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New Auditing and Accounting Obligations for Directors - International Law Office

International Law Office

Company & Commercial - Ireland

New Auditing and Accounting Obligations for Directors

December 13 2004

Directors' Compliance Statement and Related Statement
Compliance Policy Statement
Annual Compliance Statement
Relevant Obligations
'All Reasonable Endeavours'
Reasonable Assurance
Exempt Entities
Auditor Requirements under Section 205F


Under the Irish Companies (Auditing and Accounting) Act 2003, company directors will be obliged to prepare a compliance policy and annual compliance statement. The Office of Director of Corporate of Enforcement (ODCE) recently published a consultation paper and draft guidance on these new obligations, under Section 45 of the act. The draft guidance explains the implications of the new provisions and will assist directors in preparing for, and complying with, their new obligation to prepare compliance statements. The ODCE paper was followed by the publication of the Auditing Practices Board (APB) draft consultation entitled "Directors' compliance statements: reports by auditors under company law in the Republic of Ireland", which seeks to provide further clarification.

The Companies (Auditing and Accounting) Act is one of a series of recent measures at both domestic and EU levels aimed at introducing enhanced controls and better regulation for companies, their directors and auditors. However, due perhaps to the pressing requirement of the compliance statements, and the confirmation in the ODCE paper that non-executive directors will have the same obligations under the act as executive directors, the act has caused great concern among company directors. While directors were already obliged to comply with the Companies Acts and common law, the new act imposes for the first time a positive obligation on directors to document such compliance.

Section 45 of the new act inserts new Sections 205E and 205F into the Irish Companies Act 1990 in relation to compliance statements. Some sections of the new act have already come into force, although Sections 205E and 205F of the 1990 act have not yet commenced.

Directors' Compliance Statement and Related Statement

Section 205E of the 1990 act, which will apply to Irish public (whether listed or unlisted) and private limited companies, sets out perhaps the most important provision of the act. While this section is not yet in force, Director of Corporate Enforcement Paul Appleby has publicly indicated that he is likely to recommend to the minister that the provision is not brought into effect until after July 1 2005.

Compliance Policy Statement

Section 205E(3) requires, among other things, that the directors of a company shall, as soon as possible after this section takes effect, prepare or cause to be prepared a directors' compliance statement containing the following information about the company:

  • its policies in respect of necessary compliance with its 'relevant obligations', which are defined as the company's obligations under the Companies Acts, tax law, and any other enactments that provide a legal framework within which the company operates and may materially affect the company's financial statements;

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

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

Section 205E(4) (as inserted in the 1990 act) provides that the directors' compliance statement (including any revisions) must be:

  • executed in writing;

  • submitted for approval by the board of directors;

  • reviewed and, if necessary, revised by the directors at least once in every three-year period following its approval by the board; and

  • included in the directors' report under Section 158 of the Companies Act 1963.

Annual Compliance Statement

The directors are also required under Sections 205E(5) and (6) to include, in the directors' report to be annexed to the balance sheet, an annual statement:

  • acknowledging their responsibility for securing compliance by the company with its relevant obligations;

  • confirming that the company has internal financial and any other procedures in place that are designed to achieve compliance with its relevant obligations, and if this is not the case, specifying the reasons for non-compliance;

  • confirming that the directors have reviewed the effectiveness of these procedures during the financial year to which the report relates, and if this is not the case, specifying the reasons for non-compliance; and

  • specifying whether, based on such procedures and their review of those procedures, the directors are of the opinion that they used all "reasonable endeavours" to secure the company's compliance with its relevant obligations in that financial year, and if they are not of that opinion, specifying the reasons.

The concept of personal liability for directors is set out in Section 205E(8), which provides that where the directors of a company to which this section applies fail to prepare or cause to be prepared a compliance statement in accordance with the above provisions, each director to whom the failure is attributable is guilty of an offence.

The penalties in respect of this section are contained in Section 240 of the 1990 act. A person guilty of an offence under the Companies Acts for which no punishment is specifically provided shall be liable on conviction on indictment to a fine not exceeding IR£10,000 (€12,700) or to imprisonment for a term not exceeding five years, or both.

Relevant Obligations

Directors will be required to certify annually that their company is compliant with all laws relevant to their industry. In order to do this, the company directors will be required to take into account the company's relevant obligations, including all company, tax and other enactments that may materially affect the company's financial statements.

Companies Acts
In relation to all Companies Acts, this would appear to be an exhaustive exercise in itself. Company directors and their advisers will be required to highlight all requirements and obligations, regardless of materiality. A brief overview of the companies legislation may involve considerations of the following matters:

  • incorporation and ongoing filing requirements;

  • directors' duties and obligations under the Companies Acts 1963 to 2003;

  • transactions involving directors and connected parties;

  • directors' obligations in relation to statutory books, audits, financial returns, records and minutes; and

  • directors' obligations in relation to shareholders (rights, meetings, shares and resolutions).

Tax law
As part of the directors' compliance statement required under Section 205E, the directors need to provide information on the company's policies in respect of necessary compliance with respect to tax law. For companies caught by Section 205E of the 1990 act, the obligations from a tax perspective will be very arduous, as a detailed scrutiny of all financial activities under tax law (applicable to the company) will be necessary. In many cases this may necessitate pseudo-audits being carried out in order to provide the directors, and in particular non-executive directors, with the comfort they require to remain on as a director.

