JOINT COMMITTEE ON ECONOMIC REGULATORY AFFAIRS debate -
Tuesday, 31 Mar 2009

Role and Functions: Discussion with Irish Auditing and Accounting Supervisory Authority.

Chairman

The next item is the discussion with Mr. Ian Drennan, chief executive of the Irish Auditing and Accounting Supervisory Authority. I welcome Mr. Drennan, Ms Karen Erwin, chairperson of the authority, Ms Helen Hall, head of regulatory and monitoring supervision, Mr. Michael Kavanagh, head of financial reporting supervision and Senator Joe O'Toole, audit board member.

I draw witnesses' attention to the fact that members of the committee have absolute privilege but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice that members should not comment on, criticise or make charges against any person outside the House, or an official either by name or in such a way as to make him or her identifiable.

I propose to have a short presentation from Mr. Drennan that will be followed by a questions and answers session for members.

Mr. Ian Drennan

With the Chairman's permission, we propose that the chairperson of the authority will make the presentation.

Ms Karen Erwin

I thank the Chairman and the members for their kind invitation to come before the joint committee and I hope this may be the first of several visits by us to the committee so that we may keep it up to date on what we are doing. We very much welcome the opportunity to provide the committee with details of our role and activities.

I am joined today by Mr. Ian Drennan, the chief executive, Senator Joe O'Toole, authority board member, Ms Helen Hall, head of regulatory and monitoring supervision, and Mr. Michael Kavanagh, head of financial reporting supervision. As the authority has not appeared before the committee previously, it might be helpful if we first set out in broad terms the authority's statutory functions, together with a summary of our principal strategies and activities in discharging those functions. We will be happy, subsequently, to provide the committee with any further information we are in a position to, within the confines of the authority's statutory confidentiality obligations. I shall refer to those later.

The authority's establishment was provided for by the Companies Auditing and Accounting Act 2003. For ease of reference I shall refer to that as "the Act". The Act gave effect to the recommendations of the review group on auditing which was chaired by Senator O'Toole and which was established by the then Tánaiste, Deputy Mary Harney. It was established in response to recommendations made by the Committee of Public Accounts, following its examination of certain issues relating to deposit interest retention tax, DIRT. The authority was established as a legal entity in December 2005 and commencement orders conferring certain of the statutory functions provided for by the Act followed in February 2006. The authority was subsequently conferred with additional statutory functions in June 2007 by the Minister for Enterprise, Trade and Employment, under the transparency directive — in particular, 2004/109/EC — the transparency regulations 2007.

Under the Act, the authority's board comprises 15 directors, 14 of whom are appointed by the Minister for Enterprise, Trade and Employment, on the nomination of certain prescribed entities, including three directors nominated jointly by the prescribed accountancy bodies. The chief executive is also a member of the board. It might be useful for the committee to hear who are the members of the board. I am chairperson and Mr. Ian Drennan is the chief executive. The other members are Mr. Paul Appleby, the director of corporate enforcement, Ms Helene Coffey, a solicitor, on behalf of the Law Society, Ms Marie Daly, of IBEC, Mr. Michael Deasy, of the Financial Regulator, Mr. Sean Hawkshaw, of the Irish Association of Investment Managers, Mr. Tony Kelly, an accountant from the prescribed accountancy bodies, Mr. Brendan Kennedy from the Pensions Board, Mr. Tadhg O'Connell, principal officer of the Revenue Commissioners, Senator Joe O'Toole, Mr. Gerard Scully, director of international primary markets of the Irish Stock Exchange and Mr. Brian Shiels, company director.

The Act further provides that of the 15 directors, a maximum of five, or a third, to include the chief executive, may be members of a prescribed accountancy body. The positions of two nominees of the prescribed accountancy bodies are currently vacant, as a result of which the board's current membership is 13, of whom two are members of prescribed accountancy bodies. For the committee's ease of reference, appendix 1 to my opening statement sets out the names and descriptions of the members of the board.

Under the Companies (Auditing and Accounting) Act 2003 and the 2007 transparency regulations, the Irish Auditing and Accounting Supervisory Authority has four principal functions: it supervises the manner in which the prescribed accountancy bodies regulate and monitor their members and member firms; it monitors the statutory financial reporting systems of certain entities to ensure they comply with the relevant reporting frameworks, such as the applicable accounting standards and legislation; it acts as a specialist source of advice to the Minister on auditing and accounting matters; and it promotes adherence to high standards in the auditing and accounting profession.

I will give the joint committee an overview of the authority's supervisory constituencies and the principal strategies and activities it pursues in discharging its statutory functions. The first function to which I will refer is the supervision of the prescribed accountancy bodies. Under the supervisory model that was provided for in the 2003 Act, the prescribed accountancy bodies are responsible for regulating and monitoring their members and member firms. The authority is responsible for supervising the prescribed accountancy bodies' regulation and monitoring of their members and member firms. The authority has the power to intervene if it considers that a prescribed accountancy body might not be complying with the investigation and disciplinary procedures that have been approved by the authority.

The nine prescribed accountancy bodies that come within the supervisory remit of the authority have an aggregate membership in the State of just under 28,000. The Institute of Chartered Accountants in Ireland has approximately 12,000 members, 44% of the total. The Association of Chartered Certified Accountants has approximately 7,400 members, 27% of the total. The Chartered Institute of Management Accountants has approximately 3,700 members, 13.5% of the total. The Institute of Certified Public Accountants in Ireland has approximately 3,200 members, 12% of the total. The other five bodies — the Institute of Chartered Accountants in England and Wales, the Institute of Incorporated Public Accountants, the Association of International Accountants, the Chartered Institute of Public Finance and Accountancy and the Institute of Chartered Accountants in Scotland — account for the balance of the prescribed accountancy bodies' membership in the State.

I wish to give the committee an overview of the principal strategies employed by the authority in supervising the regulatory and monitoring activities of the nine bodies I have mentioned. It performs on-site supervisory reviews of the bodies. The scope of the authority's supervisory reviews of the prescribed accountancy bodies includes an examination of, inter alia, the bodies’ governance arrangements; the operation of their complaints, investigation and disciplinary processes; their licensing; and their processes for monitoring the compliance of their members or member firms with any applicable requirements, such as continuing professional development, professional indemnity insurance and professional standards.

The Irish Auditing and Accounting Supervisory Authority is also involved in approval of the constitutions of the prescribed accountancy bodies, including any amendments thereto, and the approval of the bodies' investigation and disciplinary processes. My reference to "constitutions" includes charters, memorandums and articles of association, by-laws, rules, regulations and standing orders, and so on. In this context, the authority decides whether to approve bodies' constitutions, or proposed amendments thereto, following a detailed examination of the relevant documents and on receipt of any additional information or clarifications considered necessary. The authority also conducts statutory inquiries if there are indications that a prescribed accountancy body may have failed to comply with its approved investigation and disciplinary procedures. The authority also examines any complaints or referrals it receives.

I wish to give the joint committee a sense of the authority's activities and outputs in the period since its establishment in February 2006. In-depth supervisory reviews have been completed in the cases of the five prescribed accountancy bodies that account for 97% of the total membership. Some 70 recommendations have been issued as a result of those reviews. Eight recommendations have been made in respect of constitutional documents, 27 recommendations have been made in respect of investigations and discipline, 28 recommendations have been made in respect of monitoring; and seven recommendations have been made in respect of licensing. At this time, a further two supervisory reviews are in progress. The authority has also examined and granted its approval for 32 separate constitutional documents as well as for a further 26 sets of proposed amendments to such documents.

Five statutory inquiries have been initiated into whether prescribed accountancy bodies have failed to comply with their approved investigation and disciplinary procedures. The authority has dealt with 70 complaints referred to it by members of the public and 87 referrals made to it by other regulatory and enforcement bodies.

In prioritising its supervision of the prescribed accountancy bodies, the authority has, in the main, concentrated its review and approval activities on those bodies having the largest presence in the State, that is, in membership terms. As a consequence, the five supervisory reviews that have been completed to date have provided coverage of bodies where aggregate membership accounts for 97% of the nine bodies' aggregate membership in the State.

Turning to financial reporting supervision, the authority's financial reporting supervisory remit extends to certain listed entities, that is, certain issuers of equity and debt as well as certain funds. These entities, for ease of reference, are referred to as "issuers". Currently, approximately 225 issuers come within the authority's remit, with those issuers publishing of the order of 400 financial reports per annum. Before elaborating on the authority's activities in this regard, it might be helpful to put its supervisory role in respect of issuers' financial reporting in context.

Under the legislative and regulatory model provided for by the Companies Acts, issuers are required to publish annual and half-yearly financial reports that present fairly or give a true and fair view of an their financial position and performance. This legal responsibility resides with issuers' directors. There is a legal requirement that issuers' annual financial statements be audited, but issuers' half-yearly financial reports are not required to be audited. An issuer's auditors are required to provide an opinion on, inter alia, whether an issuer’s financial statements provide a true and fair view of the issuer’s financial position and performance.

The principal strategies employed by the authority in supervising issuers' statutory financial reporting are: selection of issuers' financial reports for review, based on risk assessments supplemented by an element of cyclical and random selection; and the performance of reviews of selected issuers' financial reports for the purpose of determining whether those reports have been prepared in accordance with applicable accounting standards and legislation.

