I should like to ask the Minister a number of questions in regard to section 2, and I suppose if we ask them one a a time it will be easier rather than putting them all together on a string. Many of the comments I have to make on the Bill will be eliciting information from the Minister rather than disagreeing with him, because substantially we are all in agreement with regard to the need for the Bill. Section 2 (1) (a) states that: "the Act shall not apply to: a company not trading for the acquisition of gain by the members.". I understand that. Does that mean that any company which for the time being is not trading is also not covered by the Act? You could have a company which is set up for the purposes of gain. Senator Honan and myself might establish a company for the manufacture of garden gnomes, but we decide not to go into operation until the year 1990, or something would happen that we would not go into operation until the year 1990. Between this and 1990 would we be a company not trading for the acquisition of gain by members? It does not say "a company whose objects include not trading for the acquisition of gain." It just says "a company that is not trading for the acquisition of gain by its members." I would like to ask the Minister whether such a company is in fact covered.
Companies (Amendment) Bill, 1985: Committee Stage.
The company which is trading for eventual gain would not come under this subsection. What we are trying to achieve here is clarity and definition. The company you mentioned is one that would be intending to have gain for its members ultimately. The definition we have used here is quite clear: it means a company not trading for the acquisition of gain by the members. The company you raised, by way of example, would be intended for gain by the members either by way of the distribution of profit or by a method of acquiring a capital gain. So that would not be covered by this. What is intended here is that in no circumstances could the members gain either by acquisition of profit or by acquisition on distribution of capital.
I understand what the Minister says and, of course, I agree with him that is a correct objective. But that is not what it says. It says that any company not trading; it does not say a company whose intention is to trade. It does not say anything about its intention. It just says a company not trading for the acquisition of gain. It does not say anything about the objects of the company. It does not make any comment like that. Irrespective of the objective of the Minister or the intention of the Minister and the draftsman, the effect of that would be, in my view, that this Act would not apply to a company which for the time being was not trading for the acquisition of gain by members. Therefore, it would have to fall back to the provisions of the 1963 Act. That is my interpretation of it. I know that is not the Minister's interpretation. I want to warn the Minister because it is only fair that he should be warned. I am not really upset about it one way or the other. My interpretation of it is, speaking from the limited knowledge I have of the situation, that, irrespective of his intention, a company like the example I gave, not for the time being trading or which had never traded for the acquisition of gain by members, is not covered by the Act.
The words in section 2 (1) (a) must be taken in their entirety. "A company not trading"— a dormant company —"for the acquisition of gain by the members." It must be read in its entirety. If it is the intention of a company to trade with the eventual objective of getting a gain for its members, then it is not excluded under this provision. That is clear. It was a matter of definition. We did discuss it in the Dáil. We are satisfied that the words here are clear enough to have effect in law.
We will agree to differ on it. I do not agree. The example of the company I have given will not be covered by this Act. The Minister has to go by his advice. I am not upset one way or the other about it.
Why is it intended in section 2 (2) (c) that hire purchase companies and credit-sale companies should be excluded from the Act? I understand about banks, but these are not really banks. Why is it intended that it should not apply to a hire purchase or a credit-sale company?
The type of companies mentioned by the Senator are primarily covered by a different directive governing banks and other financial institutions. It is because they have their own directives that they are not encompassed in this directive, which is primarily intended for limited companies in the trading and commercial sector rather than the financial sector.
I accept that. I refer again to section 2 (1) (b). The Act shall not apply to: a company to which subsection (4) (c) of section 28 of the Principal Act applies. Section 128 (4) of the Principal Act, which is the Act of 1963, gives a list of companies to which the section shall not apply. It does not say the section shall apply. How does that figure then with a company to which section 28 (4) (c) of the Principal Act applies, because all section 128 (4) does is to list companies to which something shall not apply? Between those two I am terribly confused. In the Principal Act you have a list of things to which earlier provisions do not apply. It states in this Act that any company which falls within section 28 (4) (c) of the Principal Act, but there are no companies falling within that. All it is is a list of companies which are excluded from the operation. Surely it should say a company which is excluded by virtue of section 28 (4) of the Principal Act? If you look at section 128 of the Principal Act, perhaps I am looking at the wrong section, subsection (4) of that refers to "this section shall not apply to". We are talking only about (c). Surely what we should say is "a company which is of a type mentioned in section 28 (4) (c) of the Principal Act"?
I think it is quite clear that this Act does not apply to a company to which section 128 (4) (c) of the Principal Act applies:
a company, not having a share capital, which is formed for an object that is charitable and is under the control of a religion recognised by the State under Article 44 of the Constitution, and which exercises its functions in accordance with the laws, canons and ordinances of the religion concerned.
It is quite clear that we are exempting religious type companies. That is the objective and that is fairly clear.
I agree with the Minister that the operation will have the effect which he says. I think it is the most tortuous way of doing it. I just do not understand how anyone would draft something like that. I do not think the Minister understands it either.
I do. I have been through the Dáil with it.
You understand why people should draft that way?
I cannot go into the mind of the draftsman. I am sure he had good reason.
I am sure he had good reason. Would the Minister like to inform the House why he thinks this Act should not apply to religious companies and also of course charitable companies which are covered by subsections (4) (c) and (5) (a) of section 128 of the Companies Act, 1963 which states:
The Commissioners of Charitable Donations and Bequests for Ireland may, if they think fit, by order exempt, either altogether or for a limited period, from the application of this section a specified company, formed for charitable purposes, not having a share capital.
The company for charitable purposes having not had share capital, would the Minister remind the House why he thinks those companies should be exempt?
