Company law review - Eye on UK Plc

The company law review steering group will publish its proposals on how to modernise company law at the end of this month. The result of three years of ongoing consultation is anxiously awaited. But will it live up to expectations of simplicity?

Fundamentally the review’s aim has been to remove ‘the baggage of Victoriana and create a 21st century model of the company as a vehicle for creating prosperity’, as explained by Roger Davis, partner at PricewaterhouseCoopers and ICAEW representative on the Department of Trade and Industry’s company law review consultative committee.

‘Think small first’ has been the overriding philosophy governing moves to modernise an archaic framework of company law written when quill pens, not email, where the norm. To the ‘Think small first’ philosophy, Danielle Stewart, small practitioner actively involved in the consultation process, believes ‘Keep it simple’ ought to be added.

Technology, different trading methods and a 100-year gap since the law was written have all led to an urgent need to update this law.

Unlike the current legal framework, the focus of the review will be on small companies. Hence the slogan. After all, small companies are in the majority in the UK. Some 87% of UK companies have an annual turnover of #1m or less. Only 2% of UK companies have an annual turnover of above £4.8m.

Provisions for larger public interest companies will then be tacked on.

The emphasis on smaller companies can also be attributed to New Labour determination to make the UK the most attractive place for entrepreneurs.

So what will change?

It is almost a given that the deadlines for filing accounts will be shortened.

To what extent remains unknown. There has been much debate in all quarters, not least at the ICAEW’s council meeting, where representatives of sole and small practitioners attempted to revoke support for shortening the timescales.

Supporters, however, won out. ‘The institute’s council supports the proposed reduction in the filing deadline for small companies to seven months, provided that it is phased in. This will afford smaller firms and their clients time to make the changes that will arise from the reduced deadline,’ said a press release issued in February this year.

Larger listed companies can also expect to see their filing deadlines shortened. Proposals have settled on a deadline of between four and five months. But it remains a contentious issue.

Danielle Stewart dismisses any resistance to these changes as futile and anti-change. ‘I’m certain my firm can work to these deadlines,’ she says. ‘We were using the quill pen when the law was written. This is an opportunity for accountants to show how useful we can be.’

Stewart’s belief that business can speed up the process arguably ought to be widely held, especially among accountants. After all, when the law was written there were no computers, faxes or telephones let alone the internet.

‘We have to recognise the fact that information can be published more quickly, which is good for commerce. If information comes on to the public record much faster, it is better for decision-making, so better for trade.’

Plans to make companies issue preliminary statements instead of the main accounts were thrown out after more in-depth consultation deduced this information would mostly be of use to analysts.

PwC’s Roger Davis says: ‘The objections to making the preliminary statements the main accounts were logical given they are principally designed for analysts. Most individual shareholders need something different but also need to avoid complexity.

‘In shifting emphasis from paper to screen the review has updated its thinking and recognised most homes will be on the internet by the time the law is enacted. This will give shareholders faster access and greater flexibility to look at information they require.’

Since Stephen Byers, minister for transport and the regions and former trade secretary, announced last April he was raising the audit threshold for companies with a turnover of £350,000 to £1m, audit has dominated the review’s talks. Byers pledged to follow up with a further increase to £4.8m – the maximum level allowed under EU regulations.

With the rise to £1m, the government estimated the increase would allow extra 150,000 companies to take advantage of exemption producing annual savings for business of about £180m. Although a bonus to small businesses – which often view money spent on audits as cash wasted – a turnover of £1m is by no means small beans.

To cover the lack of ongoing review, an independent professional review, or IPR, has been proposed. This is designed to be a less costly lighter-touch form of assurance to compensate for the lack of a statutory audit.

But views have been mixed especially from the accountancy profession.

The review has recommended that an IPR be put in place to cover those companies exempt. Stewart is an advocate of the IPR, along with many others in the profession and was outraged when news came that the ICAEW had decided to withdraw its support for the proposal.

But Stella Fearnley, an academic and ICAEW council member seconded by Baroness Noakes, has slammed the IPR as ‘conceptually flawed’ and ‘confusing to the British public’.

It is expected the government will this year announce its decision to raise the exemption threshold to £4.8m and endorse the IPR. The ICAEW, the largest professional body in the UK, will then have to rethink its strategy. Michael Groom, new ICAEW president, is also an advocate of the IPR. During last year’s consultation period, he said: ‘If a properly structured independent review were developed, this, coupled with the relaxation of the audit requirement, could help strike an appropriate balance between reducing regulatory burdens and ensuring proper accountability.’

On a corporate governance level, little is expected to change radically.

What is expected is a clarification of duties. Improved rights of the disempowered small shareholders in companies are expected.

The DTI’s independent steering group has backed off from the idea of making directors legally responsible to stakeholders in a company. The compromise is expected to come in the guise of an inclusive statement of directors’ duties to shareholders, emphasising the long term and stakeholder interests.

Additionally structured accountability to stakeholders – through a new operating and financial review, or OFR – is expected in the annual report.

Davis says: ‘Directors’ legal responsibility to everyone would be practical responsibility to no one. Shareholder value should remain king, but needs a consort of accounting for corporate value to society.’

The Institute of Directors has welcomed this move. Daniel Somerfield, corporate governance executive at the IoD, says: ‘There was discussion on whether to expand directors’ duties but now there has been a half-way house agreement. Our research has shown there’s a demand for clarification in this area. We believe in a flexible approach, but not enforced through legislation. It would be counter-productive to be too prescriptive in this area.’

This is another issue at debate. Should these rules be written down in law or taken as accepted practice. Tony Wedgwood, technical accounting partner at KPMG, is anxious the review will advocate a rulebook approach as used in the US. ‘One thing I didn’t like was the proposals to have compliance with accounting standards to become legal requirement. It will be unfortunate if it goes to rule-based view.’

These concerns lead us to the supervision of regulation. It is hoped that to avoid rigidly prescribed laws a grouping of business leaders, investors and professional advisers can be formed in the shape of a new Companies Commission, which will be designed to set standards of governance and accountability.

The proposed structure would be based on the Financial Reporting Council, the Accounting Standards Board and Financial Reporting Review Panel. The Companies Commission would replace the FRC and would have responsibility for oversight of developments in company law, including advising on proposals for new legislation and on other matters referred to it by ministers.

The revamped ASB and FRRP would essentially become its subsidiary bodies with a possible name change.

Davis says: ‘This is a good idea and should be taken seriously. It will build on the UK’s world leadership of a participant approach to corporate governance characterised by codes of principles rather than rigid rules.

This framework should enhance the UK’s reputation as a place for business and business headquarters.’

Much is expected from the three-year consultation period, whether the company law review delivers to full expectation remains to be seen. As for pleasing all of the people all of the time, it would be wise to acknowledge the impossibility of that before publication.

Rough Guide to the Company Law Review – What’s likely to change?

– The statutory audit threshold is expected to rise to £4.8m – the maximum under EU law – The IPR, or independent professional review, is expected to replace the statutory audit for exempt companies – Results of IPR field tests will be announced at the end of the summer

– Filing deadlines for large and small companies will also be shortened

– The regulatory framework will probably see one of the biggest overhaul in the last decade. The Financial Reporting Council could be replaced by a Companies Commission

– No radical change is expected for directors’ duties and accountability, but duties will be clarified. The role of non-executive directors will also be more rigourlessly defined, following in the footsteps of the US

– The rights of the disempowered shareholders could also see a long-earned boost.