” Company Law states that it is the responsibility of Directors to maintain adequate company records.
Failure to do this can result in unlimited fines and a 2 year custodial sentence.”
Nigel Holland
TECH 01/11: GUIDANCE FOR DIRECTORS ON ACCOUNTING RECORDS UNDER
THE COMPANIES ACT 2006
Contents Paragraph
Introduction 1 – 4
The legal requirements 5 – 9
The accounts to which this requirement to maintain
adequate accounting records applies 10 – 13
Contents, form and organisation of accounting records 14 – 15
Preservation of the accounting records 16 – 17
Disclosure of the financial position at any time 18 – 24
Cash records to be kept 25 – 26
Assets and liabilities 27
Stocks 28
Purchases and sales of goods 29
Penalties and disqualification orders 30 – 32
This Technical Release provides general guidance and does not purport to deal with all possible
questions and issues that may arise in any given situation. ICAEW do not accept responsibility for
loss caused to any person who acts or refrains from acting in reliance on the material in this
publication, whether such loss is caused by negligence or otherwise.
Introduction
1 Section 386 of the Companies Act 2006 obliges all companies to have accounting records
satisfying the requirements set out in that section. The term ‘accounting records’ was
introduced by the Companies Act 1976 in recognition of the fact that the term ‘books of
account’ (used in earlier Acts) was no longer apt. It was concern about the incidence of
fraud and negligence that originally directed attention to the need for guidance on the
interpretation of this section. This resulted in the issue in 1992 of FRAG 5/92, which
provided guidance on the interpretation of section 221 of the Companies Act 1985. This
Technical Release is an updated version of that original guidance, which reflects changes
in companies legislation brought about by the Companies Act 2006 and other
developments.
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- Since 1976, and since the 1992 guidance, accounting practices, both in terms of treatments
in accounts and systems for capturing and processing financial information, have evolved
significantly. However, the Act’s requirements with respect to accounting records remain
framed in substantially the same terms as they were in the 1976 Act. The Act does not
mandate that companies adopt the highest possible standards of record keeping systems,
but sets only a minimum threshold as to the records that must be kept. The requirements,
applying to all companies regardless of how large and global, or how small and local their
businesses may be, could not aim at anything else. This is acknowledged in the
explanatory notes to the Companies Act 2006, which say:
Accounting records is a broad term and there is no specific definition as the records
may differ depending on the nature and complexity of the business. For a simple
business these may include, for example, bank statements, purchase orders, sales
and purchase invoices, whilst a more sophisticated business may have integrated
records, which it holds electronically.’ (Explanatory notes to the Companies Act
2006, para 639)
It should also be emphasised that the requirements are concerned with specifying the
matters that must be recorded and not with the system, including its internal controls, by
which a company might make such records. Thus, for example, matters of internal controls
are outside the ambit of section 386.
3 No account is taken in this paper of specific requirements of other legislation1
(eg VAT
legislation) in respect of accounting records. In addition, the records that need to be
maintained in order to manage the business may well go beyond the Act’s minimum; such
records are not covered by this technical release. As discussed in Tech 6/08 Financial and
accounting duties and responsibilities of directors, the directors have an overriding
responsibility to ensure that they have adequate information to enable them to discharge
their responsibility to manage the company’s business (Tech 6/08, para 69).
4 Counsel has confirmed that the guidance is consistent with the law at 1 December 2010.
Counsel accepts no responsibility (other than to the Institute) in relation to advice ascribed
to him in this guidance.
1 For information on these requirements, please refer to the Tech 6/08 Financial and accounting duties and
responsibilities of directors, para 76.
2
The legal requirements
5 The Act’s requirements are as follows:
386 Duty to keep accounting records
(1) Every company must keep adequate accounting records.
(2) Adequate accounting records means records that are sufficient –
(a) to show and explain the company’s transactions,
(b) to disclose with reasonable accuracy, at any time, the financial position of the
company at that time, and
(c) to enable the directors to ensure that any accounts required to be prepared
comply with the requirements of this Act (and, where applicable, of Article 4 of the
IAS Regulation).
(3) Accounting records must, in particular, contain –
(a) entries from day to day of all sums of money received and expended by the
company, and the matters in respect of which the receipt and expenditure takes
place, and
(b) a record of the assets and liabilities of the company
(4) If the company’s business involves dealing in goods, the accounting records must
contain –
(a) statements of stock held by the company at the end of each financial year of the
company,
(b) all statements of stocktakings from which any such statement of stock as is
mentioned in paragraph (a) has been or is to be prepared, and
(c) except in the case of goods sold by way of ordinary retail trade, statements of all
goods sold and purchased, showing the goods and the buyers and sellers in
sufficient detail to enable all these to be identified.
(5) A parent company that has a subsidiary undertaking in relation to which the above
requirements do not apply must take reasonable steps to secure that the undertaking
keeps such accounting records as to enable the directors of the parent company to
ensure that any accounts required to be prepared under this Part comply with the
requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).