The authority's reviews differ from an audit in a number of significant respects, the most notable of which are: whereas an auditor has access to the issuer's underlying books and records during the performance of the audit, the authority performs its reviews based on the issuer's published financial statements supplemented by any additional information or explanations requested on foot of its review; whereas the auditor performs an audit for the purpose of forming an opinion as to whether the financial statements give a true and fair view, the authority's review constitutes a form of additional, higher level, oversight; and whereas issuers' half-yearly financial reports are typically not audited, they are subjected to oversight in the form of authority reviews.

The third strategy is employed where it is considered necessary or otherwise appropriate, requiring issuers' directors to provide information, explanations or clarifications regarding their financial reports. Where necessary, on foot of reviews, we might require issuers to take appropriate remedial or corrective action with a view to addressing identified deficiencies and protecting users' interests.

By way of providing the joint committee with a sense of the authority's activities and outputs in the period since September 2007, the date on which the issuers' obligations under the regulations effectively commenced, 64 financial reports — in other words, approximately 23% of all reports received — have been reviewed. On foot of issues identified during those reviews, the authority has issued requests for information, explanations or clarification in respect of 84% of reports reviewed. We have secured the publication of amended financial information in the case of 50% of reports reviewed and undertakings from issuers' directors to effect improvements to future financial reports in the case of 73% of reports reviewed.

The third element of our remit is the provision of advice to the Minister. In its capacity as a specialist adviser on auditing and accounting matters the authority has provided advice to the Minister and his Department on a range of issues, including the European Commission's recommendation on quality assurance of auditors of public interest entities. This recommendation proposes that member states' independent audit regulatory authorities should have responsibility for quality assurance of auditors of listed entities. The authority is of the view that Ireland's current quality assurance arrangements, that is, under which quality assurance of such firms is the responsibility of the accountancy bodies, are significantly out of line with European Union and internationally accepted best practice. Accordingly, the recommendation should be implemented as soon as possible.

A second area on which advice was given was the transposition of the revised EU eighth company law directive. In addition to providing advice on directive related matters to the Minister, the authority has made substantial resources available in terms of senior management time to the Department of Enterprise, Trade and Employment for the purpose of assisting it with its implementation of the directive. The authority has also dealt with the matter of calls for the reform of auditors' liability. While in principle the authority considers reform in this area to be merited, it is equally of the view that a range of issues requires further careful consideration before a decision is taken as to how best to effect reform in this area. The authority, based on consumer protection considerations, supports granting of statutory recognition of the term "accountant".

The fourth strand of our remit is the promotion of adherence to high standards in the profession. While the objective of promoting adherence to high professional standards permeates all aspects of the authority's supervisory and advisory activities, the authority also pursues this objective through assisting members of the public with queries, ongoing interaction with various stakeholder groups and through the provision of guidance and other information for stakeholders' benefit. Examples of such information and guidance have been provided to the joint committee.

The authority is based in Naas, County Kildare, and has a budget in 2009 of €2.7 million, of which 40% or approximately €900,000 is provided by the Exchequer, with the remaining 60% or approximately €1.35 million being derived from statutory levies imposed on the prescribed accountancy bodies with the Minister's consent. The single exception is the authority's transparency regulations-related activities which cost approximately €440,000 and are fully funded by the Exchequer.

The authority has a staff complement of 12, an analysis of which is set out in Appendix 2 to the opening document circulated to members. At the time of its establishment on a statutory basis in December 2005, the authority had five staff. Since then, it has been endeavouring to increase its staff complement to its approved level of 15. However, due to the highly specialised nature of its remit and the exceptionally buoyant employment market for accounting professionals in recent years, significant and ongoing difficulties have been encountered in recruiting suitably-experienced professional staff at the salary levels available to the authority.

I said I would come back to members of the committee on one point regarding confidentiality. In that regard, section 31 of the Act prohibits disclosure by anyone, including directors and employees of the authority, of information obtained in performing the functions or exercising the powers of the authority, except in accordance with law. We have taken advice in this regard and are happy that section 22(5) of the Act overrides the prohibition in section 31 which allows for a criminal offence. Section 22(5) sets out that, whenever requested by a committee appointed jointly by both Houses of the Oireachtas, the authority's CEO and chairperson shall account to the committee for the performance of, and the functions and exercise of, the powers of the authority. We are delighted to be able to do so. However, the legal advice has warned us that both the chief executive and I have to be conscious that disclosures of confidential information about a case that is ongoing might give rise to challenges on the basis of prejudgment. I am not sure what questions the committee will have for us but if it strays into that area, whereas we wish to be very open and transparent with it, if we consider we are treading on an issue where we might actually put in jeopardy an investigation or inquiry taking place, we might seek the committee's permission to withdraw and perhaps come back to it, either in writing or at a later stage when we have clarified what we can say to it. In the public interest, we would not want to negate any current investigations.

While I trust the foregoing has served to provide the committee with a broad appreciation of the authority's role and activities, my colleagues and I will be happy to provide for it any additional information we are in a position to provide within the confines of the authority's statutory confidentiality obligations.

Chairman

I thank Ms Erwin. We will now have questions from members.

Senator Paul Coghlan

I welcome the representatives of the authority. It is good to meet them and have the overview they have provided in regard to its work. Ms Erwin touched on a number of significant issues. I wonder whether the regulatory structure involving the authority is another example of a flawed regulatory model. Instead of regulating accountants, which it is prohibited from doing, the authority must instead deal with the accountants' and auditors' professional bodies. In that regard, it must feel it has been frustrated, so to speak, in that it has told us how many times it has had to request alterations, amendments and so on in supervisory reviews. It might comment on the frustration it has felt in this regard.

Ms Erwin has stated that, in accordance with the Act, the authority is a specialist source of advice for the Minister. She might tell us how many times the authority has found it necessary to meet the Minister in the course of its work, perhaps to make recommendations to him on refinements or amendments.

The authority is a new body and effectively has only been in place since 2007, as outlined. We had a battle in the Seanad in this regard, although I cannot recall a debate in the Dáil on the authority's establishment. While I will not say we had to fight long and hard, the then Tánaiste agreed with us in the appointment of Senator Joe O'Toole to the body, which I very much welcomed. Politicians get a hard time, which was the case even then. Some in the permanent government did not want to hear of any politician of any hue being appointed to any body. However, I have said enough about that aspect.

Since the establishment of the authority, how many accountants have been barred from practising as a consequence of misconduct or fraud? Has the authority been frustrated in its work to any extent as a result of having to deal with the accountants' representative bodies? Will the witnesses outline the specific measures the authority is taking in response to the disturbing allegations about Anglo Irish Bank, Irish Life & Permanent and the Irish Nationwide Building Society? As the latter is a building society rather than a limited company, does the authority have any supervisory role in regard to auditing activities at that institution?

I was particularly struck by Ms Erwin's reference to the company law directive. She referred to the European Commission's recommendation on quality assurance of auditors of public interest entities which proposes that "member states' independent audit regulatory authorities should have responsibility for quality assurance of auditors of listed entities". Regardless of the current economic climate, this should be a sine qua non. Ms Erwin went on to say:

The authority is of the view that Ireland's current quality assurance arrangements, that is, under which quality assurance of such firms is the responsibility of the accountancy bodies, are significantly out of line with European Union and internationally accepted best practice. Accordingly, the recommendation should be implemented as soon as possible.

If I recall correctly, this directive should have been transposed into Irish law at least a year ago. The failure to do so is a very serious matter which shows great laxity on the part of the State. We must get to the root of this.

Mr. Ian Drennan

Senator Coghlan has covered a lot of ground in his questions which I propose to take in order. He has asked whether there is a flaw in the process in that we have to deal with the professional bodies. I draw two distinctions in that regard and will elaborate slightly on what my colleague, Ms Erwin, said. Our role is to supervise the bodies and, in turn, their regulation of their members. Since the establishment of the authority, we have sought to discharge our functions by undertaking a series of what we refer to as supervisory reviews of these bodies, starting with the larger ones. The scope of these reviews typically relates to constitutional documents, disciplinary processes, quality assurance — that is, monitoring the quality of member firms' work — and other areas such as professional indemnity insurance and continuing professional development.

Within this broad range, the two more significant issues are quality assurance and disciplinary matters. Subject to exceptions which inevitably arise, the professional bodies have been carrying out disciplinary activities vis-à-vis their members for many years. Notwithstanding some nuances in how individual bodies approach this, they follow a broadly similar pattern, whereby there is a preliminary inquiry, for want of a better term, the purpose of which is to determine whether there is a prima facie case in respect of the member. If that is determined to be the case, the next step is a disciplinary process, which is typically a quasi-judicial process. Broadly, on the basis of our experience thus far and subject to those areas in which we have inevitably identified there is scope for improvement, the process is working well. There is a significant benefit in that the relevant committees within each of the bodies, certainly in the case of the disciplinary process, are typically comprised of majorities of lay members, that is, non-members of the bodies concerned.

