UK: FRC consultation - Guidance for Directors of Listed Companies on Going Concern and Financial Reporting

Listing Rule 9.8.6 requires listed companies incorporated in the UK to provide in their annual report "a statement made by the directors that the business is a going concern, together with supporting assumptions or qualifications as necessary, that has been prepared in accordance with Going Concern and Financial Reporting: Guidance for Directors of listed companies registered in the United Kingdom, published in November 1994".

The 1994 Guidance is now the subject of review: the Financial Reporting Council has published a consultation paper in which it states:

The Guidance for Directors was written by a Working Group formed under the auspices of the Cadbury Committee that reported on the Financial Aspects of Corporate Governance. The formation of the Working Group arose out of concerns that there had been several high‐profile company failures where there had been no apparent indication of the imminent problems in the previous year’s report and accounts.

The objective of the Guidance for Directors is to support good corporate reporting and, in particular, the requirements of the Listing Rules and Accounting Standards. When a company is not a going concern this does not necessarily mean that it is, or is likely to become, insolvent. The Guidance for Directors is not intended to address aspects of insolvency and, in particular, is not intended to support the requirements of the Insolvency Act 1986.

In the period since 1994 there have been substantial changes to the accounting standards applied by directors of listed companies. This is particularly the case for directors preparing consolidated accounts required to comply with International Financial Reporting Standards (IFRSs) as adopted by the EU.

The FRC observes that current economic conditions are creating particular challenges for companies. Recent developments in global debt markets have led banks to be cautious of lending to one another (the so‐called “credit crunch”). This has severely restricted liquidity which has created unexpected financial difficulties for banks and entities that depend on the availability of loans as a key source of capital. Many market commentators are now forecasting a period of reduced growth and in some cases recession, with the result that going concern questions are likely to need to be considered in more detail by Boards of Directors.

In view of these deteriorating economic conditions the FRC has concluded that this is an appropriate time to consider whether the existing Guidance for Directors is necessary and remains appropriate, or whether it can be improved.

Note: The UK's Combined Code on Corporate Governance (June 2008) provides in Section C ("Accountability and Audit") the following provision (C.1.2): "The directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary".

Postscript (2 Sep 2008): For further comment see this short article in the Financial Times newspaper. 

India: company law reform moves a step closer - Companies Bill 2008 approved by Cabinet

In 2005 the Irani Report, on the reform of India's company law, was published. Legislation to replace the Companies Act 1956 has been expected for some time. Its introduction has moved a step closer: today it was announced that the Companies Bill 2008 has been approved by the Union Cabinet and will be introduced in Parliament in October. 

The Government's announcement contains an overview of the purpose of the Bill: to provide the principles for the internal governance of companies and a framework for their regulation, administered by Central Government, but with a much greater role for shareholders.  Specific proposals include:

• The introduction of a new entity, the "one-person company".
  
• The abolition of shares with differential voting rights.
  
• Provision for the duties and liabilities of directors, with every company to have at least one director resident in India.
  
• At least one third of board directors to be independent [it's not yet clear to which companies this rule will apply; the Irani Committee proposed that is should apply to public listed companies and those taking deposits from the public]. 
  
• Insider trading by directors to be recognised as a criminal offence.
  
• Auditors' rights and duties to be explained.
  
• Class action suits by shareholder associations to be permitted.
  

UK: England and Wales: auditors' liability and the ex turpi causa principle [a belated posting]

Several months ago the Court of Appeal gave judgment in Moore Stephens (a firm) v Stone & Rolls Ltd [2008] EWCA Civ 644 and it would appear from recent reports in the legal press that an appeal to the House of Lords will be made. The case required the Court of Appeal to consider the operation of the ex turpi causa non oritur actio principle (no cause of action may be founded on an illegal act) in the context of a negligence claim brought by the liquidators of a company (Stone & Rolls) against a company's auditors (Moore Stephens). 

The liquidators argued that the auditors had failed, during the course of several audits, to identify the fraud of Mr. Stojevic (the directing mind and will of the company). Mr. Stojevic fraudulently obtained, through the company, money from various banks. One of these banks sued the company and Mr. Stojevic and was awarded damages against Mr. Stojevic and the company. The company was unable to pay and entered liquidation. The auditors denied negligence and applied for the action to be struck out on the basis that the claim was barred by the ex turpi causa principle. The first instance judge declined to strike out the claim (see [2007] EWHC 1826 (Comm)). 

The Court of Appeal held that the liquidators' claim was barred by the ex turpi causa principle and struck out the claim. The court rejected the argument that the company was the victim of fraud and attributed Mr. Stojevic's actions to the company. There was not, the court unanimously agreed, any room for discretion in the application of the ex turpi causa principle because, as Lord Goff observed in Tinsley v Milligan [1994] AC 340 at 355B: "...the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other".  The court also rejected the argument that the ex turpi causa principle did not apply where the claim was based on the commission of a fraud where the prevention of that fraud was "the very thing" that the defendants had undertaken to do. In this regard, Rimer LJ observed (at para. [109]):

There is ... no support in the authorities that we were shown for the proposition that if "the very thing" from which the defendant owed a duty to save the claimant harmless is, or includes, the commission of a criminal offence, the public policy defence based on the ex turpi causa principle will be overridden so as to enable the bringing of the claim that relies on the claimant's illegality".

Note: The case has been reported here in the Law Society Gazette.

Postscript (2 Sep 2008): The House of Lords Judicial Office informs me: "[the] petition for leave was presented on 18 July 2008 ... and we would hope to get a decision on leave before the end of November this year". 

USA: adoption of IFRS - roadmap to be published

The SEC has announced that it will shortly publish for consultation a proposed roadmap for the adoption of International Financial Reporting Standards (IFRS) by US issuers beginning in 2014. The SEC notes in its press release:

Currently, U.S. issuers use U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers in their filings with the Commission. The increasing integration of the world's capital markets, which has resulted in two-thirds of U.S. investors owning securities issued by foreign companies that report their financial information using IFRS, has made the establishment of a single set of high quality accounting standards a matter of growing importance. A common accounting language around the world could give investors greater comparability and greater confidence in the transparency of financial reporting worldwide".

To watch a statement by SEC Chairman Cox, outlining the above, click here (for QuickTime) or here (for Windows Media Player). The roadmap has not yet been published on the SEC website but further information is available in this report in the Wall Street Journal. 

Note:

[a] A useful map, indicating those countries where IFRSs have been adopted, is available on the IASB website here. 

UK: DBERR consultation on the creation of a UK wide companies registry

DBERR has published a consultation paper concerning its proposal to integrate the Northern Ireland Registry of Companies with Companies House to create a single UK Registry of Companies. According to the consultation paper:

In practical terms the merger would mean that customers would be able to refer to one Register only for registration and information relating to UK companies. It would also mean that all UK customers had access to the same products and services at the same price. The system would operate in much the same way as Companies House currently works with Scotland. The Registrar for Northern Ireland would be retained, and would be an appointee of the Secretary of State for BERR, as is the case for England and Wales and for Scotland; in practice the Northern Ireland Registrar would report to the Chief Executive of Companies House. The office in Belfast would remain, but would use systems, hardware, processes and have corporate standards in common with Companies House. Registry operations in Northern Ireland would be maintained with no detrimental impact upon customers, but the existing company data would be migrated to give customers full UK information on companies. There would be a common fee structure, and customers would have the benefit of common filing and search services covering the whole of the UK. There would be an exercise to value and transfer (if applicable) relevant assets and liabilities".