7 Feb 2019 05:55pm

Debate: is Section 501 too draconian?

An auditor has duties under the Companies Act 2006 that involve obtaining information or explanations from people such as officers and employees of a company

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Caption: Image by Shutterstock

The Act requires these people to provide the explanations and information required by the auditor in performance of the auditor’s duties, and if they fail to do so, they may commit an offence under section 501 of the Act and be liable to a fine. The section also provides that a person who knowingly or recklessly contributes explanations or items of information that are misleading, false or deceptive in a material particular commits an offence and is liable to imprisonment for up to two years, or a fine, or both.

Daniel Sunderland

Deloitte & Touche’s chief auditor in Boston, in an interview with the Conference Board

The board of directors or the audit committee needs to see more than summary financial information. There should be an agreement between the audit committee/board and management about what internal information is given to directors. It’s not that there should be unfettered access, but they need to see the details to be able to ask questions. “On the external front, it is the audit committee/board member’s fiduciary duty to bring in outside sources when they don’t get all the answers from management. “Information should not only flow from the inside out – but also from the outside in.”

Charles Worth

Head of business law at ICAEW

“In isolation, s501 does not seem too draconian. People shouldn’t lie to auditors, and courts generally apply sanctions proportionately. The low level of prosecutions does not necessarily mean the provision should be repealed, particularly if it is deterring bad behaviour.

“But we should not look at this in isolation. There were almost 100 offences under the Companies Act 2006 alone when it was enacted and more have been introduced since (eg under the ‘people with significant control’ regime). Across business law as a whole, there is a bewildering array of offences for business to navigate. The Law Commission’s consultation paper Criminal Liability in the Regulatory Context (2010) outlines why we should all be concerned about this. Ultimately, respect for the rule of law is at risk. “Government’s efforts at ‘better regulation’ so far have been disappointing and a more innovative approach is needed. To have a world-beating and responsible business sector, we need a regulatory regime to match. I doubt that s501 in its current form would then be needed.”

Roger Barker

Head of corporate governance at the Institute of Directors

“Far from being a natural market failure, the demise of Carillion came about as a result of individual failings by the company’s board and other actors in the governance chain.”

Michael Izza

ICAEW chief executive, writing in economia

“A particular bugbear of mine, though, is section 501 of the Companies Act 2006.

“This provision establishes the requirement for managers of businesses to disclose all the information the auditors ask them for and makes it clear that they must not ‘knowingly or recklessly’ mislead them. It seems highly likely in some of the cases now playing out around the world that this provision has been breached.

“So why does nobody take any action? In the UK, this is an offence potentially attracting a criminal sentence of up to two years in prison, or a fine, or both, but it is extremely rarely used – although auditors do use the threat of it once in a while to bring recalcitrant audit clients to heel. Indeed, the only recent case that springs to mind was SFO v Gyrus Group Ltd and Olympus Corporation in 2015, which was lost effectively on a technicality in the Court of Appeal. “So why is this provision in the statute book if those with the locus to bring an action – be they government, regulators or other enforcement authorities – do not use all the tools at their disposal? I believe it is time that the system worked in the way that those who designed it intended.”

Brian Palmer

Tax policy expert, Association of Accounting Technicians

“Section 501 may be rarely in play, but its mere existence should serve as a powerful reminder to senior management and directors that they have a legal responsibility to ensure the accuracy of a company statement. The very recent collapse of the case concerning two Tesco directors accused of fraud and false accounting is a high-profile example of an occurrence where the SFO felt that the public and shareholders had been potentially misled, and that there was cause for investigation.

“In the eyes of the public, cases such as Tesco show that even where in reality no wrongdoing has ultimately been found, the public perception can no doubt be that management can sometimes be ‘getting away with it’, given that no rigorous punishments arise. From that side of things alone, Section 501 is probably not being used enough and should be more widely considered in order to improve public confidence in the accounting industry.”

Carol Adams

Professor of accounting at Durham University Business School

“Companies Act requirements that are not enforced are not complied with. Section 501 is important and should be enforced.

“I’d like to see enforcement of such provisions extended to assurance and reporting to authorities of information on key sustainable development issues starting with carbon emissions data and gender diversity data such as the gender pay gap. “It may be harder to see the direct impact on profit or share price of such data, but there is one. Take the Volkswagen emissions scandal, for example. In my article in economia (December 2015), I referred to it as ‘green revenue manipulation’ – cheating on emissions data in the automobile industry (and others) increases sales. When companies are caught out for cheating, it has a negative impact on sales and share price.

“Studies show that gender diversity is good for business, so shareholders and other stakeholders have an interest in gender diversity data. They should be able to rely on it, but there is an incentive to manipulate the data to make the company look better.”