As to whether we have experienced frustration in our dealings with the bodies, subject to exceptions here and there, we have not. The other issue to which I referred, quality assurance, is a different proposition in that we are dealing with the way in which bodies ascertain whether members are carrying out their audit and other functions on a satisfactory basis. We have conducted reviews and identified scope for improvement and so on. Where that has been the case, we have tabled recommendations and, as members would expect, followed through on the extent to which these recommendations have been implemented or not, as the case may be. Much of the time since the authority was established has been in parallel with the European eighth directive being transposed, or arrangements being put in place in the European Commission for transposition. During this time it has become apparent to us that there has been a very significant shift in recent years at European level and internationally in terms of how the quality assurance function is discharged.

There is a distinction to be drawn between the audit firms which carry out audits of listed entities and those which do not. It is accepted best practice that different models need to apply. In the case of audits of listed entities the prevailing wisdom in the European Union and further afield is that responsibility should reside with the independent audit regulator. The Senator referred to the European quality assurance recommendation. While the directive does not mandate such a model, the recommendation the Commission subsequently saw fit to promulgate issues a recommendation to member states that this approach be adopted. That approach has been adopted across a number of other EU member states and larger jurisdictions elsewhere; for example, the United States, Canada, Japan and Australia. Not least owing to the level of exposure we have to our European and international counterparts and being able to hear from them and share their perspectives on the impact it has had, it is and has been for some time our view that the European quality assurance recommendation should be given effect in Ireland. Therefore, ultimate responsibility for quality assurance of auditors of listed companies would reside in the authority.

The Senator's second question concerned the number of accountants barred since establishment of the authority. I do not have that information to hand because it is across nine bodies, but we can collate it quickly for the committee, if that is acceptable. The fourth question was on quality assurance which I have largely covered.

The third question concerned the measures we had taken vis-à-vis Anglo Irish Bank, IL&P and Irish Nationwide Building Society. I am conscious of my Chairman’s opening remarks but will begin with Anglo Irish Bank. As the committee will be aware, on 18 December last the then chairman of Anglo Irish Bank stepped down and certain information was brought into the public domain on the circumstances that had given rise to that resignation. If memory serves, the then chief executive resigned on the following day. As members might expect, from our ongoing activities we would have been aware that certain of these individuals were members of professional bodies and it was clear that a response would be necessary from us. On 23 December the board met and we discussed at length these issues and the appropriate response from the authority. Both Mr. FitzPatrick and Mr. Drumm, the then chief executive, are members of the Institute of Chartered Accountants in Ireland.

Having given very careful consideration to these events at the meeting of 23 December, the board determined the appropriate response was that the matter should be investigated in accordance with the by-laws of the Institute of Chartered Accountants, which have, following a detailed and lengthy review by the authority, been approved. They provide, inter alia, for the appointment of a special investigator where the relevant organs within the institute conclude that this is the appropriate course of action. As the committee will be aware, the institute has subsequently appointed the former Comptroller and Auditor General, Mr. John Purcell, as the special investigator, clearly indicating an assessment on its part that these matters need to be investigated. That is an analysis with which the authority fully concurs. In the time between 18 December, the 23 December board meeting and the appointment of Mr. Purcell the authority has been in ongoing contact and correspondence with the institute on the matter and, as members might expect, taking a very close interest in the institute’s regulatory response to these matters. As the committee will be aware, when Mr. Purcell was appointed, he was given terms of reference by the complaints committee which included examining the roles Mr. FitzPatrick, Mr. Drumm and certain other parties who were institute members or member firms might have had in the events leading up to the resignations.

The second element involves Irish Life & Permanent, to which the Senator made reference. If memory serves, it was some time in early February that a press statement issued, or certain information came into the public domain, to the effect that there had been certain circular deposits between IL&P and Anglo Irish Bank. The distinction is that Anglo Irish Bank is an issuer which, prior to its being delisted in Dublin, came within the supervisory remit of the authority and continues to do so by virtue of its debt listing. Within a matter of days of that information coming into the public domain, if I remember correctly, we entered into correspondence with Anglo Irish Bank on the issues that had come to light. Quite quickly after the revelations had come into the public domain regarding the events that had given rise to the aforementioned resignations, the authority also entered into correspondence with Anglo Irish Bank on certain related party aspects of its previous set of half-yearly financial statements. We are in ongoing contact with it on a range of issues. For that reason, as the Chairman mentioned, we are severely restricted in what we can say, not least because our deliberations are ongoing and we have yet to analyse fully the responses from the bank. On the issue of IL&P, in addition to the issuer, we have also been in discussions with the Financial Regulator, given that there is some mutual interest or crossover on these matters.

The Senator also mentioned Irish Nationwide Building Society. As he correctly asserted, by virtue of not being a listed entity, it does not come within the remit of the authority under transparency regulations which only bring within remit those entities which have listings on an equity or debt basis.

Senator Paul Coghlan

The authority has no role whatsoever in regard to accounting or similar functions?

Mr. Ian Drennan

Not with regard to its financial statements, although clearly we have an oversight role in terms of any involvement, for example, by members of the profession. The way we discharge this responsibility is similar to that I outlined vis-à-vis Anglo Irish Bank; namely, to supervise the regulatory responses to actions that might be taken by various bodies.

One important aspect I omitted in my earlier response was that because of the clear significance of issues surrounding Mr. Purcell's appointment and so on at our meeting of 23 December, the board of the authority considered it appropriate to appoint a permanent observer to the institute's complaints committee for the duration of the institute's examination of these issues. The significance of this is that the complaints committee, by virtue of the preliminary nature of its inquiries, meets in private. There is nothing inappropriate about this, but we took the view that, given the significance of these issues, it was important that an independent and objective observer be present for all of the committee's deliberations. That observer reports back to the board on a monthly basis.

Deputy Fergus O’Dowd

The option of membership of the board has not been taken up by two professional bodies. Is there any reason for this?

Mr. Ian Drennan

The 2003 Act provides that the prescribed bodies, of which there are nine, have the right to nominate three jointly agreed members to the board, whereupon they are appointed by the Minister. The terms of reference for one of these individuals recently expired. Another, Mr. Donal O'Connor, recently stepped down from the board. It is now a matter for the prescribed bodies to jointly agree their replacement nominees, whereupon the Minister will appoint them. We are awaiting an indication from the Minister in this regard. Clearly, we have no role in——

Deputy Fergus O’Dowd

Is Mr. Drennan saying there is no conflict and that the current vacancies are casual vacancies due to the process that must be carried out?

Mr. Ian Drennan

Absolutely. It is entirely a matter for the prescribed bodies. Our understanding is that they are continuing to deliberate.

Deputy Fergus O’Dowd

Is it correct that the number of statutory inquiries has been five?

Mr. Ian Drennan

Under section 23 of the Act, we have initiated five inquiries to date.

Deputy Fergus O’Dowd

Has the authority published the findings of the inquiries?

Mr. Ian Drennan

Two of the inquiries were subsequently determined to be outside the scope of the authority's remit. Certain of the issues that had been complained of predated the establishment of the authority and were, therefore, ultra vires. Of the other three, two are at preliminary inquiry stage and have not yet been made public. In recent weeks we published notifications in the newspapers stating one third had moved to a full inquiry and that a full inquiry committee had been established. This notice was published in Iris Oifigiúil and a number of newspapers. It relates to the Institute of Chartered Accountants in Ireland and the manner in which it dealt with certain complaints regarding KPMG, a member firm, in the context of an audit of National Toll Roads.

Deputy Fergus O’Dowd

Mr. Drennan said a great deal and I am trying to pick up on it. When the authority holds a statutory inquiry, that is a very serious matter. Mr. Drennan stated two inquiries had been instituted which were found not to have powers to investigate because the matters in question predated the setting up of the authority. What happened with regard to these two inquiries?

Mr. Ian Drennan

We have no role in the two issues, by virtue of the fact that they predated the establishment of the authority. Therefore, we could not progress them.

Deputy Fergus O’Dowd

I am trying to understand the process. It had obviously reached a stage where the authority deemed it important to have a statutory inquiry. That is a very serious level of engagement. I speak as an ordinary member of the public and have no knowledge of auditing. However, the public is very concerned about the lack of regulation. Mr. Drennan has spoken of the lack of powers the authority has to regulate issues it deems to be very serious and mentioned that they are now in a limbo. Is it the case that they will never be investigated? Does the Financial Regulator or any other State body have any role in this? Does the Garda have a role?

Mr. Ian Drennan

I apologise. Some of the problem as regards a lack of clarity probably resides with me. The inquiries in question would be for the purpose of determining whether an accountancy body had failed to comply with its proven processes, as opposed to an inquiry into the conduct of an individual member. The two inquiries could not be progressed because the alleged non-compliance on the part of the body or bodies concerned predated the establishment of the authority. Our legal advice was that we could not progress.

Deputy Fergus O’Dowd

Mr. Drennan is saying the authority was set up to regulate the regulators, namely, the accountancy bodies, and that it found, from its perspective, prima facie evidence to set up a statutory inquiry in two cases concerning the bodies in question.

Mr. Ian Drennan

If the process had been allowed to proceed, it would have been for the purpose of determining whether there was a prima facie case. It that had been the case, we would have moved to a full inquiry. It was not even possible to progress the process of determining whether there was a prima facie case. While I understand the Deputy’s point, with any relatively new organisation it is inevitable that issues will arise which predate its establishment.

