Item No. 2 is the approval of persons carrying out statutory audits of the annual accounts of limited companies. Senator FitzGerald will also deal with this report.
Approval of Persons Responsible for Carrying out Statutory Audits of Annual Accounts of Limited Companies.
This is a longer report and less susceptible to short cuts than the previous one. It is the proposal for what is now the Eighth Directive on Company Law. In common with others, it is designed to facilitate the exercise of the right of establishment by companies or firms. This particular one is concerned with the minimum qualifications of people who audit limited companies but it does not necessarily apply to auditors of all limited companies because the Fourth Directive, which has already been adopted and which deals with company accounts, provides Member States with the option of relieving small companies from the obligation of having their accounts audited by persons authorised by national law. This deals with the qualifications of auditors, who are to be authorised by law to audit the accounts of limited companies, although another Directive provides that that class need not be exhausted by those who would be permitted to audit small limited companies.
This Directive does not apply to unlimited companies, which are very largely rich men's holding companies and not trading operations at all. It does not apply to other forms of body corporate, such as industrial and provident societies and other unincorporated bodies, such as partnerships. The significance to be attached to all of that is that within the range of auditors under training are all those bodies, that is, small companies which they may be entitled to audit without being authorised by national law to conduct audits of larger limited companies. Their experience may be of unlimited companies, co-operatives, industrial and provident societies, friendly societies, partnerships or a whole range of those things.
The Directive would require Member States to approve statutory company audits being carried out either by natural persons or by firms, body corporates, individuals, groups of individuals, either operating together as partners or coming together under the umbrella of a corporation provided only qualified persons carry out the audit. The essential qualification is to be acquired by passing, after a course of advanced training, an examination at graduate or equivalent level. The idea here is to combine practical training with a good level of theoretical knowledge. The Directive specifies the level and scope of the examination in detail.
The Directive contains other provisions. It gives Member States an option, which they may exercise, to permit persons with long practical experience to sit the examinations having attained the required level of study. Although the most desirable thing is a combination of practical experience with theoretical study, there is an option to enable Member States to take account of long practical experience in a particular case and ignore the requirement of a period of theoretical study. It also deals with the independence of the auditor and seeks to protect the interests of practising auditors who do not satisfy the requirements of the Directive at the time it comes into operation. If there is some person who, under any of the existing national laws, is entitled to do these things at the moment he is entitled to continue doing them, even though he does not have all that will be required of future entrants into the profession. There is another Article which enables students in a similar position to carry on and complete their studies on the basis of the old syllabus even if it is not in accordance with the Directive. An Article deals with the recognition of persons who acquire similar qualifications in other countries and another one requires Member States to publish annually a list of approved auditors.
The purpose of the Directive is not to provide for the mutual recognition of diplomas or to facilitate the right of establishment of auditors in different countries, although it may be seen as laying the ground for such a step to be taken at a later date. When they have harmonised the qualification and professional training throughout the Community we may then expect that when people have received the same sort of training anywhere they will get the right to establish themselves anywhere.
There is no mention in the Directive of professional bodies such as accountancy bodies. One of the reasons for this is that, apparently, in other countries there are institutions which include the services of auditors where people may be doing a lot of other things apart from auditing. It is not intended, therefore, to exclude such bodies from their operations. The Directive, therefore, concentrates on the level and scope of the examination of professional competence.
With regard to our law, at the moment the Companies Act, 1963, provides that a person cannot be an auditor of a company unless he is a member of the Institute of Chartered Accountants in Ireland, the Institute of Certified Public Accountants in Ireland, the Association of Certified Accountants, or the Institutes of Chartered Accountants in England and Wales, and Scotland. These are all bodies recognised under the Act by the Minister for Industry, Commerce and Energy. A person can be an auditor by being a member of a body so recognised or any other body that may be recognised or be authorised as having obtained similar qualifications other than from such a body. You might get special recognition from the Minister even if your qualification is not from those bodies but from some other body similar to those bodies somewhere else in the world. The Minister in such a case could recognise an individual as being a person entitled to audit, or could recognise him as having obtained adequate knowledge and experience prior to the operative date of the Companies Act, 1963, which was 1 April, 1964. This latter category is now unlikely. Where a firm is appointed by its firm name to be the auditors, the appointment is regarded as that of those persons who are from time to time the partners in that firm and, under our law at the moment, unlike what is proposed in the Directive, it is not possible to appoint a body corporate as an accountant.
The proposed Directive is framed to deal with the qualifications of those responsible for auditing company accounts rather than with the qualifications of auditors as such. It is not concerned to say that people who are to be auditors have to get this training. People who are to audit limited companies are to have this training. In Ireland such audits may be carried out only by professional accountants. It is suggested that whatever qualifications are adopted in the Directive should apply to auditors in general and not merely to auditors of company accounts which could be dealt with in the implementing legislation. It was understood by the Sub-Committee and we advise the Joint Committee that this is so. The Directive is not intended to interfere with the system of automatic recognition such as we have under the Companies Act, 1963, that the members of particular accountancy bodies should be entitled to audit company accounts. It is the responsibility of the competent authority to ensure that educational standards of recognised accountancy bodies are in accordance with the Directive.