The directive covers commercial trading companies. The companies being excluded here are religious companies and by any stretch of the imagination could not be defined as trading for profit or gain by their members. It would appear to be quite outside the scope of the Bill. It is not my intention to have such religious companies encompassed by the Bill. Religious companies are known as custodian trustees. Their usual function is to hold diocesan property in trust, and indeed such companies are already excluded from the requirement of publishing accounts under the Companies Act, 1963, on the basis that the nature of their activities is sufficiently outside normal commercial activity so as to justify their exclusion. It is considered that their exclusion from the scope of this Bill is even more strongly justified in view of the more onerous disclosures required under the Bill. We are not talking about commercially trading companies and it is that to which we are addressing our minds in the context of the directive.
I am not very concerned about the exclusions under section 2 (2) (b) but I am a little more concerned about paragraph (c), where, in addition to the religious exclusion, there is exclusion of companies formed for charitable purposes. In addition, section 2 (2) (c) covers not the religious aspects, to which we have already referred and which are covered by section 2 (2) (b), but also the charitable aspect. Many of these charitable companies are fairly substantial enterprises in their own way. It is fair to say that large sums of money pass through their hands. Public accountability, in addition to accountability to the Commissioners of Charitable Donations and Bequests of Ireland, is to be welcomed. I refer specifically to those covered in paragraph (c) rather than those in paragraph (b). Those covered by paragraph (c) are related and referred to in section 128 (5) (a) of the Principal Act, which states:
The Commissioners of Charitable Donations and Bequests for Ireland may, if they think fit, by order exempt, either altogether or for a limited period, from the application of this section a specified company, formed for charitable purposes, not having a share capital.
I am not arguing at all about the religious aspect of it. Having recognised what the Minister has said, that it is not necessarily within the directive, we are not confined to the directive because we can extend it. As far as I am concerned, companies formed for charitable purposes should not be excluded from the report.
The companies in question include organisations which assist the sick and the infirm and, as with religious companies, the exemption proposed relates to those or to such companies which do not have a share capital.
Under section 128 (5) of the Companies Act, 1963, the Commissioners of Charitable Donations and Bequests for Ireland may, by order, exempt such companies from the requirement of publishing accounts. Where such an order is granted a sealed copy thereof must be sent to the Company's Registration Office and such an order may be revoked at any time by the commissioners. This facility was included in the 1963 Act in recognition of the special non-commercial nature of the activities of the companies.
There are only 23 charitable companies at present exempted under section 128 (5) of the Companies Act, 1963. Since the Commissioners for Charitable Bequests may not be renewing these orders as they expire, the numbers exempt will be declining.
I share, to some extent, the thrust of what the Senator has said in respect of public accountability. From what I have said over a period of time, these exemptions will diminish.
This is another most tortuous section. The Minister had an opportunity of going through it in the other House and I would like if he would bear with me if I make some errors in trying to summarise the position.
As I understand it, a new list of provisions relating to the method of preparation of accounts is laid down in section 3 of this Bill. They are being superimposed upon the requirement of section 148 of the Companies Act, 1963, which, however, is not repealed. The extraordinary situation is that one has two sets of requirements running side by side. Having thought about it, the 1963 Act covers, for example, unlimited companies. Some residual obligation must be kept for unlimited companies and, therefore, it is not possible to repeal sections 148 or 149 of the 1963 Act and replace it with this one. It appears to me that, effectively, one is talking about the reenactment of section 148 and section 149 in this particular case. If I am wrong in what I have said I am sure the Minister will correct me.
I would like to draw to the attention of the house the latter end of subsection (1) of this section, which appears most extraordinary. It deals with what should be in the profit and loss account and I quote:
...and, accordingly, in the Companies Acts, 1963 to 1982, and the Companies (Amendment) Act, 1983, in relation to a company to which this Act applies—
(i) references to the said section 149 shall be construed as references to subsection (5) and, in so far as it relates to the said subsection (5), subsection (7) of the said section 149 and to the provisions of this Act corresponding to the other provisions of the said section 149, and
In other words, large portions of section 149 of the 1963 Act are being taken out. They are not being repealed. Their applicability to companies covered under this Bill is being removed except in so far as it relates to subsection (5) of section 149. I am not actually disputing the details of it. Surely, it would be much better legislation, if one is preserving part of section 149 under the 1963 Act, to reenact section 149in toto, including subsection (5) and subsection (7) in so far as it relates to subsection (5), and have a completely new section 149 incorporated in this Bill from beginning to end relating only to companies covered by this Bill.
What we seem to be doing is this. Without specifying, we are talking about provisions of this Act corresponding to the provisions of the section 149 of the 1963 Act. That is very sloppy work. A person who tries to work out what the obligations are under the Act and who reads section 149 will find it very difficult to understand what the obligations are. In detail, of course, the obligation to have a true and fair view of the accounts will be straightforward. This convoluted section at the end states that you disregard section 149 except for subsection (5) but you do not disregard subsection (7) in so far as it relates to subsection (5) which you are already told not to disregard. That kind of drafting is enough to drive anyone through the roof. Nobody will be able to understand what all the company legislation is about. That is where the problem arises and I would like to have the Minister's view on it. I know it is a difficult point. I appreciate that when it is difficult for me to grasp it may be difficult for the Minister and for everyone else to grasp but imagine how difficult it will be for someone who just picks up the legislation to grasp it.
I accept that the references to which the Senator has referred appear to be complicated. However, the accounting profession have examined the Bill in its entirety and understand it clearly. When one reads the Finance Bill, one gets tied up far more than is the case on this Bill.