Deputy Fergus O’Dowd

I return to the main point. The authority formed an opinion that it should proceed to statutory inquiry stage. I do not wish to put words in Mr. Drennan's mouth but, in my understanding as a layman, there was a very serious issue that the authority wished to investigate and it progressed to due process in that regard. Is he at liberty to tell us the nature of the complaints made?

Mr. Ian Drennan

The process within which the authority operates is such that if an issue comes to the attention of staff which suggests there may have been an instance of non-compliance on the part of a professional body — for example, the manner in which it dealt with a disciplinary issue — and if staff within the authority believe there is an appropriately compelling case, the matter will be brought to the board. The determination as to whether an inquiry should be established resides with the board. Both steps were taken in this instance and a committee was established to investigate the matters involved.

Deputy Fergus O’Dowd

A committee was formed.

Mr. Ian Drennan

At staff level, yes.

Deputy Fergus O’Dowd

The authority formed the opinion that this was a very serious issue and staff went to the board which agreed the issue was serious. However, the authority cannot investigate the bodies concerned because the actions predated the passage of the Act. Nothing can happen now and if a serious wrong has been done, there is no redress.

Mr. Ian Drennan

That is the case vis-à-vis the body but it is important to emphasise that these issues, or indications if I may so characterise them, would have involved whether a body or bodies had complied properly with the investigation process as opposed to——

Deputy Fergus O’Dowd

It is more than a mere issue. It was a fundamental decision the authority had made to proceed to a high level inquiry. The difficulty now is that there is a lacuna in the law, as a consequence of which the authority cannot follow it. Can the professional bodies be required to do so?

Mr. Ian Drennan

The difficulty is that the indication relates to a professional body.

Deputy Fergus O’Dowd

It did not do its job. Why can we not bring it in here, or can the authority bring it in and ask what happened? If Mr. Drennan could name the bodies, we should invite them in and ask them what happened. I appreciate the authority's total professionalism on this issue but it is policing the policemen and found this serious issue.

Senator Joe O’Toole

That is a valid point and why we tried to push the legislation through quickly in 2003. We were aware before the authority was set up that there were issues requiring attention. However, we are caught by the retrospective element in the Constitution and the commencement date following enactment. Deputy O'Dowd's assessment is correct.

Deputy Fergus O’Dowd

If that is so, perhaps there is a case to be made for the professional bodies not having a role and the authority should regulate the bodies in respect of complaints. It is very serious if the authority has a preliminary concern that a body did not do its job. There should be a one stop shop under the Financial Regulator, of which the authority would perhaps be part. Everything should go there but no professional body should be able to escape a statutory inquiry, even if it is retrospective.

Senator Joe O’Toole

I made the presentation about this issue to the Committee of Public Accounts, chaired by the late Deputy Jim Mitchell. Deputy Pat Rabbitte was a senior member of the committee at the time, if not the Vice Chairman. This was the main issue discussed. The committee changed its position twice or three times and finally came to the view that the bodies would know better than anybody else where — excuse the expression — the bodies were buried. It came up with the idea that we would oversee the bodies. That led to two difficulties, the one just outlined, while the other was that nine bodies, with nine methods of doing business, came under our umbrella——

Deputy Fergus O’Dowd

Could the authority not ask these professional bodies to come in, notwithstanding that it does not have the statutory capacity to carry out this inquiry? Would that not be a way around the problem? The authority has identified an accountability problem.

Mr. Ian Drennan

Whenever such an issue arises, there are two strands to it, the look-back and investigation. If we identify what appears to be a deficiency, we immediately put in place, with or without the agreement of the body concerned, a course of appropriate action to ensure it does not recur. We do this by way of our routine supervisory activities.

Deputy Fergus O’Dowd

Is the authority doing this or has it done so?

Mr. Ian Drennan

Yes, because we would deal with it in the context of a broader approval process for the body concerned.

Deputy Fergus O’Dowd

How serious were the two issues? I am not asking Mr. Drennan to name the body or the individuals involved.

Mr. Ian Drennan

It might be more helpful to the committee if we were to withdraw and perhaps take advice on precisely what information we can give to it. If memory serves me correctly, the substance of a complaint from a member of the public was that complaints had not been properly investigated.

Deputy Fergus O’Dowd

They must have been very serious complaints.

Mr. Ian Drennan

I cannot——

Deputy Fergus O’Dowd

I would be happy for Mr. Drennan to respond later.

I am not a financial expert but many believe that banks and financial institutions generally have been involved in reckless lending in the recent past. Did the authority or any auditors it was auditing make such a finding? Was there any commentary on the morality or integrity of the process of lending money to people who obviously could not repay it?

Mr. Ian Drennan

There are two elements to that question. Clearly, we have no role in the lending practices of financial institutions.

Deputy Fergus O’Dowd

If the auditors who audited a company that was engaged in reckless lending — I will not name any such company — did not comment on such practice, in terms of the audits the authority carries out independently, would that not be an issue for the authority to examine?

Mr. Ian Drennan

We do not have a direct relationship with the audit firms. In terms of supervising or monitoring the standard by which they conduct audits, that responsibility resides with the professional bodies.

Deputy Fergus O’Dowd

I understand that, but notwithstanding the point Mr. Drennan made, the authority also has powers if it so wished to examine that .

Senator Joe O’Toole

We are doing that in the cases to which I understand the Deputy refers. We have initiated an inquiry into the auditing at that stage. Is that not correct?

Mr. Ian Drennan

Yes, but that is a separate issue.

Senator Joe O’Toole

Yes, but that is the question.

Mr. Ian Drennan

It does not have its genesis in reckless lending but rather in particular alleged practices on the part of certain individuals.

Senator Paul Coghlan

Mr. Drennan was not able to answer my question on the number of auditors or accountants who were barred because of professional misconduct or fraud. As the authority can only deal with the professional bodies, arising from Deputy O'Dowd's question, it could not deal with such accountants directly. A question that arises, again from Deputy O'Dowd's questioning, is how can we have confidence in that professional body. Perhaps there are two professional bodies. To address the cosy relationship and all the other allegations about accountants and banks, has the authority come up with any recommendation on the term of office accountants should serve with a particular financial institution? There is concern in this area, ethically and so on. The Institute of Directors in Ireland and others are concerned and have been in regard to other bodies about the independence of directors in large public companies. I would like Mr. Drennan to reply to that question.

He reiterated his view on the quality assurance matter in response to my question. The authority's responsibility in law is to advise the Minister. It is stated on page 5 of the presentation that the authority has made substantial resources available, in terms of senior management time and so on, and it agrees that the directive covering quality assurance should have been transposed. I ask Mr. Drennan bluntly: what has the authority done about it? Presumably, he has broached this matter with the Minister in view of his responsibility, as he outlined. What progress has been made on it? We, as a committee, may have to issue a stern directive in regard to this, depending on what Mr. Drennan has to tell us about it.

Chairman

Mr. Drennan might briefly respond to those points and then I will call Deputy Ardagh.

Mr. Ian Drennan

On the question of the number of members of professional bodies who have been barred since we were established, we can quickly obtain that information for the committee, as I undertook to do. It is merely a matter of collating it.

On rotation periods, auditors are subject to the requirements of ethical standards issued by an independent body in the UK and they cover both Ireland and the UK. They set out the length of time any one individual can act as a lead engagement partner or an independent review partner on an audit engagement. Those requirements are already in place.

On the Senator's final question, namely, what we have done about the directive, as he will appreciate, responsibility for transposition of the directive resides with the Department rather than the authority. However, for some considerable time the board, having taken a decision in the early days that it would to the best of its ability offer whatever assistance it could to the Department in providing for, enabling or facilitating transposition of the directive, has been working with the Department and certain other interested parties, namely, professional bodies, on, for example, drafting material that would go into the draft regulations contributing to the development of a consultation paper on the quality assurance recommendation to which I referred. We have also contributed to the development of regulations which will give effect to a tangential Commission decision on third country auditors. I assure the Senator that the authority and its senior people have been committing substantial resources towards the end of assisting the Department in transposing the directive.

Senator Joe O’Toole

My colleagues are too polite to say this but it is an embarrassment for us that this is one of the last countries in the EU to transpose this directive. The situation which now exists where the public companies oversight body of the US, which was set up after the Enron business through the development of the Sarbanes-Oxley Act, can come into this country and investigate what is going on in accountancy bodies without sharing that information with us is fraught with danger and I want the committee to know it.

Deputy Seán Ardagh

I thank Mr. Drennan for his opening statement. The reason all of this is coming about — whereby the Irish Auditing and Accounting Supervisory Authority, the Financial Regulator and others have been invited in — is what has occurred, in particular, in Anglo Irish Bank, Irish Life & Permanent and Irish Nationwide. The reputational damage done to the whole financial system in Ireland is very serious. What can the Irish Auditing and Accounting Supervisory Authority do to assist the situation?

For the past three months, the Financial Times has been writing stories saying that this is a banana republic and cowboy country. That is as a result of actions by the banks whose auditors and, apparently, some of their principal officers, belong to organisations over which the Irish Auditing and Accounting Supervisory Authority has final scrutiny and authority. What is its role and responsibility in this terrible situation in which the country finds itself as a result of some of the actions of people it scrutinises?

