At a Glance
* CA 1985 generally provides for the remuneration of the auditors to be fixed by whoever appoints them.
* The remuneration received by the auditors for their services as auditors must be disclosed in the annual accounts.
* In most cases, the accounts must also disclose details of any non-audit services provided by the auditors and their associates to the company and its associates, and the remuneration received for these.
* Significant changes have been made to the disclosures requirements for accounting periods beginning on or after 1 October 2005.
1.100 Remuneration for Services as Auditors
Section 390A of CA 1985 provides for the remuneration of the auditors to be fixed as follows:
where the auditors have been appointed by the company, their remuneration should be fixed by the company in general meeting, or in any other way decided by the company in general meeting (in practice, most companies resolve to give the directors authority to agree the auditors’ remuneration);
where the auditors have been appointed by the directors, their remuneration should be fixed by the directors; and
where the auditors have been appointed by the Secretary of State, their remu- neration should be fixed by the Secretary of State.
The legislation defines remuneration as including amounts paid in respect of expenses and any benefits in kind, but in practice, professional and ethical
requirements will usually prevent auditors from accepting benefits in kind from the company.
1.101 Disclosure of Remuneration for Services as Auditors
For accounting periods beginning before 1 October 2005, section 390A of CA 1985 requires the remuneration paid to the auditors in respect of their work as auditors to be disclosed in the notes to the annual accounts. The amount to be disclosed should include the audit fee, any amounts payable in respect of expenses and the estimated money value of any benefits in kind received by the auditors in respect of their services as auditors. The nature of any benefits in kind should also be disclosed. However, professional and ethical requirements will usually prevent auditors from accepting benefits in kind from the com- pany. For accounting periods beginning on or after 1 October 2005, a revised section 390B of CA 1985 gives the Secretary of State new powers to make regu- lations on the disclosure of remuneration received or receivable by the audi- tors, and detailed requirements are now set out in the Companies (Disclosure of Auditor Remuneration) Regulations 2005 (SI 2005/2417). These supersede the previous regulations on the disclosure of auditor remuneration and cover fees for both audit and non-audit work. The changes relate primarily to the disclo- sure of fees for non-audit work, and the requirement to give separate disclosure of the auditors’ remuneration as auditors continues to apply to all companies, as does the requirement to include (and disclose) any related benefits in kind.
However, the new disclosure requirements do make a number of changes in respect of the disclosure of audit fees in group accounts. In particular:
the amount to be disclosed is the fee receivable by the auditor of the parent company in relation to the audit of the individual accounts of that company and the audit of the consolidation, including any work carried out by the par- ent company auditors on consolidation returns prepared by the subsidiaries;
any fees receivable by the parent company auditors in respect of statutory audit work for one or more of the individual subsidiaries (i.e. separate from the audit work on the group accounts) do not form part of this disclosure and should instead be included in the first disclosure category for fees for non- audit services (i.e. the auditing of accounts of associates of the company pur- suant to legislation), together with any similar fees receivable by the auditors’
associates – this represents a significant change from the previous require- ments, where audit fees for companies included in the consolidation were aggregated for disclosure in the notes to the group accounts; and
where a subsidiary is audited by a firm that is not associated with the parent company auditors, this audit fee will no longer be included in the group accounts disclosures.
These issues are highlighted in draft guidance on the practical implications of the new disclosure requirements published by the ICAEW as TECH 04/06
‘Disclosure of Auditor Remuneration’ which can be downloaded from the ICAEW website at http://www.icaew.co.uk. The guidance document leads the
Audit
reader through a series of 44 questions on the disclosure requirements and pro- vides as an Appendix a comprehensive worked example of how the detailed requirements might be met in practice. Comments on the draft guidance were invited by 4 July 2006 and it will be published in final form after consideration of the responses.
