Appointment and removal of company auditors
This article explains the role of a company auditor, which types of companies must appoint an auditor and the circumstances when an auditor is not required.
It also explains the procedure for appointing and removing auditors from office.
What is an auditor?
An auditor conducts a review of the annual financial statements of a company makes an independent report to the owners (referred to as shareholders or members) as to whether the accounts have been properly prepared in accordance with the Companies Act.
The report will say whether, in the opinion of the auditor, the company's accounts give a true and fair view of its affairs.
The auditor will also consider if the information given in the directors' report is consistent with the annual accounts.
If in the auditor's opinion, the accounts or directors' report does not comply with the Companies Acts, he or she will say so in the report.
Is an auditor only concerned with annual accounts?
Yes. However, there is nothing to stop you employing an auditor for other purposes, such as keeping the books or compiling the tax return, provided he or she does not take part in the management of the company.
Must all company accounts be audited?
No. If they qualify for exemption and wish to take advantage of it, dormant companies and certain small companies do not have to have their accounts audited.
To qualify for audit exemption as a small company, the company must meet the following three requirements:
- qualify as small (50 or fewer employees on average)
- have a turnover of not more than £6.5 million
- have a balance sheet total of not more than £3.26 million.
Are all types of small companies eligible for the exemption?
A company that falls into any of the following categories must have its accounts audited.
a parent company or subsidiary undertaking (unless dormant for the period during which it was a subsidiary) except where the group:
- qualifies as a small group or would qualify if all the bodies corporate in the group were companies; and
- the turnover for the whole group is not more than £6.5 million net (or £7.8 million gross); and
- the combined balance sheet total is not more than £3.26 million net (or £3.9 million gross)
- a public company (unless it is dormant)
a company that at any time in the financial year in question was:
- a business that is an authorised insurance company, a bank, an e-money issuer, a MiFID (ie Markets in Financial Instruments Directive) investment firm or a UCITS (ie Undertakings for Collective Investment in Transferable Securities) management company;
- a company that carries on insurance market activity; or
- a special register body as defined in section 117(1) of the Trade Union and Labour Relations (Consolidation) Act 1992 (c. 52) or an employers' association as defined in section 122 of that Act or Article 4 of the Industrial Relations (Northern Ireland) Order 1992 (S.I. 1992/807 (N.I. 5)).
- a company where an audit is required by a member or members holding at least 10% of the nominal value of issued share capital, or holding 10% of any class of share or - in the case of a company limited by guarantee - 10% of its members in number.
- some property management companies that would otherwise qualify for exemption may have to prepare audited accounts to comply with the terms of their lease.
What should a company do with the audited accounts?
Audited accounts must be sent to Companies House annually. Companies House publishes them publically so that the stakeholders in the business, including other businesses with which the company trades, can decide whether they wish to do business with the company or not.
Can my accountant be my auditor?
An auditor must be independent of the company, and therefore, a person cannot be appointed as an auditor if they are:
- an officer or employee of the company or an associated company
- a partner or employee of such a person, or a partnership of which such a person is a partner
If your accountant does not fall into one of the above categories and if he or she has a current audit-practising certificate issued by a recognised supervisory body then he or she may act as the company's auditor.
What and who are recognised supervisory bodies?
These are bodies recognised by the Secretary of State as having rules designed to ensure that auditors are of the highest professional competence. Each recognised body has strict regulations and a disciplinary code to govern the conduct of their registered auditors. The five recognised bodies are:
- The Institute of Chartered Accountants of Scotland (ICAS)
- The Institute of Chartered Accountants in England and Wales (ICAEW)
- The Institute of Chartered Accountants in Ireland (ICAI)
- The Association of Chartered Certified Accountants (ACCA)
- The Association of Authorised Public Accountants (AAPA)
How is a company auditor appointed?
The directors appoint the first auditor of the company. He or she then holds office until the end of the first meeting of the shareholders at which the accounts are laid before the members. At that meeting the members can re-appoint the auditor, or appoint a different one, to hold office from that date until the end of the next shareholders' meeting at which accounts are laid.
However, private companies can pass an 'elective resolution' not to lay accounts before the members in a general meeting. If this is done, then the auditor has to be re-appointed, or a new one appointed, at another meeting of the company's members that must be held within 28 days of the accounts being sent to the members.
Private companies can also pass an elective resolution dispensing with the need to appoint an auditor every year. If that happens, the auditor already appointed remains in office without further formality until a resolution is passed to re-introduce annual appointment or to remove him or her as auditor.
The process is explained in detail, step by step, with copies of all the meeting minutes and notices in our pack of documents to appoint an auditor.
How is a company auditor removed from office
The members of a company may remove an auditor from office at any time during his or her term of office or decide not to re-appoint him or her for a further term. They must give the company 28 days' notice of their intention to put a resolution to remove the auditor, or to appoint somebody else, to a general meeting. A copy of the notice of the intended resolution must be sent to the auditor, who then has the right to make a written response and require that it be sent to the company's shareholders.
If an auditor ceases for any reason to hold office, he or she must deposit a statement at the company's registered office. The statement should set out any circumstances connected with his ceasing to hold office that he or she considers should be brought to the attention of the members and creditors of the company.
If there are any such circumstances, the company must send a copy of the statement to all the shareholders unless a successful application is made to the court to stop this. If the auditor does not receive notification of an application to the court within 21 days of depositing the statement with the company, he or she must within a further 7 days send a copy of the statement to Companies House for the public record.
If there are no such circumstances, the auditor must deposit a statement with the company to that effect. This statement need not be circulated to the members.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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