Mr. Ian Drennan

In regard to members of the profession, whether individuals or member firms, what we see as our responsibility is consistent with the 2003 Act — that is, to ensure that where issues arise which give rise to a need for matters to be investigated in respect of an individual's or a firm's conduct and so on, that is done. As I set out earlier in response to Senator Coghlan's question, that is very much what we are doing. We are supervising very closely the response of the ICAI vis-à-vis certain of its members and member firms, in addition to having appointed an observer to the committee’s deliberations and so on. The Deputy can be satisfied that we maintain a very close watching brief on how those matters progress.

From that perspective, our role in terms of repairing or seeking to reinstate confidence is to be able to demonstrate to the public that under the current model whereby professional bodies that regulate auditors investigate these matters, they are seen to be investigated thoroughly, that there is transparency in regard to those investigations and that, if at the end of the process, Mr. Purcell forms the view there have been transgressions or breaches of professional standards on the part of the members, the disciplinary process ensues. That is our role from that perspective.

On the financial reporting side, as I alluded to earlier, both Anglo Irish Bank and Irish Life & Permanent come within our financial reporting remit. Again, to the extent I could, I set out earlier that we are currently in contact with both those issuers with a view to obtaining additional information, clarifications and so on which would put us in a position to make a determination as to whether any of those issues give rise to an indication that their financial statements may not have been prepared in accordance with what is termed a relevant reporting framework, namely, applicable accounting standards or applicable legislation.

Earlier my chairperson alluded to one of the other things we were trying to do from what we would term our advocacy remit, and we provided some of it to the committee already. This authority, in its relatively short existence, has published a number of what we hope serve to be quite authoritative and helpful pieces of guidance, information and feedback on our financial reporting review findings to date for the benefit of not only audit firms but, more significantly, audit committees to enable them better engage with auditors. The overall purpose of that is to contribute, from that perspective, to an enhancement in the standard and quality of financial reporting.

Deputy Seán Ardagh

I accept that the authority's principal strategy and activity, paragraph 4.1, is the supervision of the prescribed accountancy bodies. Paragraph 4.4, the promotion of adherence to high standards in the profession, applies right across all of the profession. If one just looks at auditing standards as such, a director of Anglo Irish Bank transferred loans from the bank to another institution, Irish Nationwide Building Society. I cannot understand how the auditors, by examining the directors' transactions and by an examination of year-end transactions and cut off, did not come across that matter. Under the authority's remit to look at such professional standards on directors' transactions and on year-end transactions and post-balance sheet transactions, without looking at the prescribed accountancy bodies but looking at the maintenance of those high standards themselves, why did Mr. Drennan not call in and question the auditors on this matter?

Mr. Ian Drennan

There are a couple of points. First, we do not have a regulatory role vis-à-vis individual audit firms in terms of their compliance on a routine basis. That responsibility resides with the professional bodies.

On the individual instance of the auditor, Ernst & Young, unfortunately, we are simply not in a position to go into that. As the committee will be aware, Mr. Purcell is in the process of examining——

Senator Joe O’Toole

We have initiated it.

Mr. Ian Drennan

As I stated already, we are closely supervising the institute's regulatory response. The current phase of that regulatory response is one whereby Mr. Purcell is investigating certain of these issues vis-à-vis the member firm concerned. Clearly, it would be inappropriate for us to comment as to do so could have the unintended consequence of prejudicing the outcome of those inquiries.

The third point Deputy Ardagh raised was auditing standards. As he may be aware, auditing standards are now set by an international body and in these islands, namely Ireland and the UK, those standards are promulgated by the Auditing Practices Board. One of the things we do is require professional bodies to, in turn, render those standards mandatory on their member firms.

Certainly, we have seen nothing to date that would suggest that the standards are deficient. There is a parallel process ongoing in the European Union under the directive which provides that the Commission, together with member states, if they consider it appropriate, may, in the same way as they have done with accounting standards, adopt international auditing standards for use within the EU. Ireland and the UK have already adopted international standards and in some respects, we are ahead of the game. While, I suppose, any set of principle-based audit standards cannot cover every base, there certainly would not be any groundswell of opinion to suggest that those standards are materially deficient in any particular respect.

Mr. Purcell's investigation will follow its course and in due course we will learn of his findings in terms of what he identifies were the roots of any problems, if he detects problems. If he were to opine that the standard was deficient, for argument sake, clearly, that would be something, albeit that Ireland's capacity to influence the quality or sufficiency of audit standards is limited by virtue of their being set internationally. Clearly, we have a line into the auditing practices board through which we could make those views known but these are like accounting standards. They are set internationally and, therefore, an individual member state's capacity to influence that process is limited.

Deputy Seán Ardagh

Was the chairperson horrified by the actions that took place regarding both the loans and the circular loans between IL&P and Anglo Irish Bank?

Ms Karen Erwin

In my role as chairperson, we considered this at our board meeting on 23 December. The chairman of Anglo Irish Bank had resigned and, on 19 December, the next day, the chief executive resigned. On the same day, the Chartered Accountants Regulatory Board, CARB, the regulatory arm of ICAI, announced it would conduct an investigation into these matters. As a result of that, at our meeting on 23 December, the IAASA board considered what role we would play and we had a discussion as to whether we would have observer status on its complaints committee. Having considered that at length, we said we would have an observer on the complaints committee. As the chief executive said, normally the committee would sit in private and our having a senior staff member as an observer would mean that we would be aware of what was going on. The committee has met at least twice and, as a result, Mr. Purcell was appointed as investigator.

Deputy Seán Ardagh

Is that a long way of saying "Yes, I was astounded"?

Senator Joe O’Toole

I plead with the committee to understand that were we to express a view, we would not——

Deputy Seán Ardagh

I am not asking Senator O'Toole. He is an interloper at the committee to a great extent at any time. The question is being asked of the chairperson.

Senator Joe O’Toole

We would stand accused of having a bias or a prejudice. We are dealing with some of the highest net worth individuals in the State. We are being very careful to go step by step with them.

Chairman

I accept that.

Deputy Seán Ardagh

The reply speaks for itself. There is no question about that.

I refer to the issue of financial reports, which is absolutely astounding. The standard of reporting appears to be appalling, given the number returned following the IAASA review, which sought to have them adjusted. I refer to page 5 of the presentation. The authority secured the publication of amended financial information in the case of 50% of the reports reviewed. In other words, 50% of the reports had to be withdrawn and published again. Is it correct that incorrect information was provided in 50% of the reports the authority reviewed?

Mr. Ian Drennan

I will ask my colleague to supplement my response. The first thing that needs to be stressed is that the timing of giving effect to the transparency regulations was such that the majority of reports we have reviewed to date were half-yearly reports. The majority of issuers' annual reports will start to be published around now. Half-yearly reports are typically not audited. There is no requirement to do so and, generally, issuers do not have them audited. By definition, therefore, they are subject to a lesser degree of scrutiny than is the case with annual reports. That is compounded by the fact that this particular corpus of half-yearly reports has introduced requirements for compliance with the transparency regulations and IAS 34, which is a relatively new requirement for issuers.

We have identified a significant number of areas wherein there is undoubtedly scope for improvement, in particular, among what are termed the debt and fund communities versus the equity community. Typically, the standard of reporting in the equity community is considerably better. However, there is undoubtedly scope for improvement. By the same token, I do not wish it to be construed that the standard of financial reporting in Ireland is low; while there is scope for improvement, it is equally the case that people have been working with new requirements which understandably take time to bed-in. In that context, we have been keen to provide feedback by way some of the documents provided for the committee in terms of our initial findings, indicating how audit committees and directors can work together with a view to ensuring these issues do not recur and quickly enhancing the standards of half-yearly reports.

In an effort to be helpful to the committee, my colleague Mr. Kavanagh will elaborate on the nature of some of the issues that have arisen.

Deputy Seán Ardagh

I will give way to other Members who may wish to expand on this issue.

Deputy Kieran O’Donnell

I thank members of the authority for appearing before the committee. I would like to follow up on the authority's financial reporting supervisory role. Mr. Drennan stated in response to a question from Deputy Ardagh that the authority had issued requests for information in respect of 84% of reports reviewed and secured amended information in respect of 50% of reports reviewed. We have a public interest role. In terms of Anglo Irish Bank and the funds that flowed vis-a-vis the €87 million loan to Seán FitzPatrick as director, does Mr. Drennan believe Mr. FitzPatrick was in breach of company law? Also, as regards the required reporting, does Mr. Drennan believe the loan should have fallen in under related party transactions in terms of disclosures in the accounts?

Is there adequate disclosure as required under company law and general accounting standards in terms of disclosures by directors of their movements and activities throughout the year, be it in respect of commercial or general directors' loans? There is confusion in regard to the Seán FitzPatrick loans. As I understand it, they are in many cases being represented by Mr. FitzPatrick as commercial rather than directors' loans. Does Mr. Drennan believe the repayment of these loans did not show up in the year-end cut-off or post-balance sheet review? Are changes required to company law and accounting standards to ensure this activity by directors is disclosed in financial statements at year end? Furthermore, does Mr. Drennan believe such loans should be disclosed by way of related party transactions?