The wording to which the Senator refers is a catch-all provision to ensure that where section 149 and indeed the Sixth Schedule to the Companies Act 1963 are referred to in the 1963 Act and subsequent Acts, they shall be taken to refer, in the case of limited companies, to the corresponding provisions of this Bill, that is section 3 of and the Schedule to this Bill, in addition to — they are the important words — subsections (5) and (7) of section 148 of the Companies Act, 1963. What we are doing is saving subsections (5) and (7) of the Act. I know it is complicated and appears cumbersome but it is the easiest way of continuing the provisions.
I do not disagree with what the Minister of State is attempting to do and there is no point talking about the detail of it because I agree with that but it is horrendously complicated.
For a lay person, yes.
The Minister of State quite rightly referred to Finance Bills and to income tax legislation. To an increasing extent that is being helped by the production of the income tax Acts in loose-leaf form which, if it is kept up to date, means we have all the legislation together. Unfortunately in respect of company legislation that is not the position. We are looking at Acts which are becoming progressively more difficult to understand. I do not want to press the Minister any longer on that but I have a question on subsection (4).
Perhaps this Bill will lead to a whole new generation of employment for accountants.
Perhaps it will but as I have left that profession——
I take the Senator's point. I am not in favour of complex legislation if it can be avoided. On Second Stage the Senator referred to the possibility of having a consolidation Bill. My reply was that because there are other Bills and directives in the offing which will cover the Companies Acts it is not possible to deal with a consolidation Bill at this time. The attitude in Europe and in this country to company law limited liability is being radically changed and until the dust settles and a clear philosophy is established it is simply not possible to draw up a consolidation Bill. As a result of that, we have saved two provisions of the 1963 Act and, while it is cumbersome, this is the only way we could possibly do it.
The Minister of State referred to lay people understanding any section of this Bill. We found this in another Bill yesterday. Where previous legislation is referred to why not include the relevant section in the new Bill? In that way lay people might be able to understand it. Is it intended that only experts should understand company law legislation? Surely Bills should be drafted so that we understand what the said sections are about.
I always listen to Senator O'Leary because he understands what he is at. Surely those of us who do not understand company law in full are entitled to have before us legislation which we do understand.
In fairness, we have tried to make the Bill as straight forward as possible but because of the number of Acts involved it is necessary to make references backwards and it is also necessary to use technical terms. These terms are understood in the accounting profession and by legal people. I understand that a consolidation Act was produced in this area in England. It took three years to complete and contains 747 sections.
They are not always right over there.
I am not saying that. Trying to produce a consolidation Bill at this time would be extremely cumbersome. What we are trying to do here is to give effect to the Fourth Directive from the EC in regard to companies. We have done a good job and as simple a job as is possible given the responsibilities on us.
Section 3 (4) refers to subsection 1 (b) of this section and states that every balance sheet of a company must give a true and fair view of the state of the affairs of the company and also that the requirement for a true and fair view overrides the requirements of sections 4 and 5 in the Schedule to this Act. With regard to the companies which publish their accounts in full other sections will allow a certain reduction in the amount of publications and there will be a problem in that area which we will talk about at a later stage. Is the Minister comfirming that the format laid down in this Act has to be looked at always in the context of giving a true and fair view and that whatever additional explanations are necessary have to be given in order to conform with the true and fair view requirement? Subsection 1 (c) seems to cover that where it says where a balance sheet drawn up in accordance with paragraph (a) of this subsection would not provide sufficient information to comply with paragraph (b) of this subsection to give a true and fair view any additional information shall be provided in that balance sheet or profit or loss account or in a note to the accounts. Would the Minister confirm that if the format of accounts which are required to be filed under section 4, which is referred to here in subsection (4), is not adequate to give a true and fair view it will also be necessary in that case to give whatever additional information is necessary on the balance sheet, the profit and loss account or indeed in notes attached to the accounts?
I want to make it clear that the concept of a true and fair view of the state of affairs of the company is the central thrust of and the philosophy behind the Bill. Whether it is in relation to figures under any format in the profit and loss account, in the balance sheet or in the notes, everything must be based on the principle of giving a true and fair view of the company's affairs.
Section 3 (1) (c) covers that in respect of notes to the accounts, which was a specific point made by the Senator. Subsection (4) is a catch-all phrase, again simply to reinforce the concept of a true and fair view. It is the anchor on which this Bill is firmly set down.
I understand that and agree with it. Can the Minister of State explain why subsection (4) states that subsection (1) (b) of the section overrides the requirements of sections 4 and 5 but not the requirements of sections 10, 11 and 12 of the Bill? That would seem to suggest that in so far as the application of section 3 is concerned, sections 4 and 5 have a status which sections 10, 11 and 12 do not have. When you come to sections 10, 11 and 12 you will find that it also hedged around. The Minister has decided not to include under subsection (4) the requirements of sections 10, 11 and 12. I emphasise that subsection (1) (b), which deals with the true and fair principle applies to sections 4 and 5 and by implication that means it does not apply to sections 10, 11 and 12. For the benefit of other Senators, sections 10, 11 and 12 relate to the limited forms of accounts which small and medium size companies will be able to publish. Sections 4 and 5 are the full accounts to be published by all other companies. This section applies to every company, small, medium or large. Every company of any size must conform with section 3 leaving aside the question of limited liability companies. That is a true statement.
That is true.
We reiterate that by saying that subsection (1) (b) of this section overrides the requirement of sections 4 and 5 and the Schedule to the Act. By implication we are really saying that it does not override the requirements of sections 10, 11 and 12 of the Act and the Schedule which is appropriate to those sections. I should like to here the Minister of State's views on that.
