Company Law – Templsyr got the 21st century

Coming to a screen near you – company information, financial reports and audited accounts.

Gone will be the delay of seven to ten months between a company’s year-end and the appearance of its audited accounts. Reports will be up on the internet within days. What’s more, gone will be the emphasis on historical accounting. Instead, auditors will present views on the future viability and performance of a company, and they will do so in almost real-time.

In fact, this is just a potential future suggested by the trade and industry department’s consultation document on company law reform released earlier this month. New Labour may have come into office with a desire to tackle executive pay. But that aim seems to have led the DTI to a wholesale review of companies, their structure and the way they report and communicate with the outside world.

At 200 pages, the document certainly weighs in as a serious and thorough piece of work. And it needs to. Dismantling a 150-year-old company law regime and building one which better reflects Britain’s largely small-company, largely owner-managed terrain will be no easy feat. Ken Wild, partner at Deloitte & Touche and participant in the review’s working party on capital maintenance, says we should not underestimate the achievement so far. ‘It must have so few votes in it. I’m impressed that the DTI managed to convince its ministers and government as to the importance of this issue.’

Much has been made of the consultation document’s small-company emphasis and its stakeholder ethos. New Labour increasingly recognises the contribution that small companies make to the economy and to job creation. The report’s steering committee, chaired by John Lewis Partnership chairman Sir Stuart Hampson, sets out a company law regime that makes the pledge to ‘think small first’.

The report’s detractors say small companies are not necessarily best placed as wealth and job creators, as the government suggests. But of the UK’s 3.7 million businesses, only 12,000 are plcs.

John Davies, head of ACCA’s technical department, says the review properly reflects this weighting. ‘The important part of the report is its commitment to accommodate the reality in which small companies operate; 97% of limited companies are small. But the basic ethos of the Companies Act remains routed in Victorian time, where management was separated from ownership in the vast majority of cases.’

Company formation rules should be simplified and capital maintenance strictures lessened, it proposes. There should be greater transparency in financial reporting. The role and levels of pay for directors should be revisited. And companies should be encouraged to have fuller dialogue with stakeholders – employees, shareholders, creditors and the public.

The so-called expectation gap between what kind of financial information this wider user group wants and what it can learn from annual reports has already been widely discussed in the accounting profession.

By questioning the basis of financial reporting and advocating a pluralist approach whereby directors may be required to meet the interests and questions of this wider group, the DTI puts this debate centre stage.

IT and electronic communication are lauded as means of realising this more transparent, more competitive world. Video conferencing, email and internet technology ‘represent a major resource for competitive operation of companies, with, we believe, exciting potential for greater efficiency and for greater provision of information about the operation of companies. It is a high and urgent priority to facilitate their exploitation,’ the report says.

Electronic media, the report goes on, could be used by companies to communicate with members, directors, registrars and the Stock Exchange. Votes could be sent by email and, perhaps most significantly, audit reports could be published on corporate websites. John Davies says the technological aspects of the report reflect the government’s plans for e-commerce as well as mirroring debates within the profession. ‘Slowly but surely we are moving towards real-time reporting,’ he says. ‘At the moment, companies typically report up to ten months after the year-end, and we increasingly hear complaints about the usefulness of this.’

Davies believes that the report will focus the minds of the profession. ‘Financial information has got to be as useful as possible in the electronic age. Some accountants are desperately trying to preserve established ways of doing things, saying that current filing deadlines are acceptable. If accountants try to preserve that conservative line, there is a danger that the relevance of the whole profession will come under pressure.

‘I fancy that there will be more emphasis on auditors giving a view on the future viability of the company and not just the performance of the company retrospectively. They’re going to have to consider future prospects and not past performance.’

But the prospect of real-time reporting begs many questions. If audit reports can be posted within days of the year-end, is there a case for providing the same public access to preliminaries and interims? What about reporting twice-yearly, or even quarterly?

Head of professional affairs at PricewaterhouseCoopers Roger Davis says debate must be as wide as possible.

‘The DTI consultation paper quite rightly points away from six-month bottom-line reporting. The investment community needs to be part of that debate. They have an insatiable appetite for information. Our starting point should be how frequently do companies need to report. Should it be quarterly? There is demand in the investment community, but wouldn’t that level of reporting give rise to short-termism?’ argues Davis.

Bob Head, FD at Prudential’s new bank Egg, says frequent reporting makes more sense for management accounting than it does for financial reporting. Providing accurate accounts figures quarterly would prove unnecessarily burdensome, even for larger companies. ‘Being more frequent won’t tell you more. It’ll only mean you’ll have more accountants, but performing less useful tasks.’

Indeed, the report’s steering committee calls for a debate on the kind of company information that might usefully go into the public domain and suggests that companies use the balanced scorecard approach to give creditors, shareholders and employees access to management as well as financial information.

Huge questions remain, however, about the potential liabilities of the auditor if companies switch to publishing reports on the Web. Jon Grant, technical director of the Auditing Practices Board, points out that audit reports and directors’ statements are easily cross-referenced and cross-checked when they exist in printed form. Keeping abreast of directors’ statements on the Web would be more complex.

‘Auditors, through APB rules, have responsibility to read (directors’ statements) and be comfortable that they are consistent with the audit report. In an electronic environment, where a director’s statement could be updated more frequently, this will be a challenge,’ says Grant.

The profession and the business community have until June to register responses. Commentators are already raising doubts as to whether the DTI has set itself too Herculean a task.


The review panel’s strategic framework document dedicates almost five pages to discussing changes in accounting practice, most notably by raising the possibility of allowing listed UK companies to use international accounting standards, writes John Stokdyk.

The report also raises important caveats that international comparability could be bought at the expense of comparability between listed and non-listed companies in the UK and by losing some of the safeguards erected by the Accounting Standards Board against 1980s-style off-balance sheet financing.

The ASB’s role could also change if the UK follows other European countries and recognises IASs. In response, the document notes, the government could change the law to delegate further legal responsibilities for accounting rules to the Financial Reporting Council and the ASB.

ASB chairman Sir David Tweedie says there has been little detailed discussion of the potential changes within the FRC, explaining, ‘they put the ASB/FRC in mainly because of the European Commission’s proposal to use international standards’.

In Sir David’s view, the ASB has pioneered treatments for acquisition accounting and continues to have differences of opinion with the international community over deferred taxes and derivatives – differences that justify its continued existence.

‘The problem with the international debate is that, unless you research and debate the issues, you’re dead.’

After nine years at the ASB, Sir David knows a thing or two about influencing consultative processes. The board’s recently published statement of principles sets out the conceptual framework behind its financial reporting standards.

A technical supplement sets out several inconsistencies between the statement and the Companies Acts; for example, the omission of current-value treatments that the ASB sees as central to its ‘value to the business’ philosophy.

The ASB is also keen to introduce an enhanced single performance statement to replace the existing statement of total recognised gains and losses.

Such presentations may not comply with the Act, the board notes. Another key difference arises from the Act’s requirement that profits can only be realised in the p&l account at the balance sheet date and the statement’s alternative approach, which does not rely on the notion of realisation.

‘The constraints of law are not immutable,’ notes the ASB and, ‘desirable change can be motivated by accounting developments guided by the framework proposed in the draft standard.’

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