On the authority's supervisory role, how many of the covered institutions' financial statements has the authority reviewed? I am aware it has reviewed 64 financial reports. As I understand it, all of the institutions covered by the bank guarantee scheme fall within the authority's remit. I assume all of the other banking institutions also fall within its remit. How many of them have been reviewed in terms of their accounts, presentations and disclosures? I understand the authority is in communication with Anglo Irish Bank and Irish Life & Permanent in respect of their activities, the Seán FitzPatrick loans and the funds routed through deposits. Does it fall within the remit of the authority to engage in such further investigations with the other covered banking institutions? What is required is a restoration of the credibility of the financial and banking sectors which partly involves disclosure of the end of year financial accounts. They did not give the requisite information. I ask for the delegation's comments. Was company law breached? Should the matter have been disclosed? Should we have movement on directors' loan accounts at the end of the year, whether they are commercial loans or normal directors' loans? Has the authority made further inquiries into any of the other covered financial institutions? Does it intend to carry out a review similar to the review of Anglo and Irish Life & Permanent at other institutions in order to restore credibility to the banking and financial sectors?

Deputy Seán Sherlock

I welcome the delegation. I am a layman. I am not an accountant and do not have any qualification in that regard. If I was reading the statement which the authority has made about issuing requests for information, explanations and clarification in respect of 84 of the reports reviewed and that there was amended financial information in respect of 50% of reports, I would be thinking that the culture of compliance in this country is still a long way off target in respect of certain financial institutions. I seek clarification because perhaps I misunderstood these statements. If I understand correctly what Mr. Drennan is saying, that it was because certain ISA standards were not met to the full letter of the law, my view as a layman is that I think there is still something rotten in the state of Denmark, so to speak, in terms of the culture of compliance and that people are still not providing or fully disclosing proper financial information or meeting the required standards.

I refer to the European Commission's recommendation on quality assurance of auditors. If this is a Commission recommendation, to what extent should it have been transposed into Irish law? To what extent is the Government responsible for that transposition? I ask for an opinion from the delegation as to what constitutes a recommendation in terms of transposition into Irish law and what constitutes a regulation as laid down by the European Communities in terms of the quality assurance of auditors of public interest entities as that speaks volumes about the culture in this country where quite often laws, recommendations or regulations that are supposed to be transposed to assist the culture of compliance are not transposed in the manner in which they should be. This may be something on which the chief executive is not in a position to make a comment but I am sure the Senator may be in such a position.

Senator Joe O’Toole

I will make two comments. The authority has communicated with the Minister and the Department on numerous occasions in the past two years. As I do not wish to hang this around other people's necks, I will give my personal view. The official view is that this needs to be done and should be done. I draw the committee's attention to the fact that of the 27 European countries only two have not done this. This leaves us wide open. The culture of compliance is different. When the Bill was originally published in 2001, a strict and substantial directors' compliance statement was required, but that was not acceptable to the political parties in this great establishment. Some of us fought a hard fight. Paul Appleby and I met the Minister and made strong recommendations that a compliance statement should state a company had complied with its relevant obligations in a particular financial year. That would deal with the point raised by Deputy O'Donnell. It was a very wide demand. The accountancy bodies, the business community and various others got to work on all the political parties and that section was removed from the Bill. We are now paying the price.

Deputy Seán Sherlock

It is fair to say a large proportion of the mess in terms of compliance is partly due to a lack of political action in enforcing EU recommendations and regulations. It is very easy to blame the culture of regulation, but the Government must also take responsibility for its actions or inaction.

Mr. Ian Drennan

I hope I can remember all the questions asked. I will start with Deputy O'Donnell's. On whether Mr. FitzPatrick has breached company law, the authority's role is not to investigate alleged breaches of company law; rather that role resides with the Office of the Director of Corporate Enforcement. I understand certain of these matters——

Deputy Kieran O’Donnell

To whom does the Irish Auditing and Accounting Supervisory Authority report?

Mr. Ian Drennan

The Oireachtas.

Deputy Kieran O’Donnell

Does it report to the Tánaiste and Minister for Enterprise, Trade and Employment?

Mr. Ian Drennan

Yes, our reporting line in terms of the annual report is to the Minister of State at the Department of Enterprise, Trade and Employment with responsibility for trade and commerce who has been delegated with many of these functions. Ultimately, the only forum which can determine whether there has been a breach of company law is the courts. We are not competent to answer that question and, moreover, it is the responsibility of another organisation.

Deputy Kieran O’Donnell

The Irish Auditing and Accounting Supervisory Authority has a supervisory remit over a list of companies.

Mr. Ian Drennan

As opposed to breaches of company law——

Deputy Kieran O’Donnell

Surely that would be inherent in it. An auditor looks at a set of accounts to see——

Senator Joe O’Toole

The Director of Corporate Enforcement is on our board and we have a memorandum of understanding with him about the communication of information to and fro.

Deputy Kieran O’Donnell

It is a straightforward question. Was there a breach of company law?

Mr. Ian Drennan

I would make a distinction. If one fails to comply with certain provisions of company law, it constitutes a criminal offence. These matters reside squarely with the ODCE or the Director of Public Prosecutions, if they are indictable. Our remit vis-à-vis company law is whether a set of financial statements has been prepared in accordance with company law. Therefore, it is the directors as a group who have responsibility for preparing financial statements, not any one individual.

The second point was on disclosures of transactions with directors. Section 31 of the 1990 Act sets out requirements for companies to disclose certain details regarding the transactions of directors. As the Deputy may be aware, there are certain exemptions from these provisions with regard to banks.

Deputy Kieran O’Donnell

I am aware of that. I am asking whether Mr. Drennan believes the law needs to be changed.

Mr. Ian Drennan

We have had discussions on this issue with the Financial Regulator who, I understand, has also been in contact with other interested parties. Our understanding is that amendments which would, in effect, reverse that exemption are being considered.

Deputy Kieran O’Donnell

By whom?

Mr. Ian Drennan

I read something in one of the weekend newspapers to the effect that the Tánaiste was giving consideration to this.

Deputy Kieran O’Donnell

Does the Irish Auditing and Accounting Supervisory Authority believe the law should be changed? The problem is that there was activity that had been taken off the balance sheet by year end. There was no disclosure of activity during the year. A limited company filing a corporation tax return, CTI, is required to show movements in the directors' loan account in that return, yet it is not required to show them in a set of financial statements. It is an anomaly that there is a requirement to disclose such movements to the Revenue Commissioners, but there is no such requirement to include them in a set of financial statements. I am trying to make a simple point. If the law requires something to be disclosed, the person who examines the matter from a legal or accounting perspective will have to deal with that law as it is presented. Does Mr. Drennan believe there are weaknesses in the law as it is presented?

Mr. Ian Drennan

If the Deputy is asking if I have a view on whether the current exemption should be reversed, I can inform him that my personal view is that it should be. My understanding is that such a move is being actively considered in light of recent events. The Deputy also raised some specific issues about the matter under discussion. I have to reiterate that it is not appropriate for me to comment on some of them, unfortunately, because investigations are ongoing.

Deputy Kieran O’Donnell

Having reviewed the statements of the other covered institutions and banks, what is the authority's view on them?

Mr. Ian Drennan

I understand two of the six covered institutions — the EBS and Irish Nationwide Building Society — do not fall within the remit of the authority by virtue of the fact that they do not have listings on a regulated stock market. I ask my colleague, Mr. Kavanagh, to comment on the aspects of the other four covered institutions that have been reviewed.

Mr. Michael Kavanagh

We have reviewed all financial statements that fall within our remit. The first such statement was that of Bank of Ireland for the year that ended on 31 March 2008. We have reviewed Allied Irish Bank's statement for the half-year that ended on 30 June 2008. As mentioned, we are in correspondence with Anglo Irish Bank and Irish Life & Permanent. I have covered all four institutions.

Deputy Kieran O’Donnell

I thank Mr. Kavanagh.

Mr. Michael Kavanagh

I will also answer the Deputy's question about the future position. Some of the publications received by the committee have made it clear that the authority, like its counterparts throughout Europe, takes a risk-based approach to the financial statements chosen for review.

Deputy Kieran O’Donnell

I suggest the banks would be at the higher end of the risk chain at this stage.

Mr. Michael Kavanagh

I do not think I would be breaching confidentiality if I were to agree that was the case.

Deputy Kieran O’Donnell

What was the authority's impression of the financial statements of Bank of Ireland and Allied Irish Bank?

Mr. Michael Kavanagh

I would like to defer my answer to that question on the grounds of confidentiality.

Chairman

Mr. Kavanagh is taking shelter.

Mr. Michael Kavanagh

No. I am not covered.

Deputy Kieran O’Donnell

Do the reports fall within the 84% of reports in respect of which explanations were sought, or do they fall within the 50% in respect of which amended financial statements were required?

Mr. Ian Drennan

In the interests of ensuring the response is wholly accurate, I propose to respond to that question in writing, with the permission of the committee.

Chairman

That is okay.