I will be a bit simplistic by referring to section 3 (1) (b) and it states quite clearly:
every such balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of its financial year and every such profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year.
Even if the exemptions as mentioned in sections 10, 11 and 12 are there or if the balance sheet is reduced in its presented form, the true and fair view applies. Subsection (4) states positively that subsection (1) (b) of this section overrides the requirements of sections 4 and 5 of, and the Schedule to, this Act. In other words the true and fair view prevails. In section 10 it states:
Notwithstanding paragraph (a) of section 3 (1) of this Act, but subject to paragraph (b) of the said section 3 (1), the directors of a company treated...
We will deal with that when we come to it.
Section 11 is similar. It states:
Notwithstanding paragraph (a) of section 3 (1) of this Act, but subject to paragraph (b) of the said section 3 (1), ...
Again it restates that a true and fair view must prevail.
The Minister of State seems to be under some misapprehension. Every balance sheet of a company must give a true and fair view under section 3. The Minister of State must recognise that every company will now have two balance sheets, a balance sheet which is drawn up for the purpose of complying with the Companies Act and a balance sheet which conforms with the format laid out in either sections 4 and 5 or in sections 10, 11 or 12.
What this section is saying is that you can have all the balance sheets you like which conform with section 3 but any additional balance sheets, the ones filed in the Companies Office, which could be different balance sheets because they would be in a different form, must, by virtue of subsection (4), also give a true and fair view. Is that the case? If that means anything why is it not extended to sections 10, 11 and 12? If it means nothing then we can take it out. If the true and fair view is meant to extend to sections 10, 11 and 12 — I do not think it can extend to these sections — why is there not a subsection (5) or why is not subsection (4) drafted in such a way that it says: subsection (1) (b) of this section overrides the requirements of sections 4, 5, 10, 11 and 12 and the Schedule to this Act and all other requirements of the Companies Acts? Why is it necessary to re-emphasise it? What is the legal effect of this section? If this section was not there what would be the legal effect? If it has no effect and if it is intended by the Minister that accounts under sections 10, 11 and 12 should also give a true and fair view, will the Minister of State please explain why it is not mentioned?
I disagree with the Senator's suggestion that there is need to make reference to sections 10, 11 and 12. Sections 10 and 11 specifically refer back to section 3. In relation to sections 4 and 5, we put in a catch-all subsection (4) to ensure that in any form of the accounts presented and in relation to the accounting principles used, section 3 is overriding. In other words, we are reinforcing the concept of a true and fair view. In sections 10 and 11 we have again a reference "subject to paragraph (b) of section 3 (1)", in other words, though small companies will not have to put in a profit and loss account they will have to put in a balance sheet in reduced form and that reduced form must give a true and fair view of the state of health of that company.
In relation to medium-sized companies though there would be certain telescoping of their profit and loss accounts and balance sheets, they must give a true and fair view of the affairs of the company. There is no duplicity in the references forward or backward. Section 3 is the anchor of the Bill. You cannot depart from it.
With regard to the various categories of companies, the Minister of State might like to give us information on that. I am aware of what the Bill says with regard to the qualification for a small company, that the balance sheet total for the year must not exceed £1,250,000, the amount of turnover for the year should not exceed £2.5 million and the number of employees in the company should not exceed 50. Would the Minister tell us in respect of that and also in respect of a medium-sized company, where the relevant figures are £5 million, £10 million and 250 employees, what the maximum qualifications are as permitted under the Fourth Directive?
The specifications for a small company as outlined in subsection (2) of this section are the maximum allowed under the directive and that will be reviewed in 1988. We have taken the maximum figure.
What about the medium-sized companies?
The maximum figure, too.
That is very wise and the Minister is to be congratulated on it. How are these expressed? I am surprised they are so even. If they are in the directive, one would expect them to be expressed in ECUs or something which would hardly come out at exactly £2.5 million.
There is a 10 per cent leeway, so if you translate the ECUs back to punts you have a 10 per cent allowance.
Fair enough.
This is to be the nub of our discussion on the Bill during the course of the day. It relates to the exemptions for small and medium-sized companies which are a little confused. The Minister of State quite rightly pointed out when I was referring to section 3 (4) that the start of this section 10 makes everything which is subsequently permitted subject to paragraph (b) of section 3 (1) which deals with a true and fair view in respect of a balance sheet.
The balance sheet will be prepared in the normal way and will give a true and fair view. It will be available to all the people to whom it is normally available. Anybody who has a debenture with the company will obviously see the balance sheet and anybody who is in the normal course of events, able to see a balance sheet will be entitled to see it and that balance sheet will have to continue to give a true and fair view of the company. The purpose of the exemption is to aid and assist companies. The view has been expressed — it is one I share — that the very fact of summarising the balance sheet in the case of small and medium-sized companies must automatically remove it from the true and fair view. Before a balance sheet can be prepared in such a way as to give a true and fair view at present — forget the amendment to the law — it would have to contain considerably more of the information which is envisaged under the small companies format for filing in the companies registration office. The purpose of my amendment is to clarify that but this is a good time to tackle it. The actual process of summarising it means it cannot give a true and fair view. We are saying, on the one hand, to small companies, "you need not file your complete balance sheet. In fact, you do not have to file your profit and loss account at all." On the other hand we are saying that that truncated balance sheet must present a true and fair view of a company. That is a contradiction in terms. I do not think it is possible for such a balance sheet to continue to show a true and fair view of the company's affairs, or even to take advantage of the summarising that is allowed. In fact, I do not think it is possible for a balance sheet to give a true and fair view of the state of affairs of a company without a profit and loss account being attached. I do not know how you could have a true and fair view of the state of affairs of the company as required in paragraph (b) of section 3 (1) which states:
every such balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of its financial year and every such profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year,
They are inter-dependent. I do not think it is possible to pick up a balance sheet and say that it gives a true and fair view unless you see the profit and loss account. One of the important things which is needed in assessing the worth of a company and getting a true and proper view of it, is the profit for this year and last year. Part of the process of assessing in a true and fair way the health of a company is to look at the profit and loss account.
