orders, and sales and purchase invoices. I cannot accept that those examples go, as the institute has said,"““well beyond the general understanding of the definition of accounting records included in clause 359””." Perhaps I may quote guidance to directors issued by the Institute of Directors on what may be considered to be adequate accounting records for the very smallest company. It states:"““For the very smallest company, the absolute minimum accounting records would be: bank statements, cheque books and paying-in books; original invoices for all purchases and copy invoices for sales; PAYE records . . . VAT records if you are registered””," and details of ““stock at year end”” and ““fixed assets””. Of course, it is completely accepted and widely understood that the accounting records that must be kept will depend on the size and nature of the business, and the systems that they have, which are changing with the technology available. But I am very happy to clarify that point when the Explanatory Notes are revised, if it will help to allay concerns. The ICAEW has argued that directors should need to ensure only that the accounting records are sufficient for the financial statements to be properly prepared and to show a true and fair view. I disagree. Companies do not maintain accounting records for the sole purpose of preparing their accounts. If accounting records are not kept, how will it be possible for the directors and officers of the company to be satisfied on the financial position of the company? Failure to maintain adequate accounting records is one of the critical signs of a failing company. The basic obligation on companies to keep full accounting records for all the purposes set out in Clause 359 should not be diluted. Finally, the specific reference to the true and fair view in Amendment No. 301E is superfluous, given the requirements about accounts giving a true and fair view contained later in this part in Clauses 366, 369(2) and 377(2). The Bill, in Clauses 366 and 482, already reflects the very clear principle that accounts should give a true and fair view of a company’s financial position and that auditors should report on whether they do or not. It is clear that if the accounts do not give a true and fair view, neither directors nor auditors should sign them off. The additional reference to ““true and fair””, which Amendment No. 301E suggests, is therefore unnecessary.