Every company must prepare and file annual accounts. This isn't just bureaucracy - accounts provide transparency to shareholders, creditors, and the public. For the SQE, you need to know: what accounts must contain, when they must be filed, when audit is required, and what happens if directors get it wrong.
Three big themes: (1) WHAT must be prepared (accounts, reports), (2) WHEN it must be filed (deadlines differ for private/public), and (3) WHETHER audit is needed (most small companies are exempt). Directors are personally responsible for compliance.
Under s.386 CA 2006, every company must keep adequate accounting records. These must be sufficient to show and explain the company's transactions, disclose with reasonable accuracy the financial position at any time, and enable the directors to ensure that any accounts prepared comply with the Act.
Every company must keep adequate accounting records. These are records that are sufficient to show and explain the company's transactions and to disclose with reasonable accuracy, at any time, the financial position of the company.
Private companies must keep accounting records for 3 years from the date they are made. Public companies must keep them for 6 years. These are MINIMUM periods - companies often keep records longer for tax and commercial reasons.
Failure to keep adequate accounting records is a criminal offence. Every officer in default is liable to imprisonment (up to 2 years) and/or a fine. If the company is wound up and records weren't kept for the required period, officers may be liable unless they can show they acted honestly.
Annual accounts are the formal financial statements a company must prepare for each financial year. They give a snapshot of the company's financial position and performance. Directors are responsible for preparing accounts that give a 'true and fair view' of the company's affairs.
The accounts must give a 'true and fair view' of the company's assets, liabilities, financial position, and profit or loss (s.393 CA 2006). This is the fundamental requirement. Directors must not approve accounts unless satisfied they give a true and fair view. This is a legal, not just accounting, requirement.
The directors of a company must not approve accounts unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss of the company.
The directors' report accompanies the accounts and provides context. It must include: the names of directors during the year, principal activities of the company, recommended dividend, and (for larger companies) much more including environmental matters and employee engagement.
Medium and large companies must also prepare a strategic report. This must include a fair review of the company's business and a description of principal risks and uncertainties. It's designed to give shareholders a strategic overview beyond the numbers.
Company size determines what exemptions apply. Small companies get significant filing and audit exemptions. The size test looks at turnover, balance sheet total, and number of employees. A company must meet 2 of the 3 thresholds for two consecutive years to qualify.
| Category | Turnover | Balance Sheet | Employees |
|---|---|---|---|
| Micro | Up to £632,000 | Up to £316,000 | Up to 10 |
| Small | Up to £10.2m | Up to £5.1m | Up to 50 |
| Medium | Up to £36m | Up to £18m | Up to 250 |
| Large | Above medium thresholds | Above medium thresholds | Over 250 |
To qualify as small, a company must satisfy at least 2 of the 3 criteria (turnover, balance sheet, employees). It must also satisfy them for TWO CONSECUTIVE years. So a company that's small this year but was medium last year doesn't get small company treatment yet.
Some companies can NEVER qualify as small, regardless of size: public companies (plcs), companies in banking/insurance sectors, and companies that are part of an 'ineligible group' (e.g., group contains a public company or regulated entity).
Small companies can file ABBREVIATED accounts at Companies House - less detailed than full accounts. They can also claim exemption from having their accounts audited (the biggest practical benefit). Micro-entities have even simpler requirements.
Even if a company files abbreviated accounts at Companies House, it must still prepare FULL accounts and send them to shareholders. The filing exemptions only affect what goes on the public register, not what members receive.
An audit is an independent examination of the accounts by a qualified auditor. The auditor gives an opinion on whether the accounts give a 'true and fair view' and comply with the Companies Act. It provides assurance to shareholders and creditors that the accounts can be trusted.
The default rule is that ALL companies must have their annual accounts audited (s.475 CA 2006). However, there are important exemptions, and in practice most small private companies are exempt from audit.
A company's annual accounts for a financial year must be audited unless the company is exempt from audit under sections 477-481.
Under s.477, a company qualifies for audit exemption if it qualifies as SMALL (meets 2 of 3 size thresholds). This is the main exemption. The company must include a statement on the balance sheet that it's exempt and that directors acknowledge their responsibilities for proper accounting records.