Deputy Kieran O’Donnell

The key point is that while the authority is responsible for standards, etc., it also has a key supervisory role in terms of financial statements, for example. The members of the joint committee want the authority to make recommendations that we can pursue as legislators. Such recommendations may relate to the nature of disclosure, standards of reporting or the contents of financial statements, for example. One can only act within what is required of one under company law and accounting standards. If we are to move forward in a positive manner, we can never allow what happened in the Seán FitzPatrick case to happen again. I refer to directors' loans, or commercial directors' loans. If auditors had been required under company law to examine all the transactions made by the directors of a company over the course of a year, it is likely that Mr. FitzPatrick's transaction which was moved off the balance sheet at the end of the year would have been picked up and disclosed. If that had happened, the financial situation might be different today. That is it, in layman's terms. That is what the ordinary man will understand. Rather than merely fulfilling its role, the authority should proactively come back to us in order that we can do something practical, as legislators, to make the financial and banking systems more credible and secure and to provide for better disclosure. That is what I should like to take from today.

Chairman

Deputy Sherlock's questions were not answered.

Mr. Ian Drennan

We shall certainly be happy to come back, as regards Deputy O'Donnell's request.

Deputy Kieran O’Donnell

Does the authority agree as regards where we are coming from in terms of recommendations it can make to the committee? To follow on, to achieve some practicality, could the authority report to the committee as regards the recommendations it believes are needed?

Mr. Ian Drennan

Absolutely, we are already beginning to formulate some initial thoughts as to——

Deputy Kieran O’Donnell

Could it report to the committee, through the Chair?

Mr. Ian Drennan

We should be happy to do that.

To go back to Deputy Sherlock's questions on 84% of issuers, if it is helpful, perhaps I can ask my colleague to give him a sense of some of the issues that arose and which are in the public domain, based on our documents. Would that be helpful?

Deputy Seán Sherlock

It would be.

Mr. Michael Kavanagh

To reiterate what Mr. Drennan has said, the refilings, effectively, where issuers withdrew their accounts and refiled amended accounts was across all three categories but predominantly related to debt and fund issuers, not equity issuers. For the purposes of clarification, equity issuers are the companies we all know about and those the committee has been talking about today, but debt and fund issuers are on a regulated market on the Irish Stock Exchange. There are approximately 140 debt issuers within our remit and about 60 closed ended funds. Therefore, the issues that have led to the withdrawal and refiling of those half-yearly accounts have primarily been for that type of entity, the debt and fund issuers.

As Mr. Drennan has already said as well, this was a new accounting standard and new regulations which they had to adhere to, and these accounts, in the main, are not audited. Neither is there any evidence that an auditor has reviewed these financial statements. Some of the issues we have found are indicated in the publication the committee has as regards the commentary on half-yearly financial reports. Even though that was written in June 2008, the issues since are more or less the same which have led to certain issuers refiling. In some cases, it is fair to say there was no knowledge of the new requirements. That is as much as may be said on that. In others, there are new requirements regarding explanatory notes and the type of notes people should give in their half-yearly reports. Again, they were missing in some cases.

It is relevant for equity issuers as well that when it comes to business combinations, where one company acquires another during the year, it now has to give extensive disclosures in compliance with the full accounting standard dealing with that area. In a number of cases those types of disclosures were missing. There are also breaches of specific accounting standards, where actual amounts were recognised that should not have been, in non-compliance with the accounting standard. That is a flavour of some of the issues and there are many more which are elucidated on in that report. Again, the refilings in all of these cases were voluntary, and we believe that boards, whether equity, debt or fund issuers, are positively disposed to our findings and recommendations. We have not as yet had to use our extensive powers to make issuers refile as they have done so voluntarily.

Deputy Seán Sherlock

To go off on a slight but nonetheless relevant tangent, is the authority willing to make the legal advice it has received available to the committee?

Ms Karen Erwin

Does the Deputy mean in relation to confidentiality issues?

Deputy Seán Sherlock

That is correct.

Ms Karen Erwin

I do not see why not — no problem.

Deputy Seán Sherlock

The reason I ask is that the committee, as a body, could seek certain powers, theoretically, in relation to compellability. A number of things would need to happen for that to come about, but it could be helpful in order to assist the committee in terms of the questions we pose to people who come before it. In the event of such people asserting that what they say is confirmed by legal advice, if that is made available to us, it might be of assistance to us in some instances.

Mr. Ian Drennan

Out of courtesy, we should need to seek our legal advisers' consent in that particular regard.

Deputy Seán Sherlock

That is understandable.

Senator Joe O’Toole

There is another issue which we discussed before the authority came in. We feel we report to the committee through legislation. It may be that there are things we could say to the committee in private session which we could not say in public session. There are in-between steps.

Senator Ned O’Sullivan

I welcome the chairperson and members of the authority. As it is late, I will not detain them too long and many of the issues I wanted to raise have been raised by Deputy O'Donnell. To take up his latter point on being proactive, I would like to see that type of approach being used not only by the authority but by many of the other regulatory authorities we have met. In that way, we would get some forward motion out of sessions such as this one.

I particularly welcome the vision of Senator O'Toole on the other side of the House. For some strange reason, the term "poacher turned gamekeeper" keeps coming into my mind, although I do not know why.

Without going over old details, with regard to the whole banking scandal, very few individuals or organisations have come out of these scandals with an enhanced reputation. I have learned two things from the scandals. First, the idea of self regulation seems to be a non-starter in many aspects of Irish commercial life, and, second, there are many dogs in Ireland that do not bark at night. To a certain extent, all of the various regulatory boards must look into their hearts and ask whether they were such a sleeping dog. I am sure the chairperson and members of the authority have asked themselves that question. Without going into a rigmarole about it, it is important that more proactive and investigative attitudes would be displayed by all the various regulatory authorities.

These are very unusual circumstances and ordinary approaches no longer apply. The authority needs to be more aggressive and hands-on. Is it fair to suggest the witnesses have learned something from this process? Are they beginning to make greater demands on the people who are answerable to them? Are they examining their own operations and procedures as a result of this?

I have served on several company boards and I am also in business. Two aspects of auditing have always bothered me. Perhaps the witnesses are in a position to answer my questions. First, the manner in which auditors are appointed to companies by the boards of those companies has always bothered me, whether they are private or semi-State companies. The company appoints the auditor, very often following a fair amount of competition and sometimes by a vote of a board. I am sure canvassing is never meant to happen in this country but it happens in every aspect of life, and I have no doubt auditors canvass for that type of business. As the authority that oversees this, does IAASA believe this is the correct way for auditors to be appointed to do a job, which is basically to keep that board right and to investigate its procedures? The auditors are going in there, cap in hand, because they have been favoured with appointment and it is an appointment they want to keep for the following year as well. It is an issue I have not heard raised very often. Has it come before the authority by way of complaint and, if so, has the authority a view on it?

Second, where an accountancy firm is asked by an individual businessperson or a board for advice as to his or her investments and where best the person might deploy his or her resources on the treasury side, accountants will very often furnish that advice, place the order and do the business, from which they receive commission. Is this right? Is it a matter that has come before the authority by way of complaint from an individual or organisation? Is it right that an accountant, who is already being paid a fee to advise the company or individual business, is also taking a commission to operate the advice he is giving? Is this a procedure which would guarantee the best interests of the client at all times?

Deputy Fergus O’Dowd

To return to my original question——

Chairman

We will allow Senator O'Sullivan to respond and then return to Deputy O'Dowd.

Mr. Ian Drennan

I will begin with the last question on the provision of advice on investments and so on by auditors. Auditors are subject to ethical standards which are promulgated by an independent body in the UK, and those standards are applicable to auditors here and in the UK. They set down very strict criteria on, among other things, what services an auditor can provide to a client when he or she acts as an auditor. Those matters are very tightly regulated under those standards and that is compounded by the fact that when professional bodies do their monitoring visits to firms, one of the matters they will examine is whether the firms have complied with those ethical standards. In the larger firms they examine whether the internal procedures are sufficient to ensure compliance with those ethical standards and in smaller firms they will do it by, for example, selecting fee notes to examine the sort of other work or services that are being provided.

Senator Ned O’Sullivan

Has Mr. Drennan detected any level of serious complaint on that issue?

Mr. Ian Drennan

Subject to clarification by my colleague, I have no recollection of complaints of that nature.

On the appointment of auditors, in the listed entities, to which Mr. Kavanagh alluded, auditors are appointed at the AGM by the members of the company. The auditors report to the members of the company and, typically, where there is a change in the audit firm, that will be on the recommendation of the audit committee, which will have dealt with a tendering process. In a small company the governance arrangements are not quite as sophisticated and have fewer layers, but it is ultimately a matter for the shareholders of a company to determine who they wish to be the auditor of their company.

Senator Ned O’Sullivan

I understand that. I am asking if it is the view of IAASA that this is correct. Can we do better than that? Would it not be better if some independent group, such as the local authority appointments commission, would allocate a reputable, qualified auditing group to a company, particularly in the case of a harbour board or some such State company? Is it right that these auditors should be appointed by the people they are auditing and very often in a cosy relationship with? They certainly are not at arm's length.

Mr. Ian Drennan

Generally entities such as harbour boards or others which receive large tranches of funding from the State are audited by the Comptroller and Auditor General or the local government auditor. Nothing has come to our attention to suggest that the current mechanism whereby auditors are appointed by shareholders is problematic to the point that the change in arrangements the Senator suggests is merited.

Senator Ned O’Sullivan

I respectfully suggest the IAASA board might usefully examine this especially in the current climate where we cannot afford any loose ends.

