Introduction
The chapter details the companies Act Cap 486 requirements on the keeping of accounting records and books by incorporated companies. The accountant and the auditor must familiarize himself or herself with requirements before he/she carries out the audit work. The auditor must ascertain that the directors of the company have complied with all the necessary rules and requirements of the companies Act. It the responsibility of the directors to keep proper books of accounts. Proper books of accounts must comply with rules and regulation as set out in the companies Act and the relevant International Accounting Standards.
Books of Accounts and Audit
Section 147 of the companies Act Cap 486 states:
(1) Every company shall cause to be kept in the English language proper books of account with respect to–
- All sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place;
- All sales and purchases of goods by the company;
- The assets and liabilities of the company:
Provided that in respect of an existing company the requirement that such books of account shall be kept in the English language shall not have effect until after the expiration of a period of two years from the date of the commencement of this Act.
(2) For the purposes of this section, proper books of account shall be deemed not to have been kept with respect to the matters aforesaid if there are not kept such books as are necessary to give a true and fair view of the state of the company’s affairs and to explain its transactions.
(3) The books of account shall be kept at the registered office of the company or, subject to the provisions of paragraph (b), at such other place as the directors think fit, and shall at all times be open to inspection by the directors. The books of account shall only be kept at a place outside Kenya with the consent of the registrar and subject to such conditions as he may impose; and if the books of account are kept at a place outside Kenya there shall be sent to, and kept at a place in, Kenya, and be at all times open to inspection by the directors, such accounts and returns with respect to the business dealt with in the books of account so kept as will disclose with reasonable accuracy the financial position of that business at intervals not exceeding six months.
(4) If any person being a director of a company fails to take all reasonable steps to secure compliance by the company with the requirements of this section, or has by his own wilful act been the cause of any default by the company thereunder, he shall, in respect of each offence, be liable to imprisonment for a term not exceeding twelve months or to a fine not exceeding ten thousand shillings or to both:
Provided that–
(1) in any proceedings against a person in respect of an offence under this section consisting of a failure to take reasonable steps to secure compliance by the company with the requirements of this section, it shall be a defence to prove that he had reasonable ground to believe and did believe that a competent and reliable person was charged with the duty of seeing that those requirements were complied with and was in a position to discharge that duty; and
(2) A person shall not be sentenced to imprisonment for such an offence unless, in the opinion of the court, the offence was committed willfully.
In conclusion Section 147 of the companies Act Cap 486 states clearly the following:
- The company should keep proper books of account in English language. The books should be expressed in monetary terms
- The books should reflect a true and fair view of the transactions under during the period in question
- The books should be kept in the registered office of the company and any other place that the directors may deem fit
- If the books are kept outside Kenya, the registrar must be informed
- If the directors or any other officer fails to keep the books of accounts the director or any officer shall be liable a fine of not exceeding ten thousands or a jail term not exceeding twelve months or both
Income Statement and Statement of Financial Position
Section 148 of the companies Act Cap 486 states:
(1) The directors of every company shall, at some date not later than eighteen months after the incorporation of the company and subsequently once at least in every calendar year, lay before the company in general meeting a profit and loss account or, in the case of a company not trading for profit, an income and expenditure account for the period, in the case of the first account, since the incorporation of the company, and, in any other case, since the preceding account, made up to a date not earlier than the date of the meeting by more than nine months or, in the case of a company carrying on business or having interests abroad, by more than twelve months:
Provided that, if the registrar for any special reason thinks fit to do so, he may–
- in the case of any company, extend the period of eighteen months aforesaid, and in the case of any company and with respect to any year, extend the periods of nine and twelve months aforesaid; and
- in the case of any company, permit the account to be laid before the company after the end of the calendar year.
(2) The directors shall cause to be made out in every calendar year, and to be laid before the company in general meeting, a balance sheet as at the date to which the profit and loss account or the income and expenditure account, as the case may be, is made up.
(3) If any person being a director of a company fails to take all reasonable steps to comply with the provisions of this section, he shall, in respect of each offence, be liable to imprisonment for a term not exceeding twelve months or to a fine not exceeding ten thousand shillings or to both: Provided that–
- in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that he had reasonable ground to believe and did believe that a competent and reliable person was charged with the duty of seeing that the provisions of this section were complied with and was in a position to discharge that duty; and
- a person shall not be sentenced to imprisonment for such an offence unless, in the opinion of the court, the offence was committed wilfully.
In conclusion, Section 148 of the companies Act Cap 486 states clearly:
- It is the sole responsibility of the directors of the company to prepare financial statements
- It is the sole responsibility of the directors of the company to lay these financial statements during the Annual General Meeting
- If the directors fail to take necessary actions regarding preparation and laying down these financial statements, then they shall be liable to a fine not exceeding ten thousands or a jail term not exceeding twelve months or both
General Provisions toContents and Form of Financial Statements
Section 149 of the companies Act Cap 486 states that:
(1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of its financial year, and every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year.
