Progress Report - LFIG Company Law Reform Study Group
(November 2005)
One huge achievement in the domain of Company Law is the increase in the
Audit Exemption limit from £1 million to £5.6 million, under s249A of the
Companies Act. The LFIG Co Law Study Group provided a detailed submission
with examples to the DTI. Financial statements of private companies continue
to be prepared in the normal way but they do not have to be verified by
auditors unless 10% of shareholders want it. Burdens on UK commerce
decreased and UK exemption limits surpass those of Germany, Australia and
other competitors.
We took up Nigel Griffiths on his offer and he has kindly passed on our
latest submission to Alan Johnson at the DTI. Here is a summary (full
version on LFIG website):
A - There should be no limitation in auditor's liability since case law
in this area is well developed. Natural justice cannot be delivered if
auditors are not fully liable for the damage they cause.
B - Auditors' Self-Regulation needs to be abolished
Independent judges should be appointed by the Lord Chancellor, instead of
Recognised Supervisory Body (RSB) bureaucrats, to oversee:
- prima facie cases against an accused auditor
- rules of evidence are applied fully
- cross-examination and subpoenas are available to the accused
- uphold the concept of "innocent until proven guilty"
- trials are conducted fairly and are seen to be conducted fairly
- the final judgment is impartial
- fines and costs are utilised for the benefit of auditor retraining.
RSBs are not answerable to courts of law since they have the protection
of their Royal Charter. Under self-regulation, if RSB bureaucrats decide
that their own accused member has a prima facie case to answer, a
disciplinary hearing is conducted at the RSB's premises, facilitated by
RSB's secretariat. Effectively, RSBs act as (a) prosecutor, (b) jury, (c)
executioner and (d) benefactor of fines.
Smaller audit firms get harsh punishment over the most tenuous of
accusations. This is particularly acute if the auditor is not minded to be
subservient and/or deferential towards RSB's secretariat. Large audit firms
regularly get mild admonition or fines that are an incredibly small
percentage of that audit fee. Whilst small audit firms experience financial
and moral devastation over their self-regulated disciplinary hearings, big
audit firms appear to be almost unaffected by their disciplinary hearings
e.g. BCCI, Barings, Maxwell.
Self-regulation, a relic of medieval times, gives auditors the type of
latitude that does not sit well with EU laws and human rights. One
consequence is the current dilemma; "whether pensions can continue to be
paid to all who have invested in pension funds, and who in turn invest in
shares of corporates, who in turn are audited by self-regulated auditors?"
C - Private Companies should be exempted from filing annual returns and
financial statements at Companies House since:
(a) most suppliers do not check information held at Companies House
before extending unsecured credit to private companies
(b) fraudsters and reactionaries abuse public information at Companies
House.
D - Inanimate entities such as companies should not be allowed to be
appointed directors of companies. Only human individuals should remain
personally responsible for debts of failed companies.
Jaffer Manek
Chair, LFIG Co Law Reform Study Group
jmanek@lfig.org
