July 27 2009
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:
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:
The audit committee must report regularly to the board of directors on the performance of its tasks.
The statutory auditor must:
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:
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.
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.
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