1.102 Adjustments to Fees in Respect of Previous Years
The amount to be disclosed is the remuneration payable in respect of the cur- rent year. This will usually be an estimate of the amount to be charged for the audit (including expenses). The legislation does not consider a situation where the actual fee in respect of any year is different to the amount provided for (and thus disclosed) in the accounts for that year. Minor adjustments to the figure are not usually disclosed but if the audit fee for a particular year has effectively been under-/overstated by a material amount, it will usually be appropriate to disclose the adjustment separately in the following year’s accounts.
1.103 Remuneration for Non-audit Services
For accounting periods beginning before 1 October 2005, section 390B of CA 1985 gives the Secretary of State the power to require the disclosure of remu- neration paid to the auditors or their associates in respect of non-audit services provided to the company or group, and to define remuneration, associates and associated undertakings for this purpose. Disclosure requirements in respect of non-audit fees were originally introduced by the Companies Act 1985 (Disclosure of Remuneration for Non-audit Work) Regulations 1991 (SI 1991/2128) and were updated by the Companies Act 1985 (Disclosure of Remuneration for Non-audit Work) Amendment Regulations 1998 (SI 1995/1520). However, a revised section 390B was introduced by the Companies (Audit, Investigations and Community Enterprise) Act 2004. As a result, CA 1985 now specifies that the Secretary of State may make provision for disclosure of the nature of any serv- ices provided by the auditors and require the details to be given by a particular class or description, and may require the disclosure of the separate amounts received by the auditors and their associates, or the disclosure of aggregate amounts. Regulations can also specify that disclosure should be given in the notes to the accounts, the directors’ report or the auditors’ report. The Companies (Disclosure of Auditor Remuneration) Regulations 2005 (SI 2005/2417) were laid before Parliament in August 2005 and supersede the previous disclosure require- ments for accounting periods beginning on or after 1 October 2005.
1.104 Disclosures Prior to 1 October 2005
For accounting periods beginning before 1 October 2005, the figure to be dis- closed is the aggregate amount of remuneration in respect of work carried out during the financial year, regardless of whether it has been billed to the company.
Comparative figures must also be given. Once again, remuneration specifically
includes the estimated money value of benefits in kind, and both the nature and the estimated money value of any benefits must be disclosed, although these are unlikely to arise in practice. Where the auditors (or their associates) are also the auditors of any UK subsidiary undertaking of the company (as defined in section 258 of CA 1985), any amounts in respect of services to the subsidiary must be included in the aggregate remuneration. The regulations specifically require the auditors to provide the company with the information that it needs to be able to comply with the disclosure requirements. Where more than one auditor has held office during the year, separate disclosure is required in respect of each auditor and their associates.
1.105 Associates of Auditors Prior to 1 October 2005
The definition of associates for this purpose is very complex but it broadly includes:
any partnership in which the auditors are a partner or with which the audit- ors have a partner in common;
any body corporate in the same group as the auditors;
any directors of the auditors;
any body corporate in which the auditors, a partner of the auditors or a director of the auditors controls the exercise of 20 per cent or more of the voting rights, or any other body corporate in the same group as such a body corporate.
If such a relationship exists at any time during the financial year, the entity is regarded as an associate of the auditors for that year. Reference should be made to the regulations if there is any doubt over whether an entity should be treated as an associate of the auditors. Amendments were made to the regulations in 1995 to specifically exclude entities that might otherwise have been treated as asso- ciates of the auditors as a result of insolvency and receivership appointments.
1.106 ICAEW Guidance on Additional Disclosure
Guidance on more extensive disclosure of the nature and value of non-audit services provided by auditors was published by the ICAEW in July 2003. This was based on EC recommendations and recommended that full and transparent disclosure should be made of all fees due to the audit firm and its network firms in relation to work performed during the period for the audit client and all entities controlled by that client alone. In the case of joint audits, the same dis- closures should be given for each principal audit firm. The disclosures should cover both the nature and extent of the services provided and the review and approval process followed, and should provide sufficient information to enable a user of the accounts to judge whether the potential for conflicts of interest has been satisfactorily addressed. However, this guidance on voluntary additional disclosure has been superseded by the new statutory disclosure requirements for accounting periods beginning on or after 1 October 2005.