6 The key requirement is in section 386(2). Subsections (3) and (4) supplement this.
7 The 2006 Act requires companies to maintain ‘adequate’ accounting records. This drafting
is different from the requirements of the 1985 Act, which made reference only to
‘accounting records’ (section 221(1)). However, ‘adequate accounting records’ is defined in
the same way as ‘accounting records’ was under the 1985 Act, ie that they be sufficient to
meet the three purposes set out in (what is now) sub-sections (2)(a)-(c), and this change in
drafting has no substantive effect. Thus, in this respect, both the old and the new legislation
involve the same qualitative standard.
3
8 It is noted in passing that in the 2006 Act, the language of these requirements is consistent
with the auditor’s reporting duty in section 498(1)(a) – ie, the auditor is required to form an
opinion whether adequate accounting records have been kept by the company. Whilst this
is a difference in language, compared with the position under the 1985 Act, where an
auditor was required to form an opinion as to whether ‘proper’ accounting records had been
kept, there is no change to the substance of the requirement on auditors to report on the
company’s accounting records.
9 Section 387 contains penalty provisions. These are discussed in paragraph 30 below.
The accounts to which this requirement to maintain adequate accounting records
applies
10 Adequate accounting records must be kept to enable the directors to ensure that any
accounts required to be prepared comply with the requirements of the Companies Act 2006
and, where applicable, Article 4 of the IAS Regulation (section 386(2)(c)).
11 The language of the Act differs from that of the 1985 Act, which applied to accounts
required to be prepared under Part VII of the 1985 Act. Thus, the language of the Act is
wider than that of the 1985 Act, and raises a question as to whether the record keeping
requirement applies to any accounts required to be prepared eg, monthly management
accounts required to be prepared by a banking agreement. However, later wording in the
section requires the records to enable such accounts to comply with the Act (or the IAS
Regulation). Accordingly, the drafting of the 2006 Act extends the statutory requirement to
apply in relation to accounts that are required to be prepared pursuant to the Act or the IAS
Regulation, but no further.
12 However, as a result, that wider language makes it clear that under the Act the
requirements of section 386 do apply in relation to those accounts that are required to be
prepared by a provision in the Act that sits outside Part 15 – eg, initial and interim accounts
required to be prepared by Chapter 2 of Part 23 of the Act for the purpose of making a
distribution.
13 Although consolidated accounts may be required under Part 15 of the Act or under the IAS
regulation, the record keeping requirement covers only the company’s transactions (some
or all of which, of course, are included in the consolidated accounts).2
Contents, form and organisation of accounting records
14 The accounting records should comprise an orderly, classified collection of information
capable of timely retrieval, containing details of the company’s transactions, assets and
liabilities. An unorganised collection of vouchers and documents will not suffice: whatever
the physical form of the records, the information should be so organised as to enable a trial
balance to be constructed. If, for example, the information is held in electronic form as a
subset of a set of wider information, the software should be capable of retrieving the
appropriate data.
15 Section 1135 makes basic provisions with regard to the form of company records, which
includes accounting records (section 1134). These may be kept in hard copy or electronic
form, and arranged in such a manner as the directors think fit provided the information that
is recorded is adequate for future reference. Where records are kept in electronic form, they
must be capable of being reproduced in hard copy form.
2
A parent company that has a subsidiary undertaking in relation to which section 386 does not apply (e.g. an
overseas subsidiary), is required by sub-section (5) to take reasonable steps to secure that subsidiary keeps
such records as are needed to enable the parent company’s directors to prepare any accounts required to
be prepared under Part 15 of the Companies Act 2006 (including consolidated accounts). This guidance
does not address this element of the requirements.
4
Preservation of the accounting records
16 Section 388 of the Act requires that accounting records, once made, must be preserved for
at least 6 years (public companies) or 3 years (private companies). It follows that where
software is needed for retrieval of information in usable form, it must be available for use for
the same period, as must any necessary hardware.
17 However, owing to other legal obligations, eg tax legislation, companies usually need to
preserve accounting records for longer than those periods given by section 388. For a more
detailed discussion of these requirements, please refer to the Tech 6/08 Financial and
accounting duties and responsibilities of directors, para 73 et seq.
Disclosure of the financial position at any time
18 The Act requires that accounting records should be such as to disclose with reasonable
accuracy, at any time, the financial position of the company at that time. The words ‘at any
time’ emphasise the obligation to keep accounting records up to date. The words ‘at any
time … at that time’ make clear that it does not impose an obligation to keep accounting
records capable of disclosing the financial position at any time in the past. The requirement
to keep accounting records up to date does not mean that transactions and events must be
recorded instantaneously. It is sufficient if they are recorded within a reasonable time. What
is a reasonable time depends upon the nature of the business and other circumstances.
For example, a company with a very high volume of transactions, may need to write up its
records with greater frequency, than a business that does not have such volume, in order to
be in a position to disclose its financial position at any time.
19 The data in accounting records should be such as would enable the directors at any time to
prepare a reasonably accurate statement of the company’s financial position. The financial
position is not limited to the cash position. It comprises the assets and liabilities including
items such as those referred to in paragraph 23 below. The accounting records should
therefore contain the primary material on which a set of accounts would be based.
