Regulation 6 Amendment to section 416 (contents of directors’ report: general)

After section 416 of the Companies Act 2006 insert—

“Contents of directors’ report: audit and assurance policy statement

416A

(1)

This section applies in relation to the financial year of a company which is a company with a high level of employees and turnover during that financial year.

(2)

For the first financial year in relation to which this section applies, and for every third financial year thereafter in relation to which this section applies, the directors’ report for that financial year must contain an audit and assurance policy statement which sets out the information described in paragraphs (a) to (f)—

(a)

a description of the company’s operation and governance of internal auditing and assurance, including an explanation of—

(i)

how any management conclusions and judgments, which are disclosed in the annual accounts and reports, may be challenged within the company, and

(ii)

whether, and if so how, the company is proposing to strengthen its internal audit and assurance capabilities over the next three years;

(b)

an explanation of the company’s plans for obtaining internal assurance over the annual accounts and reports, which the company will be required to produce during the next three years, together with any voluntary disclosures supplied with the annual accounts and reports;

(c)

what external assurance, if any, the company intends to seek in the next three years, in relation to the annual accounts and reports of the company, in addition to—

(i)

the statutory audit of the accounts under section 495^f1; and

(ii)

the performance of the statutory auditor’s duties under sections 496^f2, 497^f3 and 497A^f4;

(d)

an explanation of whether, and if so how, the company intends to seek external assurance over—

(i)

some or all of the company’s resilience statement; and

(ii)

the effectiveness of the company’s internal controls over financial reporting;

(e)

an explanation of the extent to which shareholder views have been taken into account in the development of the audit and assurance policy, together with an explanation of the extent to which the views of employees and any other stakeholders have been taken into account; and

(f)

an explanation of the company’s policies in relation to the tendering of external audit services.

(3)

The statement must set out whether any external assurance which is referred to in subsection (2)(c) and (d)—

(a)

will be reasonable or limited assurance, as described in the definitions of “reasonable assurance engagement” and “limited assurance engagement” in the Glossary of Terms (Auditing and Ethics) dated December 2019, issued by the Financial Reporting Council and published on its website, in its role of competent authority responsible for the oversight of statutory auditors (as amended from time to time) or will take an alternative form of assurance as agreed between the company and the external assurance provider; and

(b)

will be carried out in accordance with—

(i)

the International Standard on Assurance Engagements (ISAE) (UK) 3000 Assurance Engagements Other Than Audits Or Reviews Of Historical Financial Information which was issued in July 2020 by the Financial Reporting Council in its role of competent authority responsible for the oversight of statutory auditors (as amended from time to time); or

(ii)

any other international standard on assurance which is adopted in future for use in the UK by the Financial Reporting Council in its role of competent authority responsible for the oversight of statutory auditors.

(4)

In any financial year in relation to which this section applies but which does not fall within subsection (2), the company must include in its directors’ report an audit and assurance policy statement update.

(5)

Every audit and assurance policy statement (other than the first audit and assurance policy statement required by subsection (2)) and every audit and assurance policy update must set out for the financial year to which it relates—

(a)

how the company has implemented its audit and assurance policy;

(b)

whether, and if so how, the company amended its audit and assurance policy statement;

(c)

the extent to which the company has sought any external assurance of the kind described in subsection (2)(c) and (d); and

(d)

whether, and if so how, any reports resulting from any external assurance plans described in subsection (2)(c) and (d) may be accessed on the company’s website or by an alternative means.

(6)

If the company’s directors’ report is a group directors’ report, the audit and assurance policy statement must be a consolidated statement relating to the companies in the consolidation.

(7)

This section does not apply to a company if the company is—

(a)

a subsidiary company at the end of the financial year in question; and

(b)

included in a group directors’ report which—

(i)

is produced by the company’s parent company; and

(ii)

satisfies the requirements of subsection (8).

(8)

A report falls within this subsection if it—

(a)

relates to undertakings that include the company and its subsidiary companies,

(b)

is prepared for a financial year of the parent company that ends at the same time as, or before the end of, the company’s financial year, and

(c)

includes a group audit and assurance policy statement in respect of all the companies which are included in the consolidation.