It will be impossible in the truncated form to give a true and fair view. I said to the Minister on Second Stage that I think some people might exaggerate the significance of that but the problem which will arise in this regard is that the truncated accounts will be filed and everybody will be happy. Unfortunately, as I pointed out to the Minister, some aggrieved party who has depended on this will take action as some time in the future. That will lead to a very serious situation. A true and fair view of the state of affairs of a company is not possible unless you have both the balance sheet and profit and loss account. It is not possible where you have a truncated balance sheet because all you will be offering those people will be a truncated balance sheet in respect of a small company. No matter what notes you have unless you publish the whole accounts you cannot give a true and fair view of a company's position with only a truncated balance sheet. Therefore, some amelioration of that obligation has to be devised by the Minister. Otherwise the position will be absolutely untenable.
We do not set out in the Bill to impose an undue burden on small companies.
I accept that.
Small companies will, of course, be required to draw up their accounts and have them certified in the normal course. We are requiring them to lodge in the Companies Registration Office a truncated version — the phrase used by the Senator — of the balance sheet. I do not think it is necessary for a small company to include a profit and loss account in order to get a fair view of the company's position. I would suggest that the shareholders' funds would be an indication of what their profits were in the previous year. The accounts would have to be accompanied by a directors' report and by an auditor's certificate. I do not think we should be going overboard in requiring great detail from small companies and I do not intend to do so.
The Minister is saying exactly what I believe. That is not the point I am making. The Minister is a businessman and I asked him whether in assessing a company he would be happy that a balance sheet only would give a true and fair view of the affairs of the company. You have nothing but a balance sheet, another balance sheet and another balance sheet. Would that give a true and fair view of the company? Could it possibly do so — even if it was a full balance sheet? Would the Minister be happy to act as a businessman on the basis of that information? That is what we would be requiring — it is more information than we would be requiring — from the general public to act on in relation to a company. What we are proposing to give them is not the balance sheet of the company as it exists but a truncated version of it. I am in favour of that. I do not think they should get the full thing but I do not think we should put an obligation on the company or the auditor of the company to state that that is a true and fair view of the company. We should place an obligation on the directors and the auditors to ensure that it is a proper summary of a balance sheet. That is all we should insist on. We should not put an obligation on them, which I believe is totally incapable of being met, that is that they take a full set of accounts, knock off the profit and loss account, summarise the balance sheet and in some mystical way that summary of one portion of the accounts of the company continues or will continue to give a true and fair view of the affairs of the company. It is not realistic. It is not going to be a true and fair view.
Two attitudes can be adopted in those circumstances by the directors and auditors of the company. They can say: "We cannot conform with this without publishing the full accounts and going far beyond what is required by the Act." Alternatively, they can conform strictly to the format here but I believe that by doing so they then lay themselves open to personal actions as a result of them representing that this format continues to give a true and fair view of the company. It could not possibly continue to give a true and fair view of the company. For that reason I ask the Minister to seriously consider the requirements he has put in in section 10. On the one hand he is saying he does not want the small companies to have to file too much — and I agree with that — but on the other hand he is drafting the regulations in such a way that if they do not go the whole hog and find much more than the minimum they are breaking the law and are leaving themselves open, not so much to prosecution by the Registrar of Companies because I am sure he would be quite happy with it but they are leaving themselves open to actions from disgruntled creditors of the company who, are relying on the truncated balance sheet as having given a true and fair view. If they are subsequently disappointed they will have an action against the directors personally or the auditors. There is no way that these truncated accounts could possibly give a true and fair view of what is the state of the affairs of the company.
I must differ with Senator O'Leary on a point of principle. If a limited company comply with the Act they comply with the Act and therefor cannot be brought to court for non-compliance with the Act. If the directors misinform or the auditors are not prepared to give a proper certificate then that is a different matter. In relation to a small company the requirements under this Bill are quite clearly laid out. The responsibility is on the board of directors to submit a report and the responsibility on auditors is to certify the accounts as a whole. That requirement is still there. What is required to be lodged in the companies office would still give a true and fair view of a company's affairs. In section 3 (1) (b) it is a balance sheet itself that is relied upon to give a true and fair view of the state of affairs of a company and in relation to profit and loss we provide that it shall give a true and fair view of the profit and loss of the company for the financial year. They are two distinct requirements. We are talking about the state of a company which will be reflected in their balance sheet. I accept that what we require from small companies is less than the full figures which would apply to a large company. What is required in the Act is sufficient to give a true and fair view of a small company. Over a period of time, where one can compare one balance sheet with another it would be possible to extract the trend, the direction in which the company are going. I have facilitated small companies in not having to compile a comprehensive set of accounts but I would contend that what we are requiring of them in relation to the balance sheet together with the report of the directors and certification by the auditors will be and is sufficient to give a true and fair view of a company's state of affairs.
