When a shareholder requests an audit, it can have significant implications for a company.
In the UK, shareholders have certain rights under the Companies Act 2006, which includes the ability to request an audit under specific circumstances.
Understanding the process, legal requirements, and potential consequences is crucial for both company directors and shareholders.
Why do shareholders request an audit?
A shareholder may request an audit for various reasons, including concerns about financial transparency, a lack of confidence in the management’s financial reporting, or a desire for reassurance regarding the company’s financial position.
Typically, this request arises in private companies where audits are not otherwise mandatory. Public companies are already subject to statutory audits, so shareholder requests are less common in those instances.
Legal grounds for a shareholder audit request
Under UK law, a shareholder or group of shareholders holding at least 10% of a company’s share capital (or 10% of a specific class of shares) can request an audit.
This request must be made formally in writing and submitted to the company no later than the end of the financial year for which the audit is being requested.
Once a valid request has been received, the company is legally obliged to conduct an audit, even if it would not otherwise be required under normal audit exemption rules.
What happens during the audit process?
Upon receiving a request, the company’s directors must engage a qualified auditor to carry out the process.
The auditor will conduct an independent examination of the company’s financial statements, ensuring that they provide a true and fair view of its financial position. This includes reviewing financial records, assessing internal controls, and verifying key financial transactions.
Impact of an audit on the company
An audit can have significant financial and operational implications.
For smaller companies, an audit can be costly and time-consuming, requiring management to allocate resources to meet auditor requests for documentation and explanations.
While the audit is meant to provide assurance, it can also uncover financial discrepancies, inefficiencies, or areas requiring improved governance.
If any issues arise, the company will need to address them promptly to avoid further scrutiny or reputational damage.
Advantages of audit for shareholders
From a shareholder’s perspective, an audit can provide greater transparency and confidence in the company’s financial health.
If concerns about mismanagement or financial irregularities are justified, the audit may uncover areas that require corrective action.
In extreme cases, it could lead to further investigations or even legal action if significant financial misconduct is identified.
How should directors respond to an audit request?
Company directors should approach an audit request with transparency and professionalism.
While it may feel like a challenge to their authority, audits ultimately help build trust and credibility.
A cooperative approach with auditors and shareholders can demonstrate good governance and commitment to financial integrity.
In some cases, directors may wish to communicate with shareholders to understand their concerns before an audit is requested formally.
If the request is driven by a misunderstanding or lack of communication, providing additional financial information or reassurance may prevent unnecessary costs and disruptions.
However, if an audit request is made formally and meets the legal requirements, it cannot be refused.
Reducing the likelihood of audit requests
For companies that regularly face shareholder audit requests, it may be beneficial to maintain high levels of financial transparency and corporate governance.
Regular internal audits, clear financial reporting, and open communication with shareholders can reduce the likelihood of formal audit requests and foster a more trusting relationship.
In conclusion, when a shareholder requests an audit, it triggers a formal process with legal and financial implications.
Companies should be prepared to comply with such requests and view them as an opportunity to demonstrate sound financial management. Proactively maintaining strong financial controls and engaging with shareholders transparently can mitigate the risks associated with audit requests and reinforce confidence in the company’s operations.
How we can help
Navigating the complexities of shareholder audit requests can be challenging, but our expert team is here to support you.
At Williamson & Croft, we offer comprehensive audit and advisory services to ensure compliance, transparency, and financial stability.
Whether you need assistance in responding to an audit request, improving internal financial controls, or maintaining shareholder confidence, we can provide tailored solutions to meet your needs.
Contact us today to discuss how we can help safeguard your company’s financial health and governance.