Defective accounts and reports

Introduction

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members navigate the requirements for dealing with defective accounts and reports for private companies. 

Background

Errors do sometimes occur in accounts and reports. Often such errors can be corrected in the following period. There may be circumstances, however, where the directors of a company believe it would be better to revise the financial statements.

The requirements for revising defective accounts and reports are set out in Part 15 Chapter 11 of the Companies Act 2006 (i.e. sections 454 to 462) and SI 2008/373 The Companies (Revision of Defective Accounts and Reports) Regulations 2008 (the ‘Defective Accounts Regulations’) both of which are amended by SI 2019/685 The International Accounting Standards and European Public Limited Liability Company (Amendment etc) (EU Exit) Regulations 2019 for accounting periods commencing on or after IP completion day (practically accounting periods commencing on or after 1 January 2021).

Is revision the right approach

Where the directors of a company discover a problem with the accounts or reports, the appropriate response will usually be driven by the timing of its discovery.

Discovery during preparation of the accounts and reports

If a problem is discovered during the preparation of the accounts and reports, before the board has approved them, then the problem can just be corrected as for all normal adjustments during preparation.

Discovery after board approval but before the accounts and reports have been sent to members (shareholders) or filed

If a material misstatement is discovered after the accounts and reports have been approved by the board, but before they have been sent to members (shareholders) or filed, the board may rescind approval, amend the accounts and approve the amended versions.

It would be best practice to destroy all copies of the originally approved accounts and reports. This will avoid confusion - the previous version is now misleading as it purports to be the statutory financial statements when that is no longer the case.

For audited accounts, it would be usual in the UK to provide a new auditor’s report on the amended financial statements, dated on/after the date of the approval of the amended financial statements.

If the board are not willing to amend the original financial statements and intend to publish, but a fact becomes known to the auditor that, had it been known at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report, then the auditor would raise their concerns with the board and may need to seek legal advice in order to seek to prevent reliance on the auditor’s report (ISA 560, para A16).

Discovery after accounts and reports have been sent to members (shareholders) or filed

If a problem is discovered after the accounts and reports have been sent to shareholders or filed, the directors will usually have two choices:

1. Correct the problem in the next set of financial statements (i.e. the correction of a prior period error) – this approach is not discussed further in this helpsheet; or
2. Revise the defective accounts or report(s) – this is only permissible in certain circumstances (see Is it permissible to revise the accounts and report(s)?) .

Where it is permissible, the revision of defective accounts is voluntary, except in rare cases where a company is required to do so by the Secretary of State.

The decision whether or not to revise the accounts will usually depend on a number of factors. Whilst this is a choice of the directors, it is best practice to include the auditors in the discussion. Discovery of a problem soon after the original accounts have been issued may be better corrected by revising the defective accounts, whereas discovery close to the publication of the next set of accounts is perhaps better suited to correction in those accounts. The severity of the problem will also be a factor. The directors will need to weigh up pragmatically the cost of carrying out the revision with the benefits of avoiding the use of potentially misleading accounts by third parties. Users of the published accounts may be better served by having up-to-date financial statements with the correction to last year’s comparatives in the following year’s accounts, rather than a prolonged delay caused by revising last year’s accounts first before proceeding to complete this year’s accounts. Whichever route is chosen, auditors may not be comfortable with any substantial delays. Directors may wish to seek legal advice in making their decision.

Is it permissible to revise the accounts and report(s)?

Voluntary revision of accounts and reports by the directors under s454 of the Companies Act 2006 is only permissible if the accounts previously approved are defective – i.e. they failed to comply with the requirements of the Companies Act 2006 (including relevant accounting standards), or, where applicable, Article 4 of the IAS Regulation (for periods commencing before 1 January 2021). For periods commencing on or after this date, the reference to the IAS Regulation is revoked by SI 2019/685 regulation 19. It applies to the following (where relevant):

• The company’s annual accounts;
• The directors’ remuneration report or the directors’ report; or
• A strategic report of the company;

This procedure cannot be used to revise an auditor’s report. Where any of the above are revised, and were audited, a revised auditor’s report will be required (see Auditor's report section below).

It is not permissible to use this procedure to change something in the accounts the directors later decide they dislike, or to simply improve the accounts or reports –accounts must be defective in order for the option to revise the accounts to become available.. Neither is it permissible to revise the accounts simply because more information has come to light after their issue about conditions which existed at the balance sheet date.

An example of when there would be the option to revise the accounts, would be when the accounts do not meet statutory requirements. This could include the original accounts being prepared under small company regime, when in fact the company did not qualify for this.

Revision of defective accounts and reports

Where the original accounts or report(s) are defective, and the directors elect to revise them under s454 of the Companies Act 2006, they may do so by:

• Supplementary note (i.e. a note explaining the corrections required); or
• Replacement (i.e. a corrected set of financial statements or reports).

The decision will usually be a pragmatic one. The directors may use whichever approach appears more appropriate to them.

General requirements

Where copies of the original accounts or report(s) have been sent out to members (shareholders) or filed, the revisions must be confined to the correction of those respects in which the original accounts or report(s) did not comply with the requirements of the Companies Act 2006 (including relevant accounting standards).

