The FRRP has today announced its approach to the review of accounts whose audit report is qualified for failure to comply with the Companies Act 1985.

Last year the FRRP published a consultation paper in which it asked whether auditors would voluntarily report to the FRRP when they qualify a set of accounts. The responses are summarised in the Appendix to this press notice, and it can be seen that auditors were unwilling to make such a report. The FRRP has therefore arranged for other means of notification of qualified audit reports on accounts that fall within the Panel’s remit. So far the FRRP has received notification of over 740 qualified accounts. All the companies involved, while substantial businesses, are private limited entities. In some cases they are subsidiaries of traded entities.

The FRRP is writing to more than 50 of the companies concerned, drawing attention to the directors’ responsibilities under the Companies Act to prepare accounts that comply with the law and accounting standards. The FRRP will tell directors that, at this stage it will not be opening an enquiry into the accounts which have caused it to write, but the FRRP will review their next set of accounts and will take appropriate action in accordance with its operating procedures if the qualification remains.

The FRRP has power to apply to the court for an order seeking the revision of defective accounts. To date the FRRP has managed to agree appropriate resolution of issues raised with companies without recourse to court action. However the FRRP will be pointing out to directors that if the FRRP is successful in obtaining an order of the court requiring directors to prepare revised accounts it is open to the court to order that the costs of the action and the revision should be paid by the directors personally if they were party to the approval of the defective accounts.

The FRRP has a clear interest in company accounts which are qualified by their auditors for breach of accounting requirements. This is a strong indicator that the financial statements may not be properly prepared in accordance with the law and do not give a true and fair view.

The FRRP hopes that this approach will encourage directors who presently prepare accounts that do not comply with the law to address the non-compliance so that neither the audit qualification nor an FRRP enquiry is necessary in future.

Bill Knight, the FRRP Chairman said:

"The FRRP exists to enforce compliance with the law and accounting standards. We are giving directors of companies with qualified accounts an opportunity to put matters right. We are writing to some of the companies concerned, but our warning applies to all of them and, in future, we will not hesitate to take appropriate action where such qualified accounts come to our attention, whether or not we have previously written to the company concerned."

1. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. The FRC’s functions are exercised principally by its operating bodies (the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy & Actuarial Discipline Board) and by the FRC Board. The Committee on Corporate Governance assists the Board in its work on corporate governance.
2. The role of the Panel is to examine the annual accounts of public and large private companies to see whether they comply with the requirements of the Companies Act 1985 (‘the Act’), including applicable accounting standards. Following implementation of the Accounting Regulation (EC) No. 1606/2002, this may mean compliance with UK or International Financial Reporting Standards.
3. Where breaches of the Act are discovered the Panel seeks to take corrective action that is proportionate to the nature and effect of the defects, taking account of market and user needs. Where a company’s accounts are defective in a material respect the Panel will, wherever possible, try to secure their revision by voluntary means, but if this approach fails the Panel is empowered to make an application to the court under section 245B of the Companies Act 1985 for an order for revision. To date no court applications have been made.
4. The Chairman of the Panel is Bill Knight and the Deputy Chairmen Ian Brindle and Ian Wright. There are currently 25 other Panel members drawn from a broad spectrum of commerce and the professions. Individual cases are normally dealt with by specially constituted Groups of five or more members.
5. All Press enquiries should be directed to: Carol Page on tel: 020 7492 2460 or email: c.page@frc-frrp.org.uk