Other laws
The ODCE paper has stated that these laws will only refer to Irish legislation. The amount of legislation which will impact on a company's sphere of activity is bound to be significant. The legislation may encompass the following areas:

  • financial services law;

  • consumer law;

  • intellectual property;

  • data protection law;

  • pensions;

  • employment;

  • health and safety;

  • property law; and

  • competition law.

'All Reasonable Endeavours'

The annual statement requirement is interesting for a number of reasons.

First, the directors are actually publicly stating that they are responsible for the company's compliance with its relevant obligations. Therefore, although many of the day-to-day functions may be delegated internally to other managers/employees or committees, the expectation is that the directors will need to have a complete awareness of the issues affecting the company. This implies that the communication channels to directors need to be clear, open and immediate.

Second, on an annual basis the directors will be required to monitor the company's compliance with company, tax and all laws which may have a material affect on its operations on an ongoing basis to ensure that the company is compliant in these specific areas of law which affect the company, and if not, why it is not.

Third, in the annual compliance statement the company directors must specify whether they are of the opinion that they have used all reasonable endeavours to secure the company's compliance with its relevant obligations, or if they are not of this opinion, specify the reasons for this. However, the act is silent on what constitutes 'all reasonable endeavours'. It is expected that it may fall to the courts to interpret the phrase should a dispute arise.

Reasonable Assurance

Section 205E(7) also provides that:

"a company's internal financial and other procedures are considered to be designed to secure compliance with its relevant obligations and to be effective for that purpose if they provide a reasonable assurance of compliance in all material respects with those obligations."

The ODCE paper states that "reasonable assurance indicates a high, not absolute, level of assurance, recognizing that no internal control or system of internal control is capable of guaranteeing total compliance". It is difficult to see how a company's financial or other procedures may be deemed to be effective, unless some form of testing is also carried out on such procedures. It would be prudent for the company to ensure that any testing of procedures is documented and provided to the directors in order to give them the necessary assurance when preparing their compliance statements. It is crucial that the auditors are made aware of such testing of procedures and provided with the relevant documentation.

Exempt Entities

Several categories of companies are exempt from the provisions of Section 205E.

First, a private company limited by shares qualifies for an exemption from this section in respect of any financial year of the company if its balance sheet total does not exceed €7.61 million and its turnover does not exceed €15.23 million. The minister has retained the flexibility to alter these thresholds by regulation under Section 48(1)(l) of the act.

Companies falling within a class of undertaking exempted by ministerial regulation (as provided for under Section 48(1)(j) of the act) are also exempt.

Further, under Section 48(1)(j) of the new act the minister may also introduce regulations to exempt certain classes of companies (in particular investment companies in the financial services funds industry and qualifying companies within the meaning of Section 110 of the Taxes Consolidation Act 1997, which are typically securitization vehicles) from these sections and certain other sections of this act and the Companies Act 1990.

Auditor Requirements under Section 205F

There is also a requirement for the company's auditors to conduct an annual review of the directors' compliance statement and of the statement required under the section in relation to the report under Section 158 of the Companies Act 1963.

The purpose of the review of the statements by the auditors is to determine whether, in their opinion:

    "each statement is fair and reasonable having regard to the information obtained by the auditor...in the course of and by virtue of having carried out audit work, audit-related word or non-audit work for the company."
However, Section 205F of the 1990 act may provide difficulties for auditors in terms of independence and objectivity, as recognized in the APB and ODCE papers. When reviewing the compliance statements, auditors may find that they are also reviewing their own work carried out by them for the client previously. However, if auditors decide to limit their client work solely in terms of audit work, to counter possible independence and objectivity conflicts, there may be limits to the degree of comfort which auditing firms may be willing or able to provide to directors in the future.

Auditors will have a duty to report any failure by the directors to prepare or cause to have prepared a full and proper compliance statement in accordance with the relevant provisions of section 205E of the 1990 Act to the ODCE.


Both the ODCE and APB papers have provided some welcome input into the requirements of Sections 205E and 205F of the 1990 act. However, a certain amount of doubt still remains in relation to the actual practicalities of these provisions. For instance, will even relatively minor breaches of companies or taxes legislation (where there does not appear to be any concept of 'materiality') need to be set out in the annual compliance statement?

Due to the number of requirements imposed on the directors, the cost level of compliance would also seem to many to be high. However, the argument on the other hand may be that these laws always existed for directors, and that the compliance statements are just a method of ensuring that the company is more transparent and open with its members, investors and creditors.

In the European Union, similar proposals have been put forward in the EU Action Plan on Corporate Governance with respect to an annual compliance statement requirement, directors' remuneration and independent directors. However, like the Sarbanes-Oxley Act 2002, these proposals appear to be geared more towards listed companies. It may be asked whether, by applying these measures to many private companies as well as public companies, Ireland is putting some of its companies at a distinct disadvantage when they come to compete with non-Irish companies, either in Ireland or internationally. It remains to be seen what the effects of these new provisions will be following the entry into force of Sections 205E and 205F of the 1990 act.

Both the consultation paper and draft guidance can be accessed from the publications section (consultation papers) of the ODCE website at www.odce.ie.

For further information on this topic please contact Sean Murray or Gregory Reilly at Dillon Eustace by telephone (+353 1 6670022) or by fax (+353 1 6670042) or by email (info@dilloneustace.ie).

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