Leaving aside exceptional circumstances which are covered in the Bill, I am talking about the general body of companies, whether they are small or medium-sized companies. Is the Minister of the view that as regards the vast bulk of those small companies the summarised balance sheet as required will without further qualification give a true and fair view of the company?
At the moment nothing is required. We are moving into a new phase in relation to company accountability and the publication of accounts. I would suggest that what we are requiring in this Bill will be sufficient for those interested in the affairs of the company to acquire a good knowledge of the company's state of health and over a period, when one compares balance sheets, it will allow all people interested in the company's affairs to get a good view of the company as reported by the board of directors and by the certification process of the auditors.
I do not feel it is incumbent on me to ask smaller companies anything more than what we are asking in the Bill.
I am not suggesting we should ask more. The Minister seems to be arguing about something else, I do not want that at all. I want the Minister to act on small companies precisely in the way he is proposing. I would like the Minister to recognise in this Bill that in summarising the full balance sheet of the company — and summarising in respect of medium-sized companies the profit and loss account — that in itself may distort the full requirement of section 3 (1) (b). I do not think any argument has been put up by the Minister against that fact. I am not interested in the Minister looking for more disclosures, I want the legislation to be framed in such a way that it would provide protection for those people who are genuinely carrying out their duties, whether they are directors of the company or the secretary or auditors. I believe it is impossible that an abridged balance sheet can give a true and fair view in precisely the same way as a full balance sheet.
I am satisfied that the philosophy in the Bill as contained in section 3 (1) (b) can be sustained for small companies in relation to the publication of their balance sheets.
Could the Minister look at subsection (1) again, leaving aside that other section which I find totally unsatisfactory? I am not saying I am right in my point of view. I think my view is entitled to a rational explanation which I do not think I am getting. Perhaps the Minister would explain to us what would actually be required in respect of small companies. It says that the directors, pursuant to section 8 (1) of this Act:
may draw up an abridged balance sheet showing only those items preceded by letters or roman numerals in Formats 1 and 2 of the balance sheet formats set out in the Schedule to this Act.
I am looking at the balance sheet Format 1 and it contains only items preceded by letters or roman numerals. Am I right in saying that in the case of the balance sheet under Format 1 what would be required in respect of a small company is fixed assets, intangible assets in total, tangible assets in total, financial assets in total, stocks in total, debtors in total?
That is under fixed assets.
Could I give the Minister an example from that of why I think that a true and fair view may not be possible. If you look under the heading Stocks, you see it is divided into the following: raw materials and consumables, work in progress, finished goods and payments on account. Leaving aside the payments on account which is a specialist thing which applies more to builders and contractors than to anything else, the Minister will be aware that of crucial importance in deciding on the solvency of a company — not necessarily on its profitability — is whether their work in progress or finished goods has increased in size. The Minister will realise that in considering the balance sheet of a company, one year with the other, with stocks more or less the same size, a crucial difference is going to be whether it was in raw materials the stocks were high, in work in progress or finished goods. From my experience when I was an accountant, one of the most significant indicators of trouble in a company was an increase in finished stocks. That showed that the company were failing to sell their goods. I am not suggesting that more information should be made available but that a division of the stock between work in progress, raw materials and finished goods is a necessary prerequisite for a true and fair view of a company. For any company who will get themselves into difficulty over a period of time and where the balance of the stock, which may have gradually increased significantly has shifted from being raw material stock to finished goods — that will be a significant factor. A company cannot show a true and fair view of their position without disclosing on a year-by-year, ongoing basis the relative value of their stocks under these headings. What you would expect in a company who are prospering is reasonably high and buoyant work in progress and raw material stocks enough to keep them going for sometime in the future, depending on the nature of the trade, and small finished goods as they get stuff out. What you would expect in a company in trouble is very little raw materials, because they cannot afford to purchase. There might be very little work in progress because they were under pressure for cash and high finished stocks. The total of the stock in both cases might be the same but to say that the total of the stock gives a true and fair view is not sustainable.
I understand that if the position got to an extreme the auditors would have to draw attention to that by way of a note but there are going to be gradations and graduations within that. As a general good principle, if a company do not show a detailed analysis of stock, at least under the headings as required by the full disclosure, they cannot continue to maintain that the accounts which are truncated and which omit that continue to give a true and fair view of the company.
I do not want to go into the realms of speculation as to what would constitute a company being in difficulty or otherwise. In relation to a small company — I am talking about the balance sheet — the balance sheet total should not exceed £1.25 million and the turnover in the year is £2.5 million. If you look at the balance sheet total of £1.25 million we have two essential elements, one is fixed assets which must be specified and the other is current assets which must be specified. You cannot take one figure and say that the company will hinge on the amount of finished stock and say that that will mean the company are going or gone. The turnover must be shown, the comparable figure for the prior year must be shown. This would give an immediate comparison on the balance sheet. When one takes into account what is required on the liability side of the balance sheet, that figure would show, say under H where you have a capital and reserves, so that you should be able to get a clearer view of the direction in which a company are going.
Another point I will make is that the directors are still statutorily required to make the annual report and that must also be correct and true. The auditors must also certify the accounts. There is the ultimate requirement that the auditors can qualify accounts and to what extent they can qualify accounts will depend on the state of health of the company. For instance, if they feel that the company on a going concern basis is not to their satisfaction they will qualify the accounts and enter into their certificate a statement in respect of a going concern. The problems raised by Senators in relation to small companies are there — I accept that. It may be possible that a company may not be going well but our safeguard mechanism in the balance sheet and in the directors' report and the safeguard mechanism of certificates to be issued by the auditor must give support to the accounts procedure.
