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Directors face difficult task in implementing new compliance requirements Back  
SSSection 45 of the Companies (Auditing and Accounting) Act 2003 contains one of the most important and far-reaching changes to Irish company law for directors.

It requires directors of certain Irish companies to prepare a Directors’ Compliance Statement and a Directors’ Related Statement. These statements must be reviewed, certified as ‘fair and reasonable’ by the company’s auditors and attached to the company’s annual accounts which are publicly filed. This new requirement, which amounts to little short of a compliance sign-off on company, tax and other important legislation, will significantly increase directors’ duties.

Any director (executive or non-executive) who fails to comply with these requirements will be guilty of an offence. Unfortunately, the Department of Enterprise, Trade and Employment has not yet confirmed when Section 45 will be brought into force. Given the work required to comply with these requirements, we would endorse the suggestion of the Office of the Director of Corporate Enforcement (ODCE) of a commencement date not earlier than July 1st, 2005. It would be helpful too if Section 45 would only be brought into force for accounting periods beginning on or after that date.

The ODCE, which will be responsible for overseeing these new requirements, has been proactive in issuing, just before Christmas, its revised guidance on compliance with this legislation. To whom does the requirement to prepare statements apply? The obligation applies to directors of:

- A public limited company (whether or not listed)
- A shares whose balance sheet or turnover in the financial year in question exceeds €7,618,428 and
€15,236,856 respectively (or such thresholds as amended by Ministerial order)

In a group, each company must (where relevant) separately comply with this requirement.

Certain companies may be exempted from these requirements. Other than investment companies within the collective investment schemes legislation, we are not aware whether any exemption orders will be made.
Directors’ compliance statement: Directors must, as soon as possible after this requirement becomes applicable, prepare or cause to be prepared a statement setting out the company’s:

- Policies regarding compliance with its relevant obligations (see below);
- Internal financial and other procedures for securing compliance with its relevant obligations; and
- Arrangements for implementing and reviewing the effectiveness of such policies and procedures.

Directors’ related statement: Directors must include a statement in their report to the company’s annual accounts:
- Acknowledging responsibility for securing the company’s compliance with its relevant obligations
- Confirming the company has internal procedures in place designed to secure such compliance or, if this is not the case, specifying the reasons
- Confirming their review of the effectiveness of such procedures during the year or, if this is not the case, specifying the reasons; and
- Specifying whether, based on such procedures and their review of same, they are of the opinion that they used ‘all reasonable endeavours’ to secure the company’s compliance with such relevant obligations, or if this is not the case, specifying the reasons

Relevant obligations: Both statements relate to securing compliance with ‘relevant obligations’. These are defined as:
- The Companies Acts
- Tax law
- Any other enactments providing a legal framework within which the company operates and which may materially affect the company’s financial statements.

Directors must consider all obligations under company and tax law. With other enactments, directors will need to consider whether such legislation could materially affect the financial statements of the company.
Legislation which may need to be considered include health and safety, employment, environmental, data protection and sectoral legislation. The ODCE has taken the view that ‘enactments’ refers only to primary and secondary Irish legislation and directly applicable EU law. This is, in our view, correct for most companies.

A broader definition of ‘enactments’ may, however, need to be taken by companies regulated by the Irish Financial Services Regulatory Authority (IFSRA) and which are subject to the Central Bank and Financial Services Authority of Ireland Act 2004 (the so called IFSRA No. 2 Act). Under the IFSRA No. 2 Act certain prescribed contraventions may attract a fine of up to €5 million. Breach of IFSRA Notices and Codes of Practice are included as prescribed contraventions and as such could attract this significant sanction. On this basis we believe that for companies regulated by IFSRA the list of relevant obligations will be significantly broader than non-regulated companies. Obligations under foreign law do not need to be considered.

Role of the auditor: The company’s auditors must review both statements annually and determine if they are fair and reasonable. This opinion must then be included in the auditors’ report to the accounts. It will be critical for directors to ensure that auditors have the appropriate level of comfort to sign-off on such statements.
Guidance: The Revised Guidance issued by the ODCE in December and available at www.odce.ie, is timely, helpful and comprehensive. Framework statements are included. What is correctly emphasised is the unique situation of every company and as such there is no ‘off-the-shelf’ or ‘cookie-cutter’ solution.

The Auditing Practices Board has also issued draft guidance for auditor (www.frc.org.uk/apb/) which is due to be finalised in the coming months.

Action required: Many companies and their advisers have begun work on projects to comply with this far reaching legislation. The experience so far is that designing and documenting compliance policies and procedures, to the standard required by the legislation and the draft guidance, is an extremely time and resource consuming exercise. For those who have not yet started, a potential 1 July start date is probably sufficiently far away to allow adequate preparation but only if directors begin the process immediately.

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