Audit Committee Requirements for Listed Companies and Financial Undertakings - International Law Office

Scope of Legislation
Committee's Functions
Independence
Competence
Entry into Force
Comment

As of January 8 2009 Belgian listed companies and financial undertakings are required to have an audit committee. The Law of December 17 2008 entered into force on that date, transposing the provisions on audit committees in the EU Statutory Audit Directive (2006/43/EC) into Belgian law. Previously, the creation of an audit committee was only a recommendation under the Corporate Governance Code for Belgian listed companies.

Scope of Legislation

An audit committee is created within the framework of a company's board of directors. The audit committee requirement applies to large listed companies and financial undertakings (ie, credit institutions, insurance undertakings, investment undertakings and management companies of undertakings for collective investment).

Small and medium-sized enterprises are not required to have an audit committee. Companies are exempt if, according to their most recent annual or consolidated accounts, they meet at least two of the following criteria:

• an average of under 250 employees during the financial year;
• a balance sheet of €43 million or less; and
• an annual net turnover of €50 million or less.

In small and medium-sized listed companies, credit institutions and insurance undertakings, the functions that would be assigned to an audit committee must be performed by the board of directors as a whole, although if the chairman of the board is an executive member, he or she may not act as chairman when the board acts as an audit committee. Small and medium-sized listed companies must 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 need not assign audit functions to the board of directors.

Two specific types of entity are exempt from the audit committee obligation: (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.

If an audit committee is created at group level and fulfils the requirements of the law, the Banking, Finance and Insurance Commission can exempt a financial undertaking from the audit committee requirement if the 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.

Committee's Functions

Among other things, an audit committee must:

• monitor the financial reporting process;
• monitor the effectiveness of the company's internal control and risk management systems;
• monitor the company's internal audit system and related activities;
• monitor the statutory audit of the annual and consolidated accounts; and
• review and monitor the independence of the statutory auditor, particularly the provision of additional services by the statutory auditor to the audited entity.

The audit committee must report regularly to the board of directors on the performance of its tasks.

The statutory auditor must:

• confirm annually his or her independence from the audited entity, disclosing to the audit committee any additional services provided to that entity;
• discuss with the audit committee the risks that endanger his or her independence and the safeguards applied to mitigate those risks; and
• 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.

Independence

The audit committee is part of the board of directors and must be composed of non-executive members of the board.

At least one member of the audit committee must be independent and meet the following requirements:

• He or she may not be an executive member of the board, a member of the management committee or the managing director of the company or an affiliated company, and may not have held such a position for the previous five years;
• He or she may not have served on the supervisory board as a non-executive or supervisory director for more than three terms or for more than 12 years;
• He or she may not have been a senior employee(1) of the company or of an affiliated company during the three years immediately preceding his or her appointment;
• He or she may not receive and may not have received significant additional remuneration from the company or an associated company, apart from fees received in his or her capacity as a non-executive or supervisory director;
• He or she may not hold an interest in the company equivalent to 10% or more of the capital or corporate funds or a category of shares, and may not represent a shareholder that holds such an interest;
• He or she may not have 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, and may not have had such a relationship within the past financial year;
• He or she may not be - and within the past three years may not have been - a partner or employee of the present or former external auditor of the company or an affiliated company;
• He or she may not be 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 or she may not have other significant links with executive directors of the company through his or her involvement in other companies or bodies; and
• His or her spouse, legal cohabitant and his or her relatives to the second degree must meet the independence criteria - such personal relations may not act as:
  • members of the board of directors;
  • members of the management committee;
  • persons entrusted with the day-to-day management of the company; or
  • senior employees of the company or an affiliated company.

Competence

In financial undertakings the independent director must have competence in accounting or auditing; in listed companies he or she must have competence in both areas. Independent directors may fulfil these requirements by holding a degree in economics or finance or through relevant professional experience.

For financial undertakings, the law specifies a further test of competence: the audit committee as a whole must be competent in accounting and auditing and in the activities of the entity.

The annual report must include evidence that the relevant director is independent and that he or she has competence in accounting or auditing. For financial undertakings, the annual report must also include evidence of the committee's collective competence.

Entry into Force

The law became effective on January 8 2009. Thus, the relevant entities must have an audit committee as from that date. Nevertheless, independent directors appointed before January 8 2009 who meet the old independence requirements, but not all of the new independence requirements, may remain in their positions until July 1 2011.

The provisions that relate to the committee's tasks and responsibilities apply from the financial year beginning after the publication of the law in the Official Gazette on December 29 2008 and in subsequent financial years.

Comment

By legally recognizing audit committees, the government hopes to reinforce the quality of financial reporting. This initiative should be applauded in light of the financial crisis, which 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. However, companies that fall under the scope of the new law must verify whether their articles of association, internal rules and corporate governance charter are in line with the new provisions. For instance, they should verify whether the members of their audit committee meet the new independence criteria, giving special attention to the rule that independent directors may not have had significant business relationships with the company. They should also verify whether their audit committee fulfils the tasks prescribed by law.

For further information on this topic please contact Bram Delmotte at Altius by telephone (+32 2 426 1414) or by fax (+32 2 426 2030) or by email (bram.delmotte@altius.com).

Endnotes

(1) The terms in the law - leidinggevend personeel and personnel de direction - specifically denote a member of the managerial staff.