I will do my best.
The Commission has been examining the proposal for a new company law directive for some time in consultation with member states and other interested parties such as the auditing profession. The objective of the proposed directive is to ensure that interested parties can rely on the accuracy of audited accounts by requiring auditors to meet certain standards and be subject to appropriate regulation and oversight. Added urgency was given to the need to "beef up" the original eight directive, which came into existence in 1984, by a number of high profile corporate scandals in the EU and the USA which gave rise to questions over the manner in which companies are audited.
Consideration of the Commission's proposal by the Department of Enterprise, Trade and Employment has been undertaken in the light of the policy recently laid down by the Government and the Oireachtas and set out in the Companies (Auditing and Accounting) Act 2003. This Act will establish a new auditing and accounting supervisory authority and other such measures. As there is basically no conflict between the approach set out in the Commission's proposal and in the Act recently adopted, the Department does not foresee that the directive would cause any major difficulties for Ireland. However, there are one or two points of detail on which would wish to argue with the Commission, but we consider the directive to be basically in line with existing policy.
I will briefly outline Ireland's existing regulatory structure to which there are a number of elements. For a person to be qualified for appointment as a company auditor, he or she must be a member of a body of accountants recognised for this purpose. Formerly, responsibility for such recognition was undertaken by the Minister for Enterprise, Trade and Employment, but this function will now reside with the Irish Auditing and Accounting Supervisory Authority, IAASA. The criteria which a body must meet to be eligible for recognition are set out in section 191 of the Companies Act and cover such areas as education and training of its members, disciplinary procedures, ethics and independence.
The day to day approval and registration of individual auditors and audit firms is undertaken by six recognised bodies, of which the Institute of Chartered Accountants and the Institute of Certified Public Accountants are the two largest. The recognised bodies provide, either directly or through their qualified institutions, educational and practical instruction to their members and organise appropriate tests. The recognised bodies are required to undertake the quality assurance of their members, which means that they are supposed to test and ensure that auditors are carrying out their functions properly.
IAASA, which is currently being established, will operate a system of public oversight over the national regulatory regime. It will be responsible for supervising how the recognised accountancy bodies regulate and monitor their members, and is given a mandate to promote the adherence to high professional standards in the auditing and accountancy profession. As well as having a general oversight role, IAASA is empowered to intervene directly in the investigation and discipline of individual auditors.
I will outline the main requirements of the directive. It will require member states to designate competent authorities which will be responsible for approving persons and firms to act as auditors. Ireland gives effect to this through the designation of specified recognised accountancy bodies such as the Institute of Chartered Accountants and the Institute of Certified Public Accountants.
The directive requires that statutory audits be carried out only by persons and firms who meet certain education, training and other criteria. This will be given effect by way of the Companies Act and enforced by the recognised accountancy bodies. Auditors must be registered on a public register, which is done through the Companies Registration Office.
The directive requires that auditors and audit firms be subject to an ongoing system of quality assurance and effective system of investigation and sanction. This is undertaken by the recognised accountancy bodies. Their disciplinary procedures will now be given statutory backing under the Companies (Auditing and Accounting) Act 2003.
The directive requires member states to have in place an effective system of public oversight, and this we will seek to do through the establishment of IAASA. It requires that the governance of the public oversight system must be undertaken by non-practitioners, non-accountants, although a minority of practitioners may be allowed. This is the way IAASA is structured.
The directive will require public interest entities to have an audit committee. Under the Companies (Auditing and Accounting) Act 2003, plcs or public companies will be required to have an audit committee while large private companies will be required either to have an audit committee or to explain in their annual report why the company decided not to appoint such a committee.
I will deal with the elements in the proposed directive not currently provided for in the Irish regulatory system. The directive will require member states to have systems in place to approve auditors from other members states wishing to practise in Ireland. The directive also has provisions dealing with the approval and registration of auditors and audit firms from non-EU member states. The directive will further require member states to have in place a co-operation regime between Irish competent authority and competent authorities in non-EU member states. While currently we do not specifically provide for these, giving effect to these is not viewed as something that will cause us any difficulty.
The directive has a number of provisions covering auditors involved in the audit of public interest entities. We do not currently distinguish generally between the audit of ordinary firms and the audit of public interest entities. Under the Commission's proposal, auditors of public interest entities must publish on their website an annual transparency report giving certain information on the practice, firms audited, financial information and so on. They have to report to the company's audit committee on certain matters. These obligations are not currently imposed by statute but their implementation is not viewed as something that will cause a problem.
The directive has certain rotation requirements in terms of when the key audit partner must rotate from the audit. There is also a requirement that the key audit partner cannot take up an appointment with a firm within a period of two years. These are covered in the existing rules of the recognised accountancy bodies.
From Ireland's perspective, the most difficult provision in the directive is the Commission's proposal not to allow practitioner involvement in the governance of the system of public oversight of auditors who audit public interest entities. This is contrary to the Companies (Auditing and Accounting) Act which allow four out of 14 members of the board of IAASA to be practitioners. There seemed to be considerable opposition from member states to this provision, therefore, we would be hopeful that this provision will not appear in the final version approved by the Council and the European Parliament.
The European Commission issued its proposal for a new directive in March this year. The first meeting of the Council working group was held in April. Five such meetings have been held to date. Following the First Reading, recently completed, a revised Presidency text was circulated to member states containing suggestions for amendments. This will be taken up by the Dutch Presidency and considered in tandem with the original Commission proposal during the Second Reading of the directive. The First Reading was very much exploratory, with member states trying to understand the thinking behind and the impact of the Commission's proposal. It is only during the Second Reading that we expect them to get down to substantive negotiations on what might be included in the directive as it is referred to the ministerial Council. The Dutch Presidency has indicated its intention to bring the proposal for a directive before ECOFIN in November this year for a political orientation debate, not adoption, by which stage it is unlikely that the European Parliament will have expressed its view because of the break in proceedings due to the elections.
