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The Companies (Auditing and Accounting) Act 2003 (the Act) will apply to public limited companies (both listed and not listed), companies limited by shares and undertakings such as unlimited companies and partnerships whose members effectively enjoy limited liability. It should be noted that not all companies will be subject to the requirements of each section as certain criteria, such as balance sheet total and amount of annual turnover, may need to be met.
The Minister has the power to make regulations exempting certain companies from specific provisions of the Act under section 48(1) (j) of the Act. The Minister has indicated that investment companies may be exempted from specific sections of the Act, however no such regulation will be made until the relevant sections are commenced.
What are the headline sections?
Irish Auditing and Accounting Supervisory Authority (IAASA)
The establishment of an oversight board for the Accounting and Audit professions was seen as the dominant purpose of the Act. It was also one of the key recommendations of the Review Group on Auditing in its report in July 2000. The Irish Auditing and Accounting Supervisory Authority (IAASA) was established under section 5 of the Act. Under section 8 of the Act the objects for which IAASA was established are to carry out the following functions, among others, under the Act.
To oversee and monitor accountancy bodies, their rules, standards, procedures and their members.
• To act as a specialist source of advice to the Minister for Enterprise, Trade and Employment on auditing and accounting matters.
• Under section 26 of the Act to review the accounts of public limited companies in order to ensure that they are in compliance with the Companies Acts. Accounts of large private companies and undertakings (which include partnerships and unlimited companies whose members enjoy limited liability) which either alone or together with their subsidiaries (if any) have a balance sheet total which exceeds €25 million and a turnover which exceeds E50 million in their most recent financial year and immediately preceding financial year, may also be reviewed by IAASA.
• In addition, public limited companies and large private companies and undertakings will be required to pay a levy to the IAASA reserve fund under section 15 of the Act.
Audit committees
Under section 42 of the Act the requirement for audit committees will be mandatory for public limited companies. Section 42 of the Act outlines the matters with which the audit committee should be concerned and the composition of the audit committee in order to ensure that it is an independent committee. For instance, an audit committee should comprise of no fewer than two members nor should it comprise the chairperson of the board or any person who has been an employee of the company within the last three years. There is a limited exemption to these requirements and if an audit committee is established in reliance on such exemption its reasons for doing so must be outlined in the directors’ report.
The establishment of an audit committee is optional for large private companies or undertakings (such as unlimited companies and partnerships whose members have effective limited liability) which either alone or together with their subsidiaries (if any) meet a threshold of a €25 million total balance sheet and an annual turnover of €50 million in their most recent financial year and immediately preceding financial year. In any event a statement will be required in the directors’ report of the large private company or undertaking stating:
• Whether it has chosen to establish an audit committee;
• Whether it has established an audit committee with either the full or some of the responsibilities listed in the Act;
• If it has decided not to establish an audit committee, the reasons for that decision.
Section 42 does not apply to public limited companies which are wholly owned subsidiaries of another public limited company or any company or undertaking exempted under section 48(1) (j) of the Act.
Compliance statements
During the consultation period, section 45 of the Act was perhaps the most contentious part of the Act. It was generally believed that the compliance statement requirement may unfairly impact on the competitiveness of many Irish companies. In particular, this would have been the case for smaller enterprises, which might have found it more burdensome to comply with the increased regulation.
In this regard, the exemption thresholds in relation to the compliance statement requirement were raised dramatically. Certain companies are now exempted from the compliance statement section if in respect of any financial year of the company its balance sheet total does not exceed E7,618.428 and its annual turnover does not exceed E15,236.856. Importantly, the Minister has retained the flexibility to alter these threshold amounts under section 48(1) (l) of the Act. Additionally, companies or undertakings are exempted if they fall within a class or category as exempted by the Minister under section 48(1) (j) of the Act. To date no such regulations have been made by the Minister.
