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Print articleAudit Committee Required for Belgian Listed Companies and Financial Undertakings
July, 2009 - Bram Delmotte
Introduction
As of 8 January 2009, Belgian listed companies and financial undertakings are required to have an audit committee. The Law of 17 December 2008 on the establishment of an audit committee in listed companies and financial undertakings (the “Law”) then enters into force. The Law implements the provisions of the European Statutory Audit Directive relating to the audit committee into Belgian law (Directive 2006/43/EG of 17 May 2006 on statutory audits of annual accounts and consolidated accounts). Before 8 January 2009, the creation of an audit committee was only a recommendation under the Belgian Corporate Governance Code for Belgian listed companies.
1. Scope of the Law
1.1. Rule
The audit committee is created within the framework of the Board of Directors. The requirement to have an audit committee only applies to “large” listed companies, as well as to credit institutions, insurance undertakings, investment undertakings and management companies of undertakings for collective investment (hereinafter collectively called “financial undertakings”).
1.2. Exceptions
Small and medium-sized enterprises are not required to have an audit committee. These are companies, which, according to their last annual or consolidated accounts, meet at least two of the following three criteria: an average number of employees during the financial year of less than 250, a balance sheet total not exceeding EUR 43,000,000 and an annual net turnover not exceeding EUR 50,000,000.
In small and medium-sized listed companies, credit institutions and insurance undertakings, the functions assigned to the audit committee must be performed by the Board of Directors as a whole, provided at least that when the Chairman of the Board is an executive member, he or she is not the Chairman when the Board acts as the audit committee. Small and medium-sized listed companies must also have at least one independent director. Small and medium-sized investment undertakings and management companies of undertakings for collective investment are not required to have an audit committee and do not have to assign the audit functions to the Board of Directors.
Two specific types of entities are exempt from the obligation to have an audit committee: (i) collective investment undertakings with variable numbers of participation rights and (ii) entities whose sole business is to act as issuers of asset-backed securities.
Finally, if an audit committee is created at group level which fulfils the requirements of the Law, the Belgian Banking, Finance and Insurance Commission can exempt a financial undertaking from the requirement to set up an audit committee if such financial undertaking is a subsidiary of an insurance holding company, a (mixed) financial holding company, an insurance undertaking, a reinsurance undertaking, a credit institution, an investment undertaking or a management company of undertakings for collective investment.
2. Functioning of the audit committee
2.1. Functions of the audit committee
The audit committee must be given inter alia the following tasks:
1. monitoring the financial reporting process;
2. monitoring the effectiveness of the company's internal control and risk management systems;
3. monitoring the company’s internal audit system and related activities;
4. monitoring the statutory audit of the annual and consolidated accounts; and
5. reviewing and monitoring the independence of the statutory auditor, and in particular the provision of additional services by the statutory auditor to the audited entity.
The audit committee must regularly report to the Board of Directors on the performance of its tasks.
2.2. Interaction with the statutory auditor
The statutory auditor has to confirm annually to the audit committee his independence from the audited entity. He has to disclose annually to the audit committee any additional services provided to the audited entity. He also has to discuss with the audit committee the threats to his independence and the safeguards applied to mitigate those threats. Finally, the statutory auditor has to report to the audit committee on key matters arising from the statutory audit, and in particular on material weaknesses in internal controls in relation to the financial reporting process.
3. Members of the audit committee
As mentioned above, the audit committee is part of the Board of Directors. The audit committee is to be composed of non-executive members of the Board of Directors.
3.1. Independence
At least one member of the audit committee has to be independent. The independent director has to meet the following nine independence requirements.
1. he/she is not an executive member of the Board, a member of the Management Committee or Managing Director of the company or an affiliated company, and has not held such a position for the previous five years;
2. he/she has not served on the (Supervisory) Board as a non-executive or supervisory director for more than three terms, or for more than 12 years;
3. he/she has not been a senior employee (“leidinggevend personeel / personnel de direction”) of the company or of an affiliated company during the three years immediately preceding his/her appointment;
4. he/she does not receive, and has not received, significant additional remuneration from the company or an associated company, apart from any fees received as a non-executive or supervisory director;
5. he/she does not hold any interest in the company that represents 10% or more of the capital or of the corporate funds or of a category of shares of the company, and in any case does not represent a shareholder who holds such an interest;
6. he/she does not have, or has not had within the last financial year, a significant business relationship with the company or an affiliated company, either directly or as a partner, shareholder, director or senior employee of the company or of a person that maintains such a relationship;
7. he/she is not, and has not been within the last three years, a partner or an employee of the present or former external auditor of the company or an affiliated company;
8. he/she is not an executive member of the Board of Directors of another company in which an executive director of the company is a non-executive or supervisory director, and he/she does not have other significant links with executive directors of the company through involvement in other companies or bodies; and
9. his/her spouse, legal cohabitant or relatives to the second degree do not act as a member of the Board of Directors, a member of the Management Committee, a person entrusted with the day-to-day management of the company, a senior employee of the company or an affiliated company, and his/her spouse, legal cohabitant and relatives to the second degree meet all independence criteria mentioned in points 1 to 8.