20 However, they need not contain whatever additional items of information it would be
necessary to include in statutory accounts in order to make those accounts true and fair
(see paragraph 23 below). In requiring that the accounting records be sufficient to disclose
with reasonable accuracy, at any time, the financial position of the company at that time,
the Act recognises that it is not practicable to keep accounting records in such a way as to
enable accounts to be prepared giving a true and fair view at every moment during the
year. The concept of “true and fair” is extremely wide and embraces information not
necessarily contained within the accounting records themselves.
21 Whether a company is keeping the right kind of accounting records to meet the
requirements of the Act is a question of fact to be decided in any particular case. Regard
will be had, among other things, to prevailing practice of the time in businesses of the type
in question although this consideration will not itself be conclusive.
22 What is a sufficient record of stocks within the total picture will depend on the
circumstances. The materiality of stock and the extent of stock movements are relevant
factors. Continuous stock records can provide adequate information when supported by
systematic physical checks. The information may, however, require to be supplemented by
judgements with respect to realisable value including times of potential realisation and this
may require accounting entries to be made, for example by way of memorandum, as
indicated in paragraph 23 below. Continuous records are not essential if the stock position
can be assessed with sufficient reliability from other accounting records, for example, the
statement of stock held at the previous financial year-end or, in appropriate cases, any
interim stocktakings, together with records of subsequent stock movements. Express
requirements with respect to stocks held at the end of financial years are contained in
section 386(4), and are discussed in paragraph 28 below.
5
23 Provisions for such matters as depreciation, bad debts, impairments and other losses are
often made only at the end of an accounting year. The requirement to disclose the financial
position with reasonable accuracy at any time during a financial year will normally be
satisfied if the basic data is recorded and a procedure exists to be applied to that data, so
that when the financial position needs to be ascertained an adequate record is made and
retained – for example by way of memorandum – of any expected loss, liability or
contingency material to the assessment of the current position. Such a memorandum would
then constitute part of the accounting records. Similar considerations also apply to
obtaining valuations of certain assets and liabilities – in particular, financial assets and
liabilities. The assets and liabilities must be recorded initially but their valuation is a process
that can be undertaken within a reasonable time when the financial position needs to be
ascertained. What is a reasonable time depends, as noted earlier, on the nature and
circumstances of the business. For example, it may be not necessary for a manufacturing
company to obtain frequent valuations of, say, its interest rate swaps. However, a financial
institution with a very high volume of transactions would need to have frequent valuations of
its trading book of interest rate swaps.
24 Records made to disclose the current financial position (including any stock records or
memoranda) must be retained for the statutory period.
Cash records to be kept
25 Section 386(3)(a) requires the accounting records to contain entries from day to day of all
sums of money received and expended. Accordingly, the accounting records must contain:
(1) the dates of transactions;
(2) the sums received and expended;
(3) the matters in respect of which the receipt and expenditure took place.
As noted above, it is not necessary in all cases for entries to be made instantaneously,
although they must be made within a reasonable time.
26 It will sometimes be appropriate to record groups of transactions rather than individual
transactions (e.g. in the records of the daily cash takings of a shop where a record of
individual receipts is not necessary to explain the transactions). Paragraph 29 below sets
out the position as regards records of goods sold and purchased.
Assets and liabilities
27 Assets and liabilities must be recorded (section 386(3)(b)). Details must therefore be
included of all the company’s assets and liabilities such as debtors, creditors, properties
and plant to a sufficient level of detail to show and explain the company’s transactions and
to disclose with reasonable accuracy the financial position of the company so that accounts
can be prepared.
Stocks
28 Section 386(4)(a) requires that where the company’s business involves dealing in goods,
statements of stock held at each financial year-end are to be part of the accounting records.
‘Statements of stock’ is taken to mean a summary supporting the amount included in the
annual accounts in respect of stock. It is further required, by section 386(4)(b), that any
statements of stocktakings supporting the year-end stock summary are to form part of the
accounting records. Any continuous stock records used for that purpose, or if stock is taken
physically the original stock sheets, are therefore to be treated as part of the accounting
records.
6
7
Purchases and sales of goods
29 Where the company’s business involves dealing in goods, section 386(4)(c) requires details
of goods sold and purchased, and of individual buyers and sellers, to be recorded. This
does not, however, apply to sales by way of ordinary retail trade.
Penalties and disqualification orders
30 Under the penalty provisions in section 387 non-compliance with section 386 is a criminal
offence by a director (or other officer) who is in default (liable to a maximum of two years’
imprisonment, an unlimited fine, or both).
31 By virtue of section 9 of, and paragraph 4(a) of Schedule 1 to, the Company Directors
Disqualification Act 1986, the extent of the director’s responsibility for any failure by the
company to comply with section 386 is one of the matters to which the court must have
regard on an application for disqualification of a director.
32 Companies should note that a failure to keep adequate accounting records may provide a
basis for action by prosecuting authorities (as it has in the past in relation to the Proceeds
of Crime Act 2002 and may in the future in relation to the Bribery Act 2010). In addition, for
those subject to regulatory supervision any such failure may have a significant effect in the
context of its regulatory supervision and may lead to intervention by a relevant regulator.
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