Being a Company Director: Why Financial Reporting Responsibility Still Sits With the Board

Appointing an accountant, finance team or external auditor can provide a company with valuable expertise and independent scrutiny. It does not, however, transfer the board’s responsibility for the company’s financial reporting.

Under the Companies Act 2006, directors sit at the centre of the statutory reporting process. Companies must maintain adequate accounting records, annual accounts must be prepared in accordance with the applicable requirements, and the board must approve those accounts before a director signs the balance sheet on its behalf.

For larger UK companies, there can be a further layer of personal accountability under the Senior Accounting Officer regime, which focuses specifically on the systems and controls used to calculate the company’s tax liabilities.

These obligations are different, but they reflect the same underlying principle: professional advisers can prepare information, provide advice and independently challenge management, but responsibility for appropriate governance cannot simply be outsourced.

Outsourcing the work does not outsource the responsibility

Current Companies House guidance makes the position clear. A director can appoint professionals, including accountants, to assist in managing a company, but remains legally responsible for the company’s records, accounts and performance.

That principle is reflected throughout the Companies Act 2006.

Every company must keep adequate accounting records. Those records must be sufficient to show and explain the company’s transactions, disclose its financial position with reasonable accuracy and enable the directors to ensure that the accounts comply with the relevant statutory requirements.

Subject to the applicable statutory framework, directors are also responsible for preparing annual accounts for each financial year.

Most importantly, directors must not approve the accounts unless they are satisfied that they give a true and fair view of the company’s assets, liabilities, financial position and profit or loss. Once the board approves the annual accounts, a director signs the balance sheet on behalf of the board.

Board approval is therefore not simply an administrative step at the end of the accounts process.

What should directors understand before approving the accounts?

A director does not need to be a qualified accountant. The Companies Act does, however, require directors to exercise reasonable care, skill and diligence, while the accounts themselves cannot be approved unless the board is satisfied with the true and fair view they present.

The level of enquiry required will depend on the nature and complexity of the business, but directors should ordinarily be able to understand and challenge the principal matters affecting the reported financial position.

Particular attention may be required in areas such as:

• significant accounting estimates and judgements;
• revenue recognition and unusual transactions;
• valuations and impairment assessments;
• provisions and contingent liabilities;
• related-party transactions and directors’ balances;
• tax liabilities and uncertain tax positions;
• recoverability of material receivables;
• financing arrangements and covenant compliance;
• post-balance-sheet events; and
• going concern, liquidity and cash-flow forecasts.

The objective is not for each director to reproduce the work of the company’s accountants. It is for the board to understand the material assumptions and judgements underpinning the accounts it is being asked to approve.

Where management accounts, forecasts or information previously presented to the board appear inconsistent with the statutory accounts, the difference should also be understood before approval.

Adequate records are part of the obligation

Financial reporting starts well before the year-end accounts are drafted.

Section 386 of the Companies Act 2006 requires companies to maintain adequate accounting records. These must be sufficient to show and explain the company’s transactions, disclose its financial position with reasonable accuracy at any time and enable the directors to ensure that the relevant accounts comply with the Act.

For directors, this means that material weaknesses in bookkeeping, incomplete reconciliations, unexplained balances or missing supporting documentation are not simply operational issues for the finance department.

They can affect the board’s ability to discharge its statutory responsibilities.

A reliable year-end process therefore depends on the quality of the accounting environment throughout the financial year: appropriate systems, reconciliations, controls, supporting documentation and clear responsibility for the underlying data.

For larger companies, the Senior Accounting Officer regime adds another layer

For larger UK companies, financial governance can also interact with the Senior Accounting Officer, or SAO, regime.

The SAO regime is separate from the Companies Act requirements governing statutory accounts. Introduced by Schedule 46 to the Finance Act 2009, it is concerned specifically with the arrangements through which qualifying companies calculate their relevant tax liabilities.

A UK-incorporated company can fall within the regime where, either alone or after applying the relevant aggregation rules to other UK-incorporated companies in the same group, the preceding financial year shows:

• turnover of more than £200 million; or
• a relevant balance-sheet total of more than £2 billion.

The group rules are important. A UK company does not necessarily need to exceed those thresholds on a standalone basis before it becomes a qualifying company.