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1.107 Disclosures from 1 October 2005
The Companies (Disclosure of Auditor Remuneration) Regulations 2005 (SI 2005/2417) set out new disclosure requirements on the remuneration of audit- ors for accounting periods beginning on or after 1 October 2005. They require companies to give separate disclosure in the notes to the accounts for each type of service specified in Schedule 2 to the regulations and the amount paid to the auditors and their associates for that service, with no de minimis exemptions.
The following categories are specified for disclosure:
auditing the accounts of associates of the company pursuant to legislation;
other services provided under legislation;
other services relating to taxation;
services relating to information technology;
internal audit services;
valuation and actuarial services;
services relating to litigation;
services relating to recruitment and remuneration;
services relating to corporate finance transactions; and
other services.
Where a service could fall within more than one of the specified categories, it should be treated as falling within the first one listed. As under the previous disclosure requirements, remuneration includes any benefits in kind (although these should be rare in practice) and the nature and estimated money value of such benefits must be separately disclosed. The auditors are also required to provide the directors with any information needed to comply with the disclosure requirements. Where more than one person has acted as auditor during the year, separate disclosure is required for each auditor and their associates.
1.108 Disclosure Exemptions
Small and medium-sized companies and groups continue to be exempt from the detailed disclosures in respect of non-audit services, although they must con- tinue to disclose the remuneration paid to the auditors in respect of the audit of the company’s accounts. There is also no requirement for the disclosures in respect of non-audit services to be given in the individual accounts of a parent company, or of its subsidiaries, when the parent prepares group accounts under CA 1985, provided that the individual accounts state that the relevant disclosures are required to be given in the group accounts. These exemptions are considered in some detail in the ICAEW’s TECH 04/06 (see 1.101) which concludes that the exemptions will not be available to:
(i) a parent that voluntarily prepares group accounts in addition to individual accounts;
(ii) a parent that is exempt from the requirement to prepare group accounts because it is itself a subsidiary of a foreign parent – this is on the basis that the foreign parent is not required to prepare group accounts under the Act
and so is not required by the legislation to provide the relevant disclosures in its own group accounts; or
(iii) the subsidiaries of such parent companies.
1.109 Associates of the Company from 1 October 2005
The disclosure requirements cover services provided to the company and its associates. A company’s associates include any subsidiary, other than one in respect of which severe long-term restrictions substantially hinder the exercise of the company’s rights, and any associated pension scheme, which is defined as a scheme for the provision of pension and similar retirement or death bene- fits to directors and employees (or former directors and employees) of the com- pany or any subsidiary, where either:
a majority of trustees are appointed by the company or a subsidiary (or a per- son acting on their behalf); or
the company or a subsidiary exercises a dominant influence over the appoint- ment of the auditor to the scheme.
Overseas entities are included within the definition. For each service category identified above, separate details must be given for services provided to the company and its subsidiaries, and services provided to any associated pension schemes.
1.110 Associates of Auditors from 1 October 2005
Under the new regulations, the following are included within the definition of associates of the auditors:
any person controlled by the auditors or by an associate of the auditors (unless the control arises solely as a result of an insolvency or receivership appointment);
any person or group of persons which controls the auditors;
any person using a common or similar trading name to the auditors, if the auditors’ intention in using that name is to create the impression of a connec- tion between them;
any party to an arrangement with the auditors under which costs, profits, quality control, business strategy or significant professional resources are shared; and
any partnership which has a partner in common with the auditors, or any body corporate which has a director in common with the auditors.
The regulations also cover a number of more complex situations involving links and associations with other partnerships and bodies corporate. Overseas entities are also included within the definition of associates. The draft ICAEW guidance in TECH 4/06 (see 1.101) notes that the revised definition of auditors’
associates is comprehensive and will capture a wide range of individuals and
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organisations with connections to the auditor. Auditors will therefore need to apply careful judgement in assessing whether a particular individual, partner- ship, body corporate or other entity falls within the new definition.