Member Article

The Government has recently announced changes to the proposed regime of confirmation by directors of compliance by a company with its obligations. This note explains the background to the announcement and comments on the new proposals. Background - 2003 Act From the time that the Companies (Auditing and Accounting) Act, 2003 was first published there was considerable and widespread concern voiced about the proposed regime for Directors’ Compliance Statements. In summary, the proposed regime would have required the directors of companies to whom the regime was applicable to prepare a compliance statement containing the following information concerning the company: its policies respecting compliance with its relevant obligations; its internal financial and other procedures for securing compliance with its relevant obligations; and its arrangements for implementing and reviewing the effectiveness of the policies and procedures referred to at paragraphs (a) and (b). The “relevant obligations” of a company in respect of which a compliance statement was required were those obligations of a company under: the Companies Acts; Irish tax law; and any other enactments that provide a legal framework within which the company operates and that may materially affect the company’s financial statements. The 2003 Act further provided that where a compliance statement was required, the company’s auditors were obliged to review the statements each year to determine and report whether the statements were fair and reasonable. The arguments made against the regime were many, but can be summarised as falling into two categories: First, that the obligation was unreasonably wide and vague. There was no statutory guidance as to what was meant by the phrase “any other enactments that provide a legal framework within which the company operates“ and it potentially included foreign enactments. Secondly, that the proposed regime was disproportionate in scope and context . In particular, the requirement for auditors to report upon a director’s compliance statement was seen as creating excessive cost for little perceived benefit for any stakeholder. Unfavourable comparisons were drawn with corporate governance standards in other jurisdictions, including the United States and the United Kingdom. Many critics pointed to the many separate factors which had been conducive to an ever-increasing culture of high standards of corporate governance in Ireland, including the establishment of the Office of the Director of Corporate Enforcement and the obligations of auditors to report to the Director of Corporate Enforcement circumstances in which the auditors in conducting their audit work have formed the opinion that there may have been a breach of the Companies Acts. Possible change announced In April 2005 the Taoiseach, Mr. Bertie Ahern TD, announced that the Company Law Reform Group (CLRG) would be requested to conduct a review of the Directors’ Compliance Statements Regime. The CLRG reported to the Minister for Trade and Commerce, Mr. Michael Ahern TD, who announced on 1 December 2005 that the government had agreed to take forward in legislation the proposal for a new model of the Directors’ Compliance Statement as recommended by a majority of the CLRG. Proposed new regime If the regime recommended by the CLRG is implemented, it would apply to directors of all public limited companies whether or not such a company has securities traded on a stock exchange; and large private limited companies, i.e. those which have a balance sheet total for the relevant financial year exceeding €12,500,000 and a turnover in the relevant year exceeding €25,000,000 – although in either case a lower figure may be set by the Minister. The directors of companies to which the new regime would apply would be obliged to include in their report on the financial performance of a company each year a statement acknowledging that the directors are responsible for securing compliance by the company with its relevant obligations; confirming that the company has in place a compliance policy statement that is in the opinion of the directors appropriate for the company, and if this is not the case specifying the reason for the same; confirming that the company has in place appropriate arrangements or structures that are in the opinion of the directors designed to secure material compliance with its relevant obligations, and if this is not the case, specifying the reasons; and confirming that the company’s arrangements had been reviewed by the directors during the financial year to which the report relates, and if this is not the case specifying the reasons. The relevant obligations of a company in respect of which the new regime would be applicable would be those obligations of a company under the Companies Acts, failure to comply with which would amount to an indictable offence under the Companies Acts and Irish tax law. The CLRG proposal is to be commended because it takes a balanced and realistic approach to the importance of directors being aware of, and complying with, their obligations to maintain high standards of corporate governance. The deletion of a requirement for the auditors to include in their report on the accounts of a company a report on the directors compliance statement does not in any way lessen the obligations of the auditors to its client company or to its shareholders or the obligations of the auditors under the Companies Acts or similar legislation and directors will still in our opinion be required to take appropriate steps and obtain professional advice as necessary in order to ensure that the required statement was properly made and can be justified. However the revised proposal avoids a scenario in which auditors would be forever requiring that their clients justify and explain how the directors have satisfied themselves that any enactment that provides a legal framework within which a company might operate has been fully and properly reviewed and the activities of the company similarly reviewed so as to ensure compliance with those enactments. The consequent cost savings for companies subject to the new regime should be very significant and welcome. For entities subject to IFSRA regulation, the wide powers given to IFSRA in respect of requiring compliance statements under the 2004 Central Bank Act still remain.

 

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