Presentation

Audit Committee Institute Ireland

Conrad Hotel, Dublin 2

7 September 2004

Draft Guidance on Directors’ Compliance Statements

Paul Appleby

Director of Corporate Enforcement

Introduction

• Companies (Auditing and Accounting) Act 2003

• Outline of New Compliance Obligations in S.45

• Issues for Consideration in Draft Guidance

• Timetable for Conclusion of Deliberations

• Some Concluding Comments

Compliance Duties in Summary

• It involves the making by the directors of certain companies in their annual report of:– a Compliance Policy Statement and– an Annual Compliance Statement

• It also involves the relevant auditors expressing:– an opinion as to whether each of these

Statements is fair and reasonable.

Compliance - by Whom?

The directors and auditors of:– all public limited companies (whether listed or

not) and– all private companies limited by shares-

• whose turnover exceeds €15.2 million or• whose balance sheet total exceeds €7.6 million

in the year in question

Compliance - with What?

The company’s ‘relevant obligations’ are:– the Companies Acts– 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

Compliance – from When?

• A decision on the date of commencement is expected from Government shortly

• It will be made following completion of the present consultation process

• The new obligations are not likely to become effective before 1 January 2005

Compliance Policy Statement - Content

• the company’s policies respecting compliance with its ‘relevant obligations’

• its internal financial and other procedures for securing compliance with its relevant obligations

• its arrangements for implementing and reviewing the effectiveness of the above policies and procedures

Annual Compliance Statement - Content

• Directors’ acknowledgement that they are responsible for securing company compliance

• Confirmation that the company has internal financial and other procedures in place to secure compliance and if not, specifying the reasons

• Confirmation that the directors have reviewed the effectiveness of the company’s procedures during the year and if not, specifying the reasons and

Annual Compliance Statement – Content(continued)

• Statement whether, based on the procedures in place and their review of them, the directors are of the opinion that they have used all reasonable endeavours to secure compliance during the year and if not, specifying the reasons

Role of Audit Committee

• Must review the Annual Compliance Statement before its approval by the board

• Must state whether, in its opinion, the Statement– complies with the legal requirements and– is fair and reasonable and is based on due and

careful enquiry

Consequences of Non-Compliance

Market Consequences: Disclosure enables the market to assess the implications if-– directors cannot confirm that they used all

reasonable endeavours to secure compliance– its auditor has formed the opinion that either or

both Statements are not fair and reasonable or– s/he is unable to form an opinion that either or

both Statements are fair and reasonable

Consequences of Non-Compliance

Legal Consequences– Failure by directors to prepare either Statement or to

include it in their report is an indictable offence– Failure of an auditor to comply with his/her

obligations is also an indictable offence – The reckless making of a materially false statement or

the making of a materially false statement, knowing it to be false, is also an indictable offence

Draft Guidance on Compliance

• Initial work commenced by ODCE early in 2004

• Draft Guidance finalised in consultation with CCAB-I, IBEC, IoD and Revenue

• Draft Guidance and Consultation Paper published in late July

Issues related to the Guidance

• ‘Relevant Obligations’ includes:– Company/tax law irrespective of materiality– Other enactments material to financial statements– Relevant Irish primary and secondary legislation– Relevant and directly applicable EU legislation

• It excludes foreign law and non-statutory rules

Issues related to the Guidance

Timing of application to affected companies:– Reporting obligation will apply from the first year

of qualification, both for currently qualifying or future qualifying companies

A prudent board of directors will therefore be anticipating qualification and taking the steps necessary to report at the end of that first year

Issues related to the Guidance

Terminology– Directors’ opinion that they used ‘all reasonable

endeavours’ to secure compliance– Effective compliance is defined as ‘a reasonable

assurance of compliance in all material respects’– Auditors’ and the Audit Committee’s opinion that

the Statement(s) is/are ‘fair and reasonable’

Issues related to the Guidance

Imperatives for Positive Confirmation include– ‘relevant obligations’ have been identified – financial/other procedures have been put in place– procedures address the risk of non-compliance– procedures have operated effectively

Issues related to the Guidance

Elements of Effective Review– Continuous Monitoring of Control System– Independent Review of Operation of Controls– Reporting of Results to the Board– Assessment of Control Framework/Operation

Recognition that company circumstances will differ – no ‘one size fits all’ solution

Issues related to the Guidance

Documentary Support is critical for: – Identification of company’s ‘relevant obligations’– Design of appropriate control processes– Outputs of the control process– Review by directors of compliance environment

Issues related to the Guidance

Commencement with effect from, say, the financial year starting on or after 1/1/2005 would mean:– Identification of ‘relevant obligations’ and implementation of

proper compliance controls by the start of that financial year

– Preparation of the Compliance Policy Statement by that date

– Review of the effectiveness of controls throughout the year

– Preparation of the Annual Compliance Statement at year-end

– Publication of both Statements in the Directors’ Report and the Auditors’ Opinion of those Statements after year-end

Issues related to the Guidance

• Commencement Date remains undetermined– Views on receipt will be referred for political

decision

• Comments on other elements of Draft Guidance will be considered – Final Guidance is planned to be published in late

October

Concluding Comments

• Copies of the ODCE Consultation Paper and Draft Guidance is available from www. odce. ie – Comments welcome up to 30 September

• Related Draft Bulletin on Auditor Compliance Reporting is also available from the Auditing Practices Board at www. frc. org. uk/apb– Deadline for comments is 15 October

Concluding Comments

• Requirement that companies should comply with the law is not new

• What is different in the new Act is the onus placed on company directors to clearly discharge their responsibility for that compliance

• Auditors are also given extra responsibility to evaluate the directors’ compliance statements

Concluding Comments

• Undoubtedly, the purpose of the Act is to focus greater priority on corporate compliance

• It extends the ‘comply or explain’ approach adopted in other areas, where the market is used to incentivise compliance

• It represents an ambitious effort by the Oireachtas to ‘raise the bar’ of corporate compliance in the State

Concluding Comments

This quote which is attributed to Sir David Tweedie, IASB, was made in the context of his work to develop a common set of international accounting standards:

“Critics say: ‘You’re making people change their behaviour.’ Well, exactly. That’s what accounting is all about. If they don’t change their behaviour, why bother?”

A similar purpose underlies the new compliance statement obligations in the 2003 Act

End of Presentation

Thank You