Who is the Senior Accounting Officer?

The SAO is the director or officer who, in the company’s reasonable opinion, has overall responsibility for its financial accounting arrangements.

Depending on the business, this may be the Chief Financial Officer, Finance Director or another senior officer with the relevant overall responsibility.

The position is necessarily an internal one. Because the SAO must be a director or officer of the company, the statutory responsibility cannot simply be delegated to an external accountant, tax adviser or other professional adviser.

In a group, the same individual may act as SAO for a number of qualifying companies, or different individuals may hold the role for different companies.

What is the SAO responsible for?

The SAO’s principal duty is to take reasonable steps to ensure that the company establishes and maintains appropriate tax accounting arrangements.

HMRC describes tax accounting arrangements as the framework of responsibilities, policies, appropriate people and procedures used to manage tax compliance risk, together with the systems and processes through which that framework operates.

Those arrangements must enable the company’s relevant tax liabilities to be calculated accurately in all material respects.

The obligation is therefore wider than reviewing a tax return immediately before it is submitted.

Depending on the nature and complexity of the business, reasonable steps may involve:

• clearly allocating responsibility for tax-sensitive processes;
• establishing and monitoring appropriate controls;
• ensuring relevant personnel have appropriate knowledge and training;
• considering the tax implications of changes to accounting or operational systems;
• maintaining appropriate records and reconciliations;
• ensuring outsourced activities are appropriately controlled;
• identifying weaknesses in systems or processes; and
• implementing improvements where shortcomings are identified.

The SAO duty applies throughout the period for which the individual holds the role. It is not simply a year-end certification exercise.

Annual certification creates personal accountability

After the end of each relevant financial year, the SAO must provide a certificate to HMRC.

Broadly, the certificate must state either that the company had appropriate tax accounting arrangements throughout the financial year or that it did not. Where the arrangements were not appropriate, the certification must identify the respects in which they fell short.

The qualifying company must also notify HMRC of the individual or individuals who acted as its SAO during the year.

The regime includes fixed £5,000 penalties in specified circumstances. These include a penalty on a qualifying company for failing to notify HMRC of its SAO within the required timeframe and personal penalties on the SAO for failures including not complying with the main duty, failing to provide the required certificate on time, or providing a timely certificate containing a careless or deliberate inaccuracy.

This means that significant weaknesses in financial systems, tax data or internal controls can have consequences beyond correcting an individual tax computation.

How does the SAO regime interact with directors’ responsibilities?

The two regimes should not be confused.

Directors’ Companies Act responsibilities include maintaining appropriate accounting records, preparing and approving the annual accounts and being satisfied that those accounts give a true and fair view.

The SAO regime focuses on whether a qualifying company has appropriate tax accounting arrangements capable of calculating its relevant tax liabilities accurately in all material respects.

Appointing an SAO does not transfer the board’s Companies Act responsibilities to that individual. Equally, board approval of the statutory accounts does not by itself satisfy the separate obligations imposed on the SAO.

Taken together, however, the regimes illustrate the importance increasingly placed on the quality of the systems, controls and governance sitting behind a company’s reported numbers.

Where does the auditor fit?

An audit provides independent scrutiny. It does not transfer ownership or responsibility for the financial statements from the directors to the auditor.

The statutory auditor reports to the company’s members and expresses an independent opinion on the financial statements in accordance with the applicable statutory requirements and auditing standards.

The auditor’s objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether caused by fraud or error.

Reasonable assurance is a high level of assurance, but it is not a guarantee that every error, fraud or misstatement will be detected.

The distinction between the roles is therefore fundamental:

• the directors prepare, assess and approve the financial statements;
• the SAO, where the regime applies, has separate responsibilities in relation to appropriate tax accounting arrangements; and
• the auditor independently examines the financial statements and reports an opinion to the members.

An audit does not relieve management or those charged with governance of their own responsibilities.

Information provided to the auditor matters

The effectiveness of an audit also depends on the quality and completeness of the underlying information.

A statutory auditor has rights of access to the company’s books, accounts and relevant records and can require the information and explanations considered necessary for the audit.

Directors and management should therefore ensure that the audit team receives complete information regarding matters including unusual transactions, litigation, related parties, financing arrangements, significant estimates and events occurring after the reporting date.