Deputy Fergus O’Dowd

I want to return to a question I raised earlier but first I need information by way of the report the authority initially gave us. On page three this report states "five statutory inquiries have been initiated ... [and] the authority has dealt with 70 complaints and 87 referrals." At the bottom of the page the report says "referrals being matters referred to the authority by other regulatory or enforcement bodies." Having 87 referrals from enforcement or regulatory bodies is very serious. Does that relate to these five inquiries? That word "and" would imply that it does.

Mr. Ian Drennan

It is not intended to. It is probably on the public record from a previous annual report, and will be in the forthcoming annual report, that the lion's share of those referrals would emanate from the ODCE and would arise from issues the Director of Corporate Enforcement or his colleagues have identified, for example through the examination of complaints, where they see there is a dimension that applies to the profession. Equally, we make referrals on a relatively regular basis to other regulators.

Deputy Fergus O’Dowd

Of the five statutory inquiries the authority commenced with, according to the authority's annual report they had to go through the preliminary inquiry committee which "determines that there is a prima facie case that a PAB has failed to comply with its approved investigation and disciplinary procedures; and the circumstances of the matter are such as to warrant the initiation of a full inquiry.” This is the point I was teasing out earlier. It is a very serious issue. The authority already made a judgment there was a case and went on to hear the case. Mr. Drennan states that two of those inquiries did not proceed because they were outside the authority’s frame of reference. Of the other three inquiries, are they continuing or have they finished?

Mr. Ian Drennan

Of those three, one is now in the public domain and a determination has been made that there is a prima facie case.

Deputy Fergus O’Dowd

Which case is that?

Mr. Ian Drennan

It relates to the handling by the Institute of Chartered Accountants in Ireland of a complaint about a member from KPMG in respect of an audit of National Toll Roads. If memory serves, the genesis of this investigation was an article in the Sunday Independent by Senator Ross.

Deputy Fergus O’Dowd

I hear what the Senator says but I do not always read what he writes. I am glad he was on the ball. That was one of the cases.

Mr. Ian Drennan

With regard to the other two issues I must be more circumspect. They are still at the first stage. What I would like to do, if the committee were willing, is to put in writing further specifics about the position of those two cases.

Deputy Fergus O’Dowd

I am trying to get a full understanding. With regard to the two inquiries that did not go ahead for technical or legal reasons, what is the position regarding the professional bodies concerned? I said earlier that the authority had the option of going back and dealing with the issues beyond the actual regulations. Has that occurred?

Mr. Ian Drennan

If memory serves, we agreed we would put something in writing and submit that to the committee.

Deputy Fergus O’Dowd

Can I put the following in writing to Mr. Drennan today? I am not happy with that and I am not being pejorative. Can the authority indicate, in either its annual report or in the statement it gave the committee today, that two of those statutory inquiries did not proceed for the reasons Mr. Drennan now supplies?

Mr. Ian Drennan

Can I confirm that?

Deputy Fergus O’Dowd

Is it in the statement? I am trying to find it.

Mr. Ian Drennan

I will have to check whether it is in the previous annual report.

Deputy Fergus O’Dowd

I am talking about the documentation before us today. I am just trying to get to the bottom of this.

Mr. Ian Drennan

I beg the Deputy's pardon. I do not think that level of specificity is in the briefing the committee has.

Deputy Fergus O’Dowd

Does Mr. Drennan not think it ought to have been included? I shall say exactly how I feel about this. When the authority proceeds to statutory inquiry, or when it makes a finding, if it ultimately does, the matter can go to the High Court. Therefore, this is a very serious action, the most serious level of activity the authority can commence or follow through and for that reason we need more from the authority in respect of what has happened to the two cases that it did not progress.

The reason I am not happy is that the authority exists to regulate the regulators but, for whatever reason, it was not able to regulate this issue. However, the case is a serious one and obviously has not been dealt with. What, then, is the point of the authority if it cannot deal with an issue and if nobody else can?

My colleague asked if another body might have dealt with issues brought to the authority's attention, perhaps the Office of the Director of Corporate Enforcement. There are too many strands to this. There should be a one-stop shop and the authority should be part of that, looking after accountancy affairs. However,the situation is that the authority has failed to act, through no fault of its own, and cannot act even when it wants to and there is no other body which can. We do not know what is going on.

Chairman

There is no net to fall into to reach the next step.

Deputy Fergus O’Dowd

There is no one and these people are getting off scot free. The authority is a professional body.

Mr. Ian Drennan

With the Chair's permission, I shall ask my colleague to supplement my response. On the first issue, that is the fact of the matter and having taken advice, we can only operate within the confines of the statute.

Deputy Fergus O’Dowd

Was that decided with consent? That is the point I am making.

Mr. Ian Drennan

It is probably best to deal with that in writing.

Chairman

Perhaps the witness will come back to the committee as soon as possible on the matters they have indicated.

Deputy Kieran O’Donnell

Does the authority provide a specific report on financial supervision? When did it start to carry out its remit in respect of financial supervision?

Mr. Ian Drennan

The first set of financial statements that came within our remit were published in September 2007.

Mr. Michael Kavanagh

This concerned a transparency directive and EU law and therefore the year in question began on 6 January.

Deputy Kieran O’Donnell

Does the authority compile a report on its supervisory work?

Mr. Michael Kavanagh

This half-yearly commentary was to help issuers, most of which have half-yearly periods on 30 June. That was to indicate our findings in an effort to help them.

Deputy Kieran O’Donnell

Has the authority recommended what should be in accounts? It is a follow on.

Mr. Michael Kavanagh

The observations document issued in January has a similar role. The committee also has that. It is intended to help boards contemplating annuals at 31 December to focus on the issues we raise. We will have substantial information on our findings in one of the chapters of our forthcoming annual report because this a relatively new function.

Deputy Kieran O’Donnell

This is a stand-alone function. The authority examines financial statements. It does not interact with bodies. It has a vital role. That is why it is critical when the authority appears before the committee that it has observations and recommendations about changes in company law and accounting standards such that we have proper disclosure in the accounts, without ambiguity, so that anybody auditing a set of accounts will know exactly what disclosures are required. It is critical the authority take on that role and return to the committee with the information.

Mr. Michael Kavanagh

I should also point out that we have given several presentations on our findings within two of the largest audit firms, which audit most equity issuers, and Mr. Drennan and I gave a presentation to the Audit Committee Institute which comprises the audit committee members of boards of the largest equity issuers in the country.

Deputy Fergus O’Dowd

Did either of the statutory inquiries that did not proceed incorporate referrals from regulatory or enforcement bodies?

Mr. Ian Drennan

No. They resulted from complaints from members of the public.

Deputy Fergus O’Dowd

If something came to light today that predated the authority's legislation, which has already happened in respect of two issues, we would need to be able to deal effectively with that. How does the authority deal with serious, unprofessional and unethical conduct which comes to light after the event and before the authority's powers commenced? How do we deal with that issue?

Mr. Ian Drennan

The risk of that happening is considerably lower since the authority was put on a statutory footing at the beginning of 2006. I cannot be specific but the authority received the aforementioned two issues generated by complaints very early in its existence.

Deputy Fergus O’Dowd

Had we received other evidence at our previous meeting, for example, about alleged abuses of selling shares, trading and offshore companies, and there was an illegality or an auditor had breached the rules and signed off, what sanctions would he, as a member of a professional body, face from the authority? I am not referring to any specific person.

Mr. Ian Drennan

If the committee had information to suggest there had been a breach——

Deputy Fergus O’Dowd

This is a theoretical case.

Mr. Ian Drennan

The committee could draw that either to our attention or directly to that of the professional body concerned. The professional body has an obligation to deal with that referral in accordance with its approved by-laws.

Typically, a member of the public makes a complaint to us about an individual firm and because of the system we operate, we refer it to the body concerned——

Deputy Fergus O’Dowd

My point is that because it relates to a time before the authority's powers can deal with it, the professional body does not deal with it and nothing happens.

Mr. Ian Drennan

At the risk of understatement, any professional body that receives a complaint from a committee of the Oireachtas would take it seriously.

Deputy Fergus O’Dowd

The point is that two bodies the authority is investigating are professional bodies and the authority cannot deal with that.

Senator Joe O’Toole

No, we have no power to deal with it.

Chairman

If an incident is brought to the attention of Deputies, Senators or this committee which predates 2006 or the establishment of the authority, that body effectively cannot deal with it.

Mr. Ian Drennan

If I may clarify the position as we are slightly at cross purposes, in the event of an issue coming to the attention of the committee that it considered appropriate to refer to a professional body, that body, upon receipt of it, would have an obligation under its by-laws to process it. Where we sit in, so to speak, we would supervise the way in which that would be dealt with. If it transpired subsequently that there was an indication the professional body, in dealing with it, failed to comply with its procedures, by definition and by virtue of the fact that it was happening now it would be four-square within our remit.

Chairman

That clarifies that point. I thank members for sticking it out in dealing with this matter on a Tuesday evening. I also thank Mr. Drennan, Ms Erwin, Ms Hall, Mr. Kavanagh and Senator O'Toole for their attendance today. The business of the committee is concluded until 10.30 a.m. on Wednesday, 8 April 2009 when representatives of the Irish Financial Services Regulatory Authority will appear before the committee.

The joint committee adjourned at 6 p.m. until 10.30 a.m. on Thursday, 9 April 2009.