3.2. Competence
In financial undertakings, the independent director should have competence in accounting and/or auditing; in listed companies he/she should have competence in both accounting and auditing.
Such competence can appear from the fact that the relevant director has a degree in Economics or Finance or that he/she has relevant professional experience in these fields.
With respect to financial undertakings, the Law specifies a double test of competence. Not only should the relevant member of the audit committee have competence in accounting and/or auditing, but the audit committee as a whole should also be competent, in two fields: (i) the activities of the entity and (ii) accounting and auditing.
3.3. Annual report
The annual report must include evidence that the relevant director is independent and that he/she has competence in accounting and/or auditing. For financial undertakings, the annual report must also include evidence of the above-mentioned collective competence.
4. Entering into force
The new Law became effective on 8 January 2009. Thus, the relevant entities must have an audit committee as from that date. Nevertheless, independent directors appointed before 8 January 2009 and who meet the old independence requirements, but not all the new ones, can continue in office as independent directors until 1 July 2011.
The provisions of the Law that relate to the tasks and responsibilities of the audit committee will apply to the financial year beginning after the publication of the Law in the Belgian State Gazette (i.e. 29 December 2008), and subsequent financial years.
Conclusion
By legally recognising audit committees, the Belgian government hopes to reinforce the quality of financial reporting. In light of the financial crisis, this initiative can only be applauded. The crisis has fuelled discussions on the transparency of management, not only of financial undertakings, but also of listed companies.
Most large Belgian companies already have an audit committee. The companies that fall under the scope of the new Law must verify whether their Articles of Association, internal rules and/or corporate governance charter are in line with the new provisions. For instance, they should verify whether the members of their audit committee fulfil the new independence criteria. Special attention should be given to the requirement that independent directors must not have had significant business relationships with the company. They should also verify whether their audit committee fulfils the tasks as prescribed by the Law.
As of 8 January 2009, Belgian listed companies and financial undertakings are required to have an audit committee. The Law of 17 December 2008 on the establishment of an audit committee in listed companies and financial undertakings (the “Law”) then enters into force. The Law implements the provisions of the European Statutory Audit Directive relating to the audit committee into Belgian law (Directive 2006/43/EG of 17 May 2006 on statutory audits of annual accounts and consolidated accounts). Before 8 January 2009, the creation of an audit committee was only a recommendation under the Belgian Corporate Governance Code for Belgian listed companies.
1. Scope of the Law
1.1. Rule
The audit committee is created within the framework of the Board of Directors. The requirement to have an audit committee only applies to “large” listed companies, as well as to credit institutions, insurance undertakings, investment undertakings and management companies of undertakings for collective investment (hereinafter collectively called “financial undertakings”).
1.2. Exceptions
Small and medium-sized enterprises are not required to have an audit committee. These are companies, which, according to their last annual or consolidated accounts, meet at least two of the following three criteria: an average number of employees during the financial year of less than 250, a balance sheet total not exceeding EUR 43,000,000 and an annual net turnover not exceeding EUR 50,000,000.
In small and medium-sized listed companies, credit institutions and insurance undertakings, the functions assigned to the audit committee must be performed by the Board of Directors as a whole, provided at least that when the Chairman of the Board is an executive member, he or she is not the Chairman when the Board acts as the audit committee. Small and medium-sized listed companies must also have at least one independent director. Small and medium-sized investment undertakings and management companies of undertakings for collective investment are not required to have an audit committee and do not have to assign the audit functions to the Board of Directors.
Two specific types of entities are exempt from the obligation to have an audit committee: (i) collective investment undertakings with variable numbers of participation rights and (ii) entities whose sole business is to act as issuers of asset-backed securities.
Finally, if an audit committee is created at group level which fulfils the requirements of the Law, the Belgian Banking, Finance and Insurance Commission can exempt a financial undertaking from the requirement to set up an audit committee if such financial undertaking is a subsidiary of an insurance holding company, a (mixed) financial holding company, an insurance undertaking, a reinsurance undertaking, a credit institution, an investment undertaking or a management company of undertakings for collective investment.