A weak audit trail or incomplete information can increase the amount of work required, delay completion and, depending on the circumstances, affect the auditor’s conclusions or report.

The year-end process is generally most effective where significant accounting, control or reporting issues are identified and discussed before the final accounts are presented for approval.

For companies within the SAO regime, findings relating to tax-sensitive systems and controls should also be considered from the perspective of the SAO’s separate obligations rather than treated solely as audit adjustments.

Does every company require an audit?

No.

For financial years beginning on or after 6 April 2025, a private company may qualify for the small-company audit exemption where the applicable statutory conditions are satisfied.

The current headline size criteria are:

• annual turnover of no more than £15 million;
• a balance-sheet total of no more than £7.5 million; and
• an average of no more than 50 employees.

Broadly, at least two of the three criteria must be met.

However, audit eligibility should not be determined from those figures in isolation. The Companies Act contains rules governing qualification over successive financial years, groups and companies that are specifically excluded from the small-company regime or audit exemption.

An audit may also be required under the company’s articles, and qualifying shareholders meeting the statutory 10% threshold can require an audit by following the prescribed procedure.

The company’s actual circumstances should therefore be considered before an audit exemption is claimed.

Audit exemption does not mean accounts exemption

This distinction is particularly important for smaller companies.

Where a company legitimately claims audit exemption, the exemption relates to the statutory requirement to have the annual accounts audited. It does not remove the underlying responsibilities to maintain adequate accounting records, prepare compliant financial statements and obtain appropriate board approval.

The audit-exemption statement itself requires directors to acknowledge their responsibilities under the Companies Act concerning accounting records and the preparation of accounts.

An audit-exempt company therefore still requires an appropriate year-end financial reporting process.

Separately, some businesses may decide that a voluntary audit or another form of assurance is commercially useful even where there is no statutory audit obligation. This can arise, for example, because of shareholder expectations, financing arrangements, group reporting requirements or a contemplated transaction.

Companies House filing is changing, but board responsibility is not

The mechanics of Companies House accounts filing are also changing.

Companies House currently states that mandatory software filing of accounts will apply from 1 April 2028. Changes will also affect the information delivered by small companies and micro-entities, including requirements relating to the filing of profit and loss accounts, with specific provisions concerning whether qualifying information will be displayed publicly.

Businesses should therefore monitor the implementation requirements and ensure that their accounting software and reporting processes are capable of supporting the new filing environment.

These procedural changes do not, however, alter the underlying principle: the board remains responsible for the company’s financial reporting.

Directors must exercise their own judgement

Financial reporting responsibility also sits within directors’ wider statutory duties.

A director must exercise independent judgement and reasonable care, skill and diligence.

Companies House guidance also makes clear that appointing somebody else to assist in running the company does not remove the director’s legal responsibilities.

The practical point is straightforward: professional advice can inform a decision, but it does not replace the director’s own responsibility for that decision.

The same principle can be seen in the SAO regime. External tax work may be outsourced, but the individual holding the statutory SAO role remains responsible for taking reasonable steps to ensure appropriate tax accounting arrangements are established and maintained.

Good governance therefore depends not simply on having professional advisers, but on ensuring that the people carrying statutory responsibility understand the information placed before them, ask appropriate questions and act where deficiencies are identified.

A practical year-end governance checklist

Before annual accounts are approved, directors should be satisfied that:

• the underlying accounting records are complete and appropriately reconciled;
• material balances and unusual movements have been explained;
• significant accounting policies, estimates and judgements have been identified and understood;
• related-party transactions and directors’ interests have been appropriately considered;
• the board understands the company’s liquidity and going-concern assessment;
• material tax, legal and regulatory exposures have been considered;
• post-balance-sheet events have been appropriately assessed;
• information provided to the auditor is complete where an audit is required;
• material audit or accounting issues raised by professional advisers have been resolved or understood;
• the directors are satisfied with the accounts before authorising a director to sign the balance sheet; and
• where the company falls within the SAO regime, the SAO has considered whether appropriate tax accounting arrangements were maintained throughout the relevant period and whether identified weaknesses require remediation or disclosure through the certification process.

The level of review should be proportionate to the business. The underlying objective is that approval of the accounts represents a genuine, informed board decision supported by appropriate evidence.