Who we think companies should report to, and why
UK company law both reflects and informs that of many other countries. At present the accounts of UK companies need only be supplied, in full, to their members. The members of the company are usually its shareholders, but can also be its guarantors if the company is limited by guarantee. No one else has a legal right to the accounts of any company.
It is, however, a legal obligation that every UK registered company file its accounts with the Registrar of Companies within specified time limits (usually nine months from its year-end date, but earlier in the case of public companies). However, the accounts that are filed on public record need not be those sent to the shareholders. Whilst those shareholders always have a right to a full set of company accounts, which the company must, therefore, prepare, exemptions from filing these accounts on public record are available to small and micro-sized enterprises, which together comprise more than 90% of all UK registered companies.
Small companies have two of these three characteristics:
- a turnover of £10.2 million or less;
- £5.1 million or less on its balance sheet;
- 50 or fewer employees.
Micro companies have two of these three characteristics:
- a turnover of £632,000 or less;
- £316,000 or less on its balance sheet;
- 10 or fewer employees.
In both cases only a balance sheet and some very limited notes to the accounts need to be filed on public record. This data provides almost no meaningful information to almost any user of the accounts.
Around 400,000 companies a year fail to file any accounts at all in the UK. They are eventually removed from the Register of companies as a result, but that does not help those who wish to know about their activities in the meantime.
There is, then, a widespread, and legally endorsed, failure to ensure that most of the stakeholders of a company have access to the data that they need to appraise its activities. As a separate note on the decline in the standards implicit in UK company law explains: this fact, and the disappearance of the audit requirement from most UK company accounts, has been a phenomenon in UK company law, partly influenced by EU company law, from the early 1980s onwards.
The consequence is that most stakeholders of most UK companies do not have access to any meaningful data on the companies with which they might trade, leaving them exposed to considerable potential financial and other risks as a consequence of the moral hazard that those companies might create by exploiting the advantage that they have by being able to trade without exposing their shareholders to significant risk whilst leaving others to pick up the burden of their failure.