Commentary on Sections Section 18: Auditors ceasing to hold office
93.This section implements changes to Chapter 4 of Part 16 of the Companies Act 2006 (the “2006 Act”) and, like the Part of the 2006 Act it amends, forms part of the law of England and Wales, Scotland and Northern Ireland. The changes emerged following a consultation by the Department for Business, Innovation and Skills in November 2009. They will reduce the regulatory burden of the notification requirements which, pursuant to Chapter 4, currently apply when an auditor resigns or is removed from office, or in some cases when the auditor is not reappointed. Chapter 4 currently includes unnecessary duplication such that, in many cases, both the company and auditor must notify Companies House and the audit authorities about the auditor’s departure and the reasons for leaving. There are also unnecessary notification requirements between regulatory authorities.
94.An auditor is a person or firm appointed to examine the accounts and reports of a company, and its accounting records, and to report on whether in the opinion of the auditor the accounts give a true and fair view of a company’s financial situation. Provision in the 2006 Act for the auditor’s appointment and term of office is set out in sections 485 and 487 respectively (in the case of a private company) and in sections 489 and 491 respectively (in the case of a public company).
95.Subsection (2) of the section replaces subsections (1) to (3) of section 519 of the 2006 Act with new subsections (1) to (3B).
96.New section 519(1) has the effect that an auditor of a public interest company who is ceasing to hold office must always send to the company a statement of his or her (or its) reasons for leaving. “Public interest company” and “non-public interest company” are defined in new section 519A (see subsection (3) of the section).
97.New section 519(2), (2A) and (2B) have the effect that an auditor of a non-public interest company who is ceasing to hold office must send to the company a statement of his or her (or its) reasons for leaving unless:
	the auditor’s term of office has come to an end when he, she or it leaves; or
	the auditor’s reasons for leaving (before the end of the term of office) are all “exempt reasons” as defined in the list at new section 519A(3), and there is no information that the auditor thinks should be brought to the attention of the company’s shareholders or creditors.
98.New section 519(3) specifies the company and auditor details that must be included in the statement sent pursuant to new section 519(1) or (2).
99.New section 519(3A) provides that, if an auditor thinks that there is any related information (not being the auditor’s actual reasons for leaving office) that should be brought to the attention of the shareholders or creditors of the company, the auditor must include that information in the statement. This might be the case even if the auditor is acting for a non-public interest company and his or her reasons for leaving are exempt.
100.New section 519(3B) provides that if an auditor of a non-public interest company considers that there is no such information that should be brought to the attention of the shareholders or creditors and that none of the reasons need be brought to their attention, then the auditor’s statement under new section 519(2) must include a statement to that effect.
101.Subsection (3) of the section inserts a new section 519A into the 2006 Act. Subsections (1) and (2) of new section 519A define the terms “public interest company” and “non-public interest company”. A public interest company is defined as a company whose “transferable securities” (these include shares and bonds) are listed on a regulated market such as the London Stock Exchange, or whose shares are listed on a comparable EEA market. Subsection (3) of new section 519A lists the “exempt reasons”. These “exempt reasons” are:
	that the auditor is ceasing to practise as an auditor (this could be because an individual auditor is retiring or changing career or because an audit firm is ceasing to be in business);
	that the company the auditor is ceasing to act for qualifies for one of the exemptions from audit under Chapter 1 of Part 16 (applicable to certain small companies, dormant companies and subsidiaries) and intends to rely on one of these exemptions;
	that (broadly speaking) the auditor is ceasing to act for a “subsidiary” company (i.e. a company completely or partly owned or controlled by another, “parent”, company or other entity) because the accounts of the subsidiary are to be audited as part of the audit of the group accounts by the parent’s auditor; and
	that the company the auditor is ceasing to act for is being liquidated through an insolvency procedure.
Subsection (5) of new section 519A gives the Secretary of State a power to amend, by order, the definition of “public interest company” and subsection (6) specifies the relevant parliamentary procedure (negative resolution procedure) for any such order.
102.Subsection (4) replaces subsections (1) to (3) of section 523 of the 2006 Act. These provisions concern the giving by a company of notice to the relevant “audit authority” that an auditor is ceasing to act for the company. The relevant audit authority is defined at section 525 of the 2006 Act – in practice that authority will be the Financial Reporting Council or the accountancy body with which the auditor has his or her (or the audit firm has its) registration.
103.The new subsections provide for exceptions to this notification requirement. These exceptions apply whether or not the company is a public interest company. Taken together, new subsections (1), (1A) and (2) have the effect that a company must notify the appropriate audit authority whenever an auditor ceases to act for the company before his or her (or its) term of office ends unless the company reasonably believes that the auditor’s reasons for leaving (before the end of the term of office) are all “exempt reasons”.
104.New section 523(2A) provides that the company’s notice to the relevant audit authority must be a statement by the company of what it believes (whether reasonably or unreasonably) to be the reasons for the auditor’s departure.
105.New section 523(2B) and (2C) provide that, as an alternative, a company may provide an “endorsed” copy of the auditor’s statement under new section 519(1) if the company receives that statement from the auditor within certain time limits and the company agrees with its contents. (The endorsement is an endorsement to the effect that the company so agrees.)
106.New subsection (3) of section 523 stipulates when the company’s notice (whether a wholly new notice or an endorsed copy of the auditor’s) must be given.
107.Subsection (5) of the section gives effect to Schedule 5 which makes further amendments to the provisions on departing auditors. See commentary on Schedule 5 below.
108.The section comes into force on a day to be appointed by the Secretary of State in a commencement order.