Two separate compliance statements are required under the Act. Firstly, a statement which will need to cover the following matters, (the policy statement):
• The company’s policies for ensuring compliance with its relevant obligations. These relevant obligations refer to company laws, tax laws and other enactments that provide a legal framework within which the company operates and that may materially affect the company’s financial statements.
• The company’s internal and financial procedures in place for ensuring that it is in compliance with its relevant obligations.
• The company’s procedures for implementing and reviewing these policies and procedures (as above) in order to ensure their effectiveness.
• This policy statement must be in writing, be submitted to the board of directors for their approval and be reviewed at least every three years and revised if necessary. The policy statement will form part of the directors’ report under section 158 of the Companies Act, 1963.
The second ‘related’ statement must also be included in the directors’ report. This is an annual statement which acknowledges that the directors are responsible for the following matters (the ‘responsibility statement’):
• Securing the company’s compliance with its relevant obligations;
• Confirming that financial and other procedures are in place; and
• That the directors have reviewed the effectiveness of these procedures in the financial year to which the report relates.
• Additionally, in the statement the directors must confirm that based on their review of these procedures they are satisfied that they have used ‘reasonable endeavours’ to ensure the company’s compliance with its relevant obligations. However, if this is not the case then they must specify their reasons. Both compliance statements should be prepared as soon as possible after section 45 comes into force.
Section 45(7) of the Act provides that the financial and other procedures put in place by the company must provide a ‘reasonable assurance’ that the company will comply in all material respects with its obligations.
Additionally, the directors of a company to which this section applies who fail to prepare or cause to be prepared a compliance statement in accordance with the provisions of this section may be guilty of an offence. Both compliance statements will also be reviewed by the company’s auditor and the auditor will be required to report any failure by the directors to either prepare a compliance statement or one that is in accordance with the Act’s requirements to the Director of Corporate Enforcement.
Accounting standards and accounting policies
Sections 41 and 43 of the Act deal with the disclosure of accounting standards and accounting policies respectively and which are adopted in respect of the company’s accounts. Any material departure from accounting standards must be explained in the accounts. These requirements apply to all companies and undertakings unless specifically exempted.
Disclosure of auditor remuneration
Under section 44 of the Act there are new requirements in relation to auditor independence and disclosure of auditor remuneration. The company or undertaking will be required to make certain disclosures in respect of auditor remuneration where it exceeds the amount of €1,000 in the financial year (present and preceding) for audit, audit-related and non-audit related work. This requirement applies to an auditor of a company or undertaking and by any firm or individual that, at any time during the financial year, was an affiliate of the auditor.
Where the disclosure requirements apply and the amount of remuneration earned in a financial year for non-audit work exceeds the amount earned in respect of audit and audit-related work added together then a statement must be included in the accounts. The audit committee (if any) or directors (if there is no audit committee) must state in their respective reports the reasons for the carrying out of such non-audit work by the auditor and confirm that they are satisfied that the carrying out of such work has not interfered with the independence of the auditor. Where the audit committee or directors fail to comply with this requirement then each member of the audit committee or director to whom this failure is attributable to shall be guilty of an offence.
Following its enactment it will be important to keep the commencement dates of each section of the Act under review. The sections of the Act are due to be commenced in stages after the relevant consultation has taken place between the Department of Enterprise, Trade and Employment and relevant industry bodies. In respect of some sections it is anticipated that clarification/ guidance may need to be sought from the DETE as the requirements of the Act are translated into practice.
Additionally, the Minister has the power to make regulations under section 48 of the Act with the approval of the Oireachtas. Therefore, it will be interesting to note which classes of companies and other undertakings (if any) the Minister decides to exempt from specific provisions of the Act. This will relate to companies or undertakings that the Minister believes are sufficiently regulated under other enactments and that may also fall under the supervision of other authorities, including the Irish Financial Services Regulatory Authority (IFSRA). |
Paula Kelleher is partner and head of regulatory & compliance department and Gregory Reilly is a solicitor at Dillon Eustace.
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| Article appeared in the April 2004 issue.
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