The revised accounts or report(s) must comply with the relevant requirements of the Companies Act 2006 and in particular must show a true and fair view, viewed at the date of the original accounts or report(s) (regulation 3 of the Defective Accounts Regulations).

Revision by supplementary note

Where revision of accounts is made by supplementary note, statements addressing the following matters must be made within the note (regulation 4 of the Defective Accounts Regulations):

• That the note revises in certain respects the original annual accounts of the company and is to be treated as forming part of those accounts; and
• That the annual accounts have been revised as at the date of the original annual accounts and not as at the date of revision and accordingly do not deal with events between those dates.

Where revision of a strategic report / directors’ report / directors’ remuneration report is made by supplementary note, statements addressing the following matters must be made within the note (regulations 4A, 5 and 6, as appropriate of the Defective Accounts Regulations):

• That the note revises in certain respects the original strategic report / directors’ report / directors’ remuneration report of the company and is to be treated as forming part of that report; and
• That the strategic report / directors’ report / directors’ remuneration report has been revised as at the date of the original strategic report and not as at the date of revision and accordingly does not deal with events between those dates.

The supplementary note must be approved in the same way as the original accounts or reports. The date on which it is approved must also be stated.

Revision by replacement

Where revision of accounts is made by replacement, statements addressing the following matters must be made in a prominent position in the revised accounts (regulation 4 of the Defective Accounts Regulations):

• That the revised accounts replace the original annual accounts for the financial year (specifying the year);
• That they are now the statutory accounts of the company for that financial year;
• That they have been prepared as at the date of the original annual accounts and not as at the date of revision and accordingly do not deal with events between those dates;
• The respects in which the original annual accounts did not comply with the requirements of the Companies Act 2006; and
• Any significant amendments made consequential upon the remedying of those defects.

Where revision of a strategic report / directors’ report / directors’ remuneration report is made by replacement, statements addressing the following matters must be made in a prominent position in the revised report (regulations 4A, 5 and 6, as appropriate of the Defective Accounts Regulations):

• That the revised report replaces the original report for the financial year (specifying the year);
• That it has been prepared as at the date of the original strategic report / directors’ report / directors’ remuneration report and not as at the date of revision and accordingly does not deal with events between those dates;
• The respects in which the original strategic report / directors’ report / directors’ remuneration report did not comply with the requirements of the Companies Act 2006; and
• Any significant amendments made consequential upon the remedying of those defects.

Practically, the statements would usually be included on the first page after the front cover. The front cover should also make clear that these are revised accounts and reports.

The revised accounts or report(s) must be approved in the same way as the original accounts or report(s). The date on which they are approved must also be stated (regulations 4, 4A, 5 and 6, as appropriate of the Defective Accounts Regulations).

Auditor's report

If the original accounts were audited, an auditor’s report will be required on the revised accounts or reports (regulation 7 of the Defective Accounts Regulations).

Where the company’s auditor has changed since the original auditor’s report was approved, the Defective Accounts Regulations permit the auditor who made the original report to make the revised report, provided that they agree to do so and would be qualified for appointment as auditor of the company (regulation 7(2) of the Defective Accounts Regulations).

Further guidance is available in the Audit and Assurance Faculty’s guide Audit report on defective financial statements and the FRC Bulletin – Auditor’s reports on revised accounts and reports in the United Kingdom.

Where the original accounts were not audited, but as a result of revisions to the accounts, the company is no longer entitled to exemption from audit, an auditor’s report on the revised accounts must be prepared (regulation 8(1) of the Defective Accounts Regulations).

Publication and filing requirements

Publishing copies of revised accounts or reports

Where copies of the original annual accounts or report have been sent to any person under s423 of the Companies Act 2006, the directors of the company must send, to such persons, within 28 days of the date of revision:

•  In the case of revision by replacement, a copy of the revised accounts / revised report and a copy of the auditor’s report thereon (if applicable); or
• In the case of revision by supplementary note, a copy of that note, together with a copy of the auditor’s report thereon (if applicable).

The directors must also send this information, within 28 days of the date of the revision, to any other person not already included above, who is, at the date of the revision:

• A member (shareholder) of the company;
• A holder of the company’s debentures; or
• A person who is entitled to receive notice of general meetings.

These requirements are set out in regulation 12 of the Defective Accounts Regulations.

Filing copies of revised accounts or reports

Within 28 days of the date of revision, the directors of a company deliver to the registrar (i.e. Companies House):

• In the case of revision by replacement, a copy of the revised accounts / revised report and a copy of the auditor’s report thereon (if applicable); or
• In the case of revision by supplementary note, a copy of that note, together with a copy of the auditor’s report thereon (if applicable).

These requirements are set out in regulation 14 of the Defective Accounts Regulations.

There is no facility in the Defective Accounts Regulations to fillet revised accounts. A small company revising its accounts by replacement must therefore file the full revised accounts and auditor’s report thereon (if applicable).

Status of the revised accounts and reports

The revised accounts and/or reports will replace the original accounts and reports when approved by the directors (regulations 10 and 11 of the Defective Accounts Regulations, as appropriate). The originals will usually remain publicly available at Companies House however.

If in doubt seek advice

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.