(2) A company’s balance sheet and profit and loss account shall comply with the requirements of the Sixth Schedule, so far as applicable thereto.
(3) Save as expressly provided in the following provisions of this section or in Part III of the Sixth Schedule, the requirements of subsection (2) and the said Schedule shall be without prejudice either to the general requirements of subsection (1) or to any other requirements of this Act.
(4) The registrar may, on the application or with the consent of a company’s directors, modify in relation to that company any of the requirements of this Act as to the matters to be stated in a company’s balance sheet or profit and loss account (except the requirements of subsection (1)) for the purpose of adapting them to the circumstances of the company.
(5) Subsections (1) and (2) shall not apply to a company’s profit and loss account if–
- the company has subsidiaries; and
- the profit and loss account is framed as a consolidated profit and loss account dealing with all or any of the company’s subsidiaries as well as the company and-
- complies with the requirements of this Act relating to consolidated profit and loss accounts; and shows how much the consolidated profit or loss for the financial year is dealt with in the accounts of the company.
(6) If any person being a director of a company fails to take all reasonable steps to secure compliance as respects any accounts laid before the company in general meeting with the provisions of this section and with the other requirements of this Act as to the matters to be stated in accounts, he shall, in respect of each offence, be liable to imprisonment for a term not exceeding twelve months or to a fine not exceeding ten thousand shillings or to both:
Provided that–
- in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that he had reasonable ground to believe and did believe that a competent and reliable person was charged with the duty of seeing that the said provisions or the said other requirements, as the case may be, were complied with and was in a position to discharge that duty; and
- a person shall not be sentenced to imprisonment for any such offence unless, in the opinion of the court, the offence was committed wilfully.
(7) For the purposes of this section and the following provisions of this Act, except where the context otherwise
requires –
- any reference to a balance sheet or profit and loss account shall include any notes thereon or document annexed thereto giving information which is required by this Act and is thereby allowed to be so given; and
- any reference to a profit and loss account shall be taken, in the case of a company not trading for profit, as referring to its income and expenditure account, and references to profit or to loss and, if the company has subsidiaries, references to a consolidated profit and loss account shall be construed accordingly.
In general Section 149 of the companies Act Cap 486 states clearly the following
- Statement of financial position should give true and fair view of the state of affairs of the business at the end of the accounting period
- A company’s statement of financial position and the income statement should comply with the requirements of the Sixth Schedule of the companies Act Cap 486.
- Any person, officer or director who fails to comply with the requirements of the companies’
Act Cap 486 is liable to a jail term of twelve months or ten thousands or both Obligation to lay group accounts before holding company
Section 150 of the companies Act Cap 486 states that:
(1) Where at the end of its financial year a company has subsidiaries, accounts or statements (in this Act referred to as group accounts) dealing as hereinafter mentioned with the state of affairs and profit or loss of the company and the subsidiaries shall, subject to subsection (2), be laid before the company in general meeting when the company’s own balance sheet and profit and loss account are so laid.
(2) Notwithstanding anything in subsection (1)–
- group accounts shall not be required where the company is at the end of its financial year the wholly owned subsidiary of another body corporate incorporated in Kenya; and
- group accounts need not deal with a subsidiary of the company if the company’s directors are of opinion that–
- it is impracticable, or would be of no real value to members of the company, in view of the insignificant amounts involved, or would involve expense or delay out of proportion to the value to members of the company; or
- the result would be misleading, or harmful to the business of the company or any of its subsidiaries; or
- the business of the holding company and that of the subsidiary are so different that they cannot reasonably be treated as a single undertaking; and if the directors are of such an opinion about each of the company’s subsidiaries, group accounts shall not be
required:
Provided that the approval of the registrar shall be required for not dealing in group accounts with a subsidiary on the ground that the result would be harmful or on the ground of the difference between the business of the holding company and that of the subsidiary.
(3) If any person being a director of a company fails to take all reasonable steps to secure compliance as respects the company with the provisions of this section, he shall, in respect of each offence, be liable to imprisonment for a term not exceeding twelve months or to a fine not exceeding ten thousand shillings or to both:
Provided that–
- in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that he had reasonable ground to believe and did believe that a competent and reliable person was charged with the duty of seeing that the requirements of this section were complied with and was in a position to discharge that duty; and
- a person shall not be sentenced to imprisonment for an offence under this section unless, in the opinion of the court, the offence was committed wilfully.
(4) For the purposes of this section a body corporate shall be deemed to be the wholly owned subsidiary of another if it has no members except that other and that other’s wholly owned subsidiaries and its or their nominees.