With regard to the approval of companies or associations as auditors, the Directive obliges Member States to approve as auditors companies as well as individuals, but subject to the audits being carried out only by professionally qualified personnel, and provided that non-qualified personnel have neither access to relevant documents nor authority to appoint or remove auditors or to issue instructions in relation to audits. Moreover, non-professionals may not hold a majority of capital in concerns formed after the Directive is implemented.
In regard to this point it was strongly represented to us that we should resist the provision allowing for audits by other than firms of professionally qualified accountants. Our view is that this provision in the Directive appears to cover an existing situation in the Federal Republic of Germany. We would advise the Joint Committee that, provided there are adequate safeguards in the law, Directives made under the Article on which this proposal is based should not interfere with an existing practice such as this. The Directive should be amended so that Member States—for example, Ireland—would have an option as to whether to approve such concerns as auditors or not. It should not become incumbent in our law to allow bodies corporate, which we do not allow at the moment. We should look at that again, but we should not go further than that. It was represented to us that we should make recommendations which in effect meant that the Directive would have told Germany to get rid of these bodies corporate or comply with various requirements which we felt represented from our point of view too radical an intervention in the operations of Germany. Provided these, it was permissible for our law to ensure that bodies corporate like these could not operate or be organised here.
Constraints on non-qualified persons from dealing with or influencing the audits and the requirements of confidentiality seem to have been drafted to provide for the practice in Germany. In being drafted to try and make the German situation adequately safe, language has been used which would bring great difficulty for professional bodies here, because accountancy firms take on partners who are not qualified auditors but who are experts in one field or another. Tax law is given as an example, or computers. Our view is that there should be no doubt about the right of people of that kind to have access to the accounts. It is represented to us that if the Directive is adopted as drafted it might have the effect that an auditor of an Irish company which might be the holding company or a subsidiary company of some other Member State would not be entitled under the law to have access to what might be vital to making a proper audit of the holding company. We suggest a reframing of that provision.
On independence and good repute the Directive obliges Member States to grant approval as auditors only to persons who are of good repute and independent and says that it would be left to Member States to apply their own criteria for determining good repute. In relation to independence some criteria are given in Article II of the draft. The auditor may not directly or indirectly receive benefits from the company or its members and may not have an interest in the capital of the company. If more than 10 per cent of his turnover is derived from a client, the disciplinary authorities must decide if his independence is being limited.
The Consultative Committee of Accountancy Bodies—Ireland are strongly of the opinion that the Directive should legislate for the competency of auditors only and that the question of independence should be regulated only by the ethical code of the profession. The criteria such as the dependence of an auditor for his income beyond a particular proportion from one client is known in Irish practice and it is also known in Irish practice that, when one has an interest in a company and when one becomes an auditor one is expected to get rid of this interest. The percentages here at the moment are not 10 per cent but 15 per cent gross fees.
We note that the Directive also entitles Member States to ensure the independence of auditors through professional discipline, and that it would be open to us to allow appropriate accountancy bodies to supervise the conduct of auditors to ensure that the standards of independence are maintained. The Draft Directive does not contain the type of criteria which we have here in the law which prohibits someone from acting as an auditor of a company if he is an officer or servant of that company or of that company's holding company or subsidiary. If these criteria are missing it may be because they are already mentioned in articles of the Fifth Draft Directive and of the draft Statute for European Companies. It is suggested, however, that provisions dealing with the independence of auditors should be included in the Eighth Directive rather than be scattered throughout the various Community provisions dealing with company law.
Regarding training and examination, there is a lot in this report about advance training, attainment of university entrance level, and examination at graduate or equivalent level with an emphasis on practical as well as theoretical knowledge. We are told that the present educational requirements for entry as an accountancy student are about university level. We understand that, while it is not the practice to designate any tests in accountancy examinations as tests of practical knowledge, the written tests in a variety of subjects have a large element of practical problems in them. We believe that the Irish system of training can accommodate the requirements of the Directive with some modifications.
It has been represented to us that some difficulty may arise in Ireland by reason of the fact that the Directive specifies that the practical training of students involves principally the statutory audit of the annual accounts of companies. I said earlier that the type of experience a person might have in an Irish firm might take in partnerships, co-operative and unlimited companies. The Directive provides that the practical experience the person must have should be principally the statutory audit of the annual accounts, but that may create problems for smaller firms. Despite these difficulties, the public interest should override and the student training should embrace all aspects of accountancy. The Directive will give Member States, including ourselves, the option of admitting persons of considerable practical experience even if they have not attained the level of studies required. We are informed that the Institute of Chartered Accountants in Ireland have rules sufficiently flexible to admit of something like this and the Institute of Certified Public Accountants in Ireland permits persons who have not attained the level of education necessary for entry as a student to study for the examination if they are not less than 25 years of age and have not less than seven years' experience. We take the view that what is proposed is reasonable.
We want to thank the various accountancy bodies who have made representations and appeared before us.
Paragraphs 1 to 22, inclusive, agreed to.
Ordered : To report accordingly.