All I can say to the Minister is that he has absolutely failed to convince me that there is not a problem here. If I was on the Opposition side I would certainly oppose the section — not that I disagree with it. I agree with it, but I think that the requirement that it should be subject to paragraph (b) of section 3 (1) of this Bill is not sustainable. It is not workable or practical. I cannot bring the matter any further.
Everything I said about section 10 applies with slightly less emphasis. Because the disclosure requirements of medium-sized companies are greater than the disclosure requirements of small companies, the amount by which the abridged and abbreviated profit and loss account will continue to give a true and fair view is correspondingly reduced but the difficulty I believe remains. The difficulty remains and I think that the Minister should have in section 11 (1) qualified the applicability of section 3 (1) (b) in some way just as he should have done it in subsection (2).
Again we are talking about the filing requirements. We are moving a step upwards in disclosure in so far as the medium size company will have to include their profit and loss account. I am sorry to have to diasgree with the Senator. I believe that the thrust of section 3 can be maintained.
Would the Minister like to indicate to us what is covered by paragraphs 24, 26, 27, 33, 34 and 44 of the Schedule? Those are the paragraphs which we will continue to apply.
Specifically in response to the Senator, paragraph 24 is a statement of the accounting policies adopted by the company preparing the accounts. Paragraph 26 indicates particulars of share capital and redeemable shares. Paragraph 27 covers particulars of shares allotted in the year of accounts. Paragraph 33 covers particulars of provisions for taxation. Paragraph 34 covers precise details of debts and repayments periods. Paragraph 44 covers the basis of conversion used for foreign currencies and prior year accounts figures.
I think that is essential. I support the Minister.
I notice that section 14 deals with the question of the directors' report regarding acquisition of the shares for the company. Does this requirement apply to all the companies, small, medium and large? I think it probably does.
Yes, it does.
Would the Minister like to explain to us the circumstances in which it is possible for the company to acquire shares under section 41 of the Act of 1983? It says:
Where in any financial year of a company, shares in the company are acquired by the company by forfeiture or surender in lieu of forfeiture, or are acquired by the company in pursuance of section 41 of the Act of 1983....
The circumstances in which such acquisitions are permitted and where such are required by the company in pursuance of section 41 of the Companies (Amendment) Act, 1983, are: (1) in the form of redemption and redeemable preference shares; (2) in the form of reduction of capital duly made; (3) in pursuance of a court order under section 15 of the Companies (Amdnement) Act, 1983, that is, purchase of shares from those who dissent from a special resolution to change the company's status from a public to a private company, or in pursuance of a court order under sections 10 and 205 of the Companies Act, 1963, that is, the purchase of shares from members who dissent from a special resolution to alter the company's memorandum and shares held by a minority of members who complain of oppression; (4) by forfeiture or surrender in lieu of forfeiture in pursuance of the articles of the company for the failure to pay any sums repayable on those shares.
I move amendment No. 1:
In page 18, between lines 6 and 7, to insert a new subsection as follows:
"(6) In this section ‘properly prepared' in relation to accounts shall mean that the accounts in question are consistent with the accounts prepared pursuant to section 3 of this Act. Any summary of or omission from the accounts prepared pursuant to section 3 of this Act necessary for the purposes of conforming with the formats for accounts prepared pursuant to sections 10 to 12 of this Act shall not mean that the accounts in question are not properly prepared."
This is intended to ameliorate in some way the serious effects which I think would follow the enactment of this legislation in respect of the auditing profession. I recognise that the Minister and I already have had a long argument as to whether abridged accounts can give a true and fair view. The Minister has a different view from mine on it. On the previous occasion the discussion was in relation to the duty of directors. What we are talking about here is in relation to the duty of auditors. In order to argue for the amendment it is necessary to review what is contained in section 18 of the Bill. I hope the Leas-Chathaoirleach will permit me to make that review of what is in section 18 because to move the amendment without doing that would be pointless.
Section 18 requires that a balance sheet and profit and loss account for small and medium-sized companies should be annexed to the return of the Companies' Office and should be signed as required by section 156 of the Principal Act and contain a statement required in subsection (2). The statement must be as follows:
A copy of the balance sheet prepared pursuant to any of the provisions of section 10 to 12 of the Act must contain a statement by the directors to the following effect: (a) that they have relied on specified exemptions contained in sections 10 to 12 of the Act, and (b) they have done so on the ground that the company is entitled to the benefit of those exemptions as a small or as a medium sized company. In other words, the directors must certify that they have relied on the exemptions because they were a small or medium-sized company.
In addition to that, it makes clear that there is no obligation, in the case of a profit and loss account or a balance sheet prepared for a medium-sized company which it is proposed to deliver to the Registrar of Companies under sections 10 to 12 of this Act for it to be accompanied by the auditor's report, even though it would have to be accompanied by the directors' report. But it lays down that it shall be accompanied by a special report of the auditors. Having given the ordinary report the auditors must then give a special report where some exemptions are being claimed. It says that it shall be accompanied by (a) "a copy of the report made by the auditors of the company under subsection (4) of this section on those accounts (b) and a copy of the report of the auditors under section 163 Principal Act." Sections 1, 2, 3 and 4, as far as auditors are concerned, impose a new obligation which boils down to what is contained in subsection (4). Subsection (4) contains the following requirement:
Where the directors of a company propose to annex to the annual return accounts for any accounting period prepared pursuant to sections 10 to 12 of this Act and the auditors of the company are satisfied that the directors of the company are entitled, for that purpose, to rely on exemptions specified in sections 10 to 12 of this Act,
This is the part we are dealing with in the amendment—
and that the accounts have been properly prepared pursuant to these provisions, it shall be the duty of the auditors of the company to provide the directors of the company with a report in writing stating that, in the opinion of the auditors of the company the directors of the company are entitled to annex those accounts to the annual return and that the accounts so annexed are properly prepared as aforesaid.