Form of group accounts
Section 151 of the companies Act Cap 486 states that:
1. Subject to subsection (2), the group accounts laid before a holding company shall be consolidated accounts comprising –
- a consolidated balance sheet dealing with the state of affairs of the company and all the subsidiaries to be dealt with in group accounts;
- a consolidated profit and loss account dealing with the profit or loss of the company and those subsidiaries.
2. If the company’s directors are of opinion that it is better for the purpose–
- of presenting the same or equivalent information about the state of affairs and profit and loss of the company and those subsidiaries; and
- of so presenting it that it may be readily appreciated by the company’s members, the group accounts may be prepared in a form other than that required by subsection (1), and in particular may consist of more than one set of consolidated accounts dealing respectively with the company and one group of subsidiaries and with other groups of subsidiaries or of separate accounts dealing with each of the subsidiaries, or of statements expanding the information about the subsidiaries in the company’s own accounts, or any combination of those forms.
3. The group accounts may be wholly or partly incorporated in the company’s own balance sheet and profit and loss account.
Contents of group accounts
Section 152 of the Companies Act Cap 486 states that:
(1) The group accounts laid before a company shall give a true and fair view of the state of affairs and profit or loss of the company and the subsidiaries dealt with thereby as a whole, so far as concerns members of the company.
(2) Where the financial year of a subsidiary does not coincide with that of the holding company, the group accounts shall, unless the registrar on the application or with the consent of the holding company’s directors otherwise directs, deal with the subsidiary’s state of affairs as at the end of its financial year ending with or last before that of the holding company, and with the subsidiary’s profit or loss for that financial year.
(3) Without prejudice to subsection (1), the group accounts, if prepared as consolidated accounts shall comply with the requirements of the Sixth Schedule, so far as applicable thereto, and if not so prepared shall give the same or equivalent information: Provided that the registrar may, on the application or with the consent of a company’s directors, modify the said requirements in relation to that company for the purpose of adapting them to the circumstances of the company. Financial year of holding company and subsidiary
Section 153 of the Companies Act Cap 486 states that:
(1) A holding company’s directors shall ensure that except where in their opinion there are good reasons against it, the financial year of each of its subsidiaries shall coincide with the company’s own financial year.
(2) Where it appears to the registrar desirable for a holding company or a holding company’s subsidiary to extend its financial year so that the subsidiary’s financial year may end with that of the holding company, and for that purpose to postpone the submission of the relevant accounts to a general meeting from one calendar year to the next, the registrar may on the application or with the consent of the directors of the company whose financial year is to be extended direct that, in the case of that company, the submission of accounts to a general meeting, the holding of an annual general meeting or the making of an annual return shall not be required in the earlier of the said calendar years.
Accounts and auditors’ Report to be Annexed to Balance Sheet
Section 156 of the Companies Act Cap 486 states that:
(1) The profit and loss account, and, so far as not incorporated in the balance sheet or profit and loss account, any group accounts laid before the company in general meeting, shall be annexed to the balance sheet, and the auditors’ report shall be attached thereto.
(2) Any accounts so annexed shall be approved by the board of directors before the balance sheet is signed on their behalf.
(3) If any copy of a balance sheet is issued, circulated or published without having annexed thereto a copy of the profit and loss account or any group accounts required by this section to be so annexed, or without having attached thereto a copy of the auditors’ report, the company and every officer of the company who is in default shall be liable to a fine not exceeding one thousand shillings.
Directors’ report to be attached to balance sheet
Section 157 of the Companies Act states that:
(1) There shall be attached to every balance sheet laid before a company in general meeting a report by the directors with respect to the state of the company’s affairs, the amount, if any, which they recommend should be paid by way of dividend, and the amount, if any, which they propose to carry to reserves within the meaning of the Sixth Schedule.
(2) The said report shall deal, so far as is material for the appreciation of the state of the company’s affairs by its members and will not in the directors’ opinion be harmful to the business of the company or of any of its subsidiaries, with any change during the financial year in the nature of the company’s business, or in the company’s subsidiaries, or in the classes of business in which the company has an interest, whether as member of another company or otherwise.
(3) If any person being a director of a company fails to take all reasonable steps to comply with the Provisions of subsection (1), he shall, in respect of each offence, be liable to imprisonment for a term not exceeding twelve months or to a fine not exceeding ten thousand shillings or to both: Provided that–
- in any proceedings against a person in respect of an offence under subsection (1), it shall be a defence to prove that he had reasonable ground to believe and did believe that a competent and reliable person was charged with the duty of seeing that the provisions of that subsection were complied with and was in a position to discharge that duty; and
- a person shall not be liable to be sentenced to imprisonment for such an offence unless, in the opinion of the court, the offence was committed wilfully
