Annual accounts: dos and don’ts for directors when approving and filing

Preparing, approving and filing annual accounts is often treated as a routine compliance exercise, but mistakes at this stage can have serious consequences, particularly where there is shareholder friction. Directors who need to file company accounts should ensure that the accounts are properly prepared, approved and documented before filing. Drawing on issues we commonly see in practice, we set out below practical dos and don’ts for directors to help ensure accounts are properly prepared, approved and filed.

How directors can prepare and file company accounts correctly

Maintain robust financial records

• Have a well-structured internal process for keeping financial records. This should combine appropriate accounting software, clear internal procedures, and, most importantly, people trained to manage financial matters.

Engage accountants and tax advisers early

• Make sure you have reliable accountants and tax advisors to assist with preparing the accounts and calculating tax and give them sufficient time to do so. Providing financial records at the last minute is never a good idea as it increases the chances of transactions being missed.

Ensure compliance before you file company accounts

• Make sure the annual accounts comply with the requirements imposed by legislation before directors file company accounts, otherwise the directors can be liable for a criminal offence. This covers both the contents of the accounts and the procedural steps. The Companies Act 2006 states that a company’s annual accounts must be approved by the board of directors and then signed on behalf of the board by one of the directors. The legislation does not go into sufficient detail to prescribe how the accounts need to be approved, however it has become market practice for it to be done by a formal decision of the majority of the directors at a board meeting. This practice is consistent with the provisions of Model Articles and has been confirmed by case law as being best practice.

Review accounts carefully before you file company accounts

• Circulate the final draft of the accounts and any board papers sufficiently in advance of the meeting or written resolution, ensure directors have a fair opportunity to review and ask questions, and record any dissent or abstentions in the minutes.

Common mistakes when filing company accounts

Do not file company accounts without approval

• Do not file company accounts without getting them approved. Often there is a great deal of time pressure to meet the deadline for filing company accounts, so it is tempting to cut corners, especially when board approval is the final step before filing. Whilst having a board meeting is, in the majority of cases, the norm, the approval process does not necessarily need to be achieved at a meeting. Case law has recognised that the accounts can be approved informally by the directors provided there is unanimous consent of the directors to do so. Any informal approval should be clearly documented.

Do not ignore a dissenting director

• Do not ignore a dissenting director. Investigate the reasons for any dissent, as there might be information available which indicates the accounts are not accurate and they need to be changed. Taking advice from the accountants can provide comfort to the board and strengthen their arguments regarding the accuracy of the accounts. Ultimately, the majority of the directors must be comfortable that the accounts show a true and fair view of the financial position of the company before they can be approved. In addition to criminal liability, if directors allow a company to operate without accurate accounts being produced or authorised to be filed at Companies House, they will be in serious breach of their statutory duties, and this may result in disqualification. The severity of the consequence has been confirmed by case law in recent years.

Do not overlook constitutional documents

• Do not disregard the provisions of constitutional documents. These may impose more stringent requirements than current legislation depending on how long ago these were adopted. Check the articles of association and any shareholders’ agreement. We have come across private companies which still require the accounts to be presented and approved at a general meeting rather than simply circulated to members for information. Organising a general meeting can cause considerable delay. It also creates an opportunity for members to challenge or even refuse to approve the accounts, which, depending on what the constitutional documents state, can present significant difficulties for the directors.

Need advice before you file company accounts?

In short, keeping robust financial records and understanding your obligations and timelines is essential to avoid costly pitfalls when approving and filing annual accounts. Getting this wrong can expose directors to criminal liability, breaches of directors’ duties and potential disqualification.

The requirements for filing company accounts are set out by Companies House and the UK Government.

Further information can also be found in the Companies Act 2006.

If you need advice regarding your legal obligations around approving or filing annual accounts, please contact our firm and we will be pleased to assist.