The Companies Act 2006 imposes obligations both on an outgoing auditor and on the company it is ceasing to audit, to ensure that information about the auditor's departure (and the reasons for it) is given to the company's shareholders and to the appropriate authorities.  These provisions came into force in April 2008, and it soon emerged that there was unnecessary bureaucracy and duplication in the notification requirements. 

In November 2009, the Government consulted on changes.  It has taken a while, but simplified requirements will apply where an auditor leaves office in relation to a financial year beginning on or after 1 October 2015.  The changes will be particularly useful in the context of company acquisitions.

Firstly, the company will no longer be required to notify Companies House where the auditor resigns or is removed from office by shareholder resolution.  This makes sense, as there is no requirement to inform Companies House of the appointment of an auditor.

The company must inform the relevant audit authority if the auditor ceases to hold office before the end of his term of office.  For a listed company, the relevant authority is the Financial Reporting Council and for unlisted companies (which in the context of all these changes includes AIM companies), the relevant authority is the ICAEW (Institute of Chartered Accountants in England and Wales) or other accountancy body with which the auditor is registered.  However, under the new rules, the company will no longer need to notify the relevant audit authority if it reasonably believes that the auditor's reasons for leaving before the end of his term of office are all exempt reasons.

"Exempt reasons" are:

  • the auditor is ceasing to practice as an auditor
  • the company is exempt from the requirement to be audited
  • the company is being wound up under an insolvency procedure
  • the company is a subsidiary undertaking of a UK parent company and its new auditor is auditing the group accounts and the individual accounts of other UK subsidiary undertakings included in the consolidation

So where a company is acquired by another company, it will no longer need to notify the relevant audit authority if it asks its existing auditors to resign and appoints the acquiring company's auditors instead.

Where the audit authority must be notified, the company will have a longer period in which to do this: 28 days from the auditor ceasing to hold office.

The outgoing auditor is required to send the company a statement relating to the reasons for his departure and related information.  Under the new rules, the auditor of a listed company will always be required to send such a statement, but one will not need to be sent to an unlisted company if (i) the auditor's term of office has come to an end or (ii) his reasons for leaving before the end of his term of office are all exempt reasons as described above and there is no other information the auditor thinks should be brought to the attention of the company's shareholders or creditors.

In general, this will mean that an auditor resigning as a result of a company acquisition will not need to send a statement to the company along with his resignation letter.

Where the outgoing auditor is required to send a statement to the company, he must also send a copy to the relevant audit authority and to Companies House.  Under the new rules, he will not need to send a copy to Companies House unless the company is listed or, in the case of an unlisted company, his statement indicates matters that he thinks should be brought to the attention of the company's shareholders or creditors.

The changes do not substantially affect the rights of an outgoing auditor to require a general meeting to be called and the obligation on the company to circulate the auditor's statement (if it is a listed company or, in the case of an unlisted company, if the statement indicates matters that the auditor thinks should be brought to the attention of the company's shareholders or creditors).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.