A dormant company is one that has had no 'significant accounting transactions' during the financial year. Dormant companies are exempt from audit regardless of size (s.480). This allows shell companies or holding companies with no activity to avoid audit costs.
Even if a company qualifies for audit exemption, shareholders holding at least 10% of issued share capital (or any class) can REQUIRE an audit by giving written notice to the company. The notice must be given at least one month before the end of the financial year.
Only a 'statutory auditor' can audit company accounts - this means an individual or firm registered with a Recognised Supervisory Body (like ICAEW, ACCA, ICAS). The auditor must be independent of the company and meet professional standards.
For private companies, auditors are usually appointed by ordinary resolution at a general meeting. They hold office from the end of the meeting until the end of the next accounts meeting. Directors can appoint the first auditor or fill a casual vacancy.
Companies must file their annual accounts at Companies House. The deadline depends on company type. Private companies have 9 months from their accounting reference date (year end). Public companies have only 6 months. These are hard deadlines - late filing triggers automatic penalties.
| Company Type | Filing Deadline | First Year Accounts |
|---|---|---|
| Private company | 9 months from year end | 9 months (or 21 months from incorporation if longer) |
| Public company | 6 months from year end | 6 months (or 21 months from incorporation if longer) |
Late filing results in automatic civil penalties. For private companies: up to 1 month late = £150, 1-3 months = £375, 3-6 months = £750, over 6 months = £1,500. For public companies, penalties are DOUBLE. These penalties are strict liability - no excuses accepted.
If accounts are filed late in two consecutive years, the penalties double again. Persistent late filing can also lead to the company being struck off the register. Directors of companies struck off can face personal liability.
The accounts must be approved by the board of directors. The balance sheet must be signed on behalf of the board by a director, and the director's name must be stated. The directors' report must also be approved by the board and signed by a director or the company secretary.
A copy of the annual accounts (with directors' report and auditor's report if applicable) must be sent to every member, debenture holder, and person entitled to notice of general meetings. This must happen at least 21 days before the accounts meeting (for public companies) or before filing (for private companies).
Directors are PERSONALLY responsible for ensuring proper accounting records are kept and that accounts are properly prepared. This cannot be delegated away - even if the company employs accountants, directors remain liable. Every director should understand the accounts they approve.
Directors must make a statement in the directors' report confirming that they have provided all relevant audit information to the auditors and have taken steps to make themselves aware of relevant information. This is a significant personal commitment - a false statement is a criminal offence.
The Companies Act creates several criminal offences relating to accounts. Directors can be personally liable for: failing to keep adequate accounting records, approving defective accounts, making false statements to auditors, and failing to file accounts. Penalties include fines and imprisonment.
These offences apply to directors PERSONALLY, not just the company. A director cannot hide behind the company. If the company fails to keep proper records, every director can be criminally liable. Saying 'I left it to the accountant' is NOT a defence.
If directors discover that accounts did not comply with the Act, they may prepare revised accounts (s.454). This is voluntary but sensible - it's better to correct mistakes than wait for enforcement action. Revised accounts must be marked as replacing original accounts.
The Secretary of State (through the Financial Reporting Council) can require revision of defective accounts. If directors don't comply, the court can order revision and require the company to meet the costs. This power is used for serious non-compliance with accounting standards.
Every company has an accounting reference date (ARD) - its year end. By default, this is the last day of the month in which the anniversary of incorporation falls. Companies can change their ARD by filing form AA01, but there are restrictions on extending the accounting period.
A company's first accounts cover the period from incorporation to its first ARD. This period can be longer or shorter than 12 months (minimum 6 months, maximum 18 months). First accounts get a longer filing deadline - 21 months from incorporation or the normal deadline, whichever is longer.
Exam questions often test: (1) Does a company qualify for audit exemption? (2) What is the filing deadline? (3) What are the consequences of late filing? (4) Can shareholders demand an audit? Remember the size thresholds, the 9/6 month deadlines, and the 10% shareholder audit demand right.
Company accounts might seem dry, but they're fundamental to company law. They're how shareholders monitor their investment, how creditors assess risk, and how the public gets transparency. Directors who don't take accounts seriously face civil penalties, criminal prosecution, and personal liability. For the SQE, know the exemptions, deadlines, and consequences.