(9)

Information set out in an audit and assurance policy statement in accordance with this section may be relied upon to satisfy other requirements imposed by or under this Act in relation to a strategic report or a directors’ report.

Contents of directors’ report: material fraud statement

416B

(1)

If, in relation to a financial year, a company is a company with a high level of employees and turnover, the directors’ report for that financial year must contain a material fraud statement which must—

(a)

summarise the directors’ assessment of the risk of material fraud to the company’s business operations, including how the directors have assessed the company’s susceptibility to material fraud and the types of material fraud considered; and

(b)

describe the main measures which are in place to prevent and detect the occurrence of material fraud including any new measures which are in place or proposed to be put in place during the relevant financial year or the next financial year.

(2)

For the purposes of this section—

(a)

“fraud” means behaviour falling within any of sections 2 to 4 of the Fraud Act 2006^f5;

(b)

fraud is “material” when its nature or magnitude could reasonably be expected to influence the decisions which a reasonable shareholder would take in connection with their shareholding in the company.

(3)

Nothing in this section requires the disclosure of information if, in the opinion of the directors, the disclosure would be seriously prejudicial to the interests of the company.

(4)

If the company’s directors’ report is a group directors’ report, the material fraud statement to be included in the report under subsection (1) must be a consolidated statement relating to the companies in the consolidation.

(5)

This section does not apply to a company if the company is—

(a)

a subsidiary company at the end of the financial year in question; and

(b)

included in a group directors’ report which—

(i)

is produced by the company’s parent company; and

(ii)

satisfies the requirements of subsection (6).

(6)

A report falls within this subsection if it—

(a)

relates to undertakings that include the company and its subsidiary companies,

(b)

is prepared for a financial year of the parent company that ends at the same time as, or before the end of, the company’s financial year, and

(c)

includes a material fraud statement in respect of all the companies which are included in the consolidation.

Contents of directors’ report: policy statement concerning distributions and purchase of own shares

416C

(1)

If, in relation to a financial year, a company is a company with a high level of employees and turnover, the directors’ report for that financial year must contain a distribution policy statement which describes—

(a)

the directors’ approach to capital allocation including decisions on investment, capital expenditure, research and development, distributions in accordance with Part 23, the purchase of own shares in accordance with Part 18, and any other matters which the directors consider to be relevant;

(b)

the directors’ policy towards the amount and timing of distributions to shareholders and the purchase of own shares during the short and medium term as defined in the resilience statement;

(c)

the considerations and factors which the directors consider to be material to their policy governing distributions and the purchase of own shares including, where relevant, the availability of the sums described in the note to the accounts required by section 413A, cash within the company and, in the case of a parent company, its group;

(d)

the key risks and constraints, including legal constraints, which the directors consider to be relevant to implementing and sustaining the directors’ policy on distributions and the purchase of own shares; and

(e)

how the directors have—

(i)

implemented the distribution and share purchase policy which is referred to in paragraph (b); and

(ii)

in implementing that policy and in recommending the amount of any dividend (which the directors report under section 416(3)), considered and taken into account those matters, which are described in paragraphs (c) and (d), together with the level of distributable profits and other relevant matters (including, where appropriate, the level of distributable revenue profits), which are disclosed in the notes to the accounts required by section 413A.

(2)

If the company’s directors’ report is a group directors’ report, the policy statement concerning distributions and purchase of own shares, to be included in the report under subsection (1), must be a consolidated statement relating to the companies in the consolidation.

(3)

This section does not apply to a company if the company is—

(a)

a subsidiary company at the end of the financial year in question; and

(b)

included in a group directors’ report which—

(i)

is produced by the company’s parent company; and

(ii)

satisfies the requirements of subsection (4).

(4)

A report falls within this subsection if it—

(a)

relates to undertakings that include the company and its subsidiary companies;

(b)

is prepared for a financial year of the parent company that ends at the same time as, or before the end of, the company’s financial year, and

(c)

includes a policy statement concerning distributions and purchase of own shares in respect of all the companies which are included in the consolidation.”.