2. Functioning of the audit committee
2.1. Functions of the audit committee
The audit committee must be given inter alia the following tasks:
1. monitoring the financial reporting process;
2. monitoring the effectiveness of the company's internal control and risk management systems;
3. monitoring the company’s internal audit system and related activities;
4. monitoring the statutory audit of the annual and consolidated accounts; and
5. reviewing and monitoring the independence of the statutory auditor, and in particular the provision of additional services by the statutory auditor to the audited entity.
The audit committee must regularly report to the Board of Directors on the performance of its tasks.
2.2. Interaction with the statutory auditor
The statutory auditor has to confirm annually to the audit committee his independence from the audited entity. He has to disclose annually to the audit committee any additional services provided to the audited entity. He also has to discuss with the audit committee the threats to his independence and the safeguards applied to mitigate those threats. Finally, the statutory auditor has to report to the audit committee on key matters arising from the statutory audit, and in particular on material weaknesses in internal controls in relation to the financial reporting process.
3. Members of the audit committee
As mentioned above, the audit committee is part of the Board of Directors. The audit committee is to be composed of non-executive members of the Board of Directors.
3.1. Independence
At least one member of the audit committee has to be independent. The independent director has to meet the following nine independence requirements.
1. he/she is not an executive member of the Board, a member of the Management Committee or Managing Director of the company or an affiliated company, and has not held such a position for the previous five years;
2. he/she has not served on the (Supervisory) Board as a non-executive or supervisory director for more than three terms, or for more than 12 years;
3. he/she has not been a senior employee (“leidinggevend personeel / personnel de direction”) of the company or of an affiliated company during the three years immediately preceding his/her appointment;
4. he/she does not receive, and has not received, significant additional remuneration from the company or an associated company, apart from any fees received as a non-executive or supervisory director;
5. he/she does not hold any interest in the company that represents 10% or more of the capital or of the corporate funds or of a category of shares of the company, and in any case does not represent a shareholder who holds such an interest;
6. he/she does not have, or has not had within the last financial year, a significant business relationship with the company or an affiliated company, either directly or as a partner, shareholder, director or senior employee of the company or of a person that maintains such a relationship;
7. he/she is not, and has not been within the last three years, a partner or an employee of the present or former external auditor of the company or an affiliated company;
8. he/she is not an executive member of the Board of Directors of another company in which an executive director of the company is a non-executive or supervisory director, and he/she does not have other significant links with executive directors of the company through involvement in other companies or bodies; and
9. his/her spouse, legal cohabitant or relatives to the second degree do not act as a member of the Board of Directors, a member of the Management Committee, a person entrusted with the day-to-day management of the company, a senior employee of the company or an affiliated company, and his/her spouse, legal cohabitant and relatives to the second degree meet all independence criteria mentioned in points 1 to 8.
3.2. Competence
In financial undertakings, the independent director should have competence in accounting and/or auditing; in listed companies he/she should have competence in both accounting and auditing.
Such competence can appear from the fact that the relevant director has a degree in Economics or Finance or that he/she has relevant professional experience in these fields.
With respect to financial undertakings, the Law specifies a double test of competence. Not only should the relevant member of the audit committee have competence in accounting and/or auditing, but the audit committee as a whole should also be competent, in two fields: (i) the activities of the entity and (ii) accounting and auditing.
3.3. Annual report
The annual report must include evidence that the relevant director is independent and that he/she has competence in accounting and/or auditing. For financial undertakings, the annual report must also include evidence of the above-mentioned collective competence.
4. Entering into force
The new Law became effective on 8 January 2009. Thus, the relevant entities must have an audit committee as from that date. Nevertheless, independent directors appointed before 8 January 2009 and who meet the old independence requirements, but not all the new ones, can continue in office as independent directors until 1 July 2011.
The provisions of the Law that relate to the tasks and responsibilities of the audit committee will apply to the financial year beginning after the publication of the Law in the Belgian State Gazette (i.e. 29 December 2008), and subsequent financial years.
Conclusion
By legally recognising audit committees, the Belgian government hopes to reinforce the quality of financial reporting. In light of the financial crisis, this initiative can only be applauded. The crisis has fuelled discussions on the transparency of management, not only of financial undertakings, but also of listed companies.
Most large Belgian companies already have an audit committee. The companies that fall under the scope of the new Law must verify whether their Articles of Association, internal rules and/or corporate governance charter are in line with the new provisions. For instance, they should verify whether the members of their audit committee fulfil the new independence criteria. Special attention should be given to the requirement that independent directors must not have had significant business relationships with the company. They should also verify whether their audit committee fulfils the tasks as prescribed by the Law.
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