"Properly prepared" has not been defined. It would appear that in the absence of a definition "properly prepared" refers to and reimposes the obligation on the auditors to certify that the abridged accounts give a true and fair view. I should like the Minister, when he is replying to me, to say whether he agrees with that interpretation. Does "properly prepared" in that context require the auditors to be satisfied that the accounts, as prepared under the restricted formats of this Bill, do give a true and fair view? In other words, is "properly prepared" the same as a true and fair view?
I am concerned if that is the case. I am also concerned about the auditors being satisfied about the directors of the company, but that is a different matter, which can await the actual section itself. In order to put the matter beyond doubt, and in order to clarify the position of auditors who, after all, will be dealing with a variety of companies, and will be much more likely to be sued by the general public that the directors would, I should like it to be clear what "properly prepared" means. Therefore, I move the following amendment and it is proposed to add it as a new subsection under subsection (5), in section 18:
In this section "properly prepared" in relation to accounts shall mean that the accounts in question are consistent with the accounts prepared pursuant to section 3 of this Act ...
First of all, they will have to be consistent. In other words, they cannot be manufactured, they will have to be consistent. That does not get over the other point:
(6) Any summary of or omission from the accounts prepared pursuant to section 3 of this Act necessary for the purposes of conforming with the formats for accounts prepared pursuant to sections 10 to 12 of this Act shall not mean that the accounts in question are not properly prepared.
Just because it is summarised does not automatically mean the accounts "are properly prepared." I could rephrase it to say that any summary or omission from the ordinary accounts of the company necessary for the purpose of conforming to the restricted formats, that shall not mean that those accounts in question are not "properly prepared."
If, in good faith the auditors take the full account of the company and they apply the new format, in those circumstances we should protect the auditors from being the people who would effectively underwrite the affairs of the company in filing those abridged accounts with the company's office. In the absence of that, in theory both the directors of the company and the auditors of the company will be liable at civil law. We are not talking about criminal law. We are talking about civil law. They will be liable in tort if there is any misstatement or anything which could be construed to be a misstatement or anything which could be construed not to give a true and fair view. While both of them are theoretically liable, in point of fact in a company which has gone out of business, very often only the auditor is a mark. For that reason the auditor is the one who will end up carrying the can. For that reason this clarification of the duty of the auditors with regard to that aspect of the section, that is, the aspect of the section which deals with accounts being "properly prepared" is one which should find favour with the Minister.
I listened to the Senator quite closely. In relation to abridged accounts being submitted, this is what we are talking about. The section states:
...it shall be the duty of the auditors of the company to provide the directors of the company with a report in writing stating that, in the opinion of the auditors of the company, the directors of the company are entitled to annex those accounts to the annual return and that the accounts so annexed are properly prepared as aforesaid.
The Senator stressed the words "properly prepared as aforesaid". It is quite clear. We are putting an obligation on the auditors of the company to provide the directors of the company with a report in writing saying that they are entitled to submit the abridged accounts.
That is a separate point.
It is central to the Bill and it does affect the amendment. The registrar of the companies will have to rely on some certification to be satisfied that the company is entitled to submit an abridged form of accounts. The person who is the professonal certifying the accounts is the auditor. What we are seeking is that he provides such an opinion which the company is entitled to so submit.
It is also clear from the content and wording of sections 10 (2) and 11 (2), (3) that the company is responsible for annexing the material to the annual return and is, therefore, responsible for the document conforming to what is required by the Bill. Secondly, section 18 (4) as worded at present requires the auditors to satisfy themselves that the directors of the company are entitled to rely on the exemptions of small or medium-sized companies because they fulfil the criteria for turnover assets and employment levels. It does not seem unreasonable to require this standard in a matter which determines whether a company can obtain an exemption or not. As for the requirement that auditors satisfy themselves that accounts to be published by small and medium-sized companies are properly prepared, that is, giving a true and fair view, this is unremarkable in my view. I do not see why auditors would seek to have special treatment in this regard. I should think it would be an ordinary part of their audit and that they would be able to advise the company as to what they are and are not entitled to under the Bill.
I have always had a high regard for auditors and it is proper that their professional standing should be reinforced under the measure. That is what we are doing here. Perhaps, too much is being read into section 18 (4). As stated on Second Stage, the problem, if it exists, is somewhat exaggerated. In my view the section, as drafted, fits the Bill and fits the overall philosophy of the Bill. There is no doubt that there is a chain of responsibility in any company. The chain moves from the officers of the company and the board of directors of the company through to the shareholders. The responsibility on the directors and officers of the company compiling the annual accounts, the responsibility on the directors having those accounts audited, making a report on those accounts, all assumes the requirement of integrity both in law and in accounting practice but especially in law. It is entirely consistent with the thrust of the Bill that the directors would have to submit a report, and the required notes to ensure that whatever is in the profit and loss account and the balance sheet that would be necessary to reinforce a fair and true view of the company's state is available. An auditor would be required to give his written opinion that the company are entitled to the exemptions and to submit the accounts in a truncated form. All of that is entirely consistent with the thrust of the Bill. Therefore, I cannot accept the amendment.
I am fascinated because the Minister did not speak about my amendment at all. He certainly laid out the position about the necessity for directors to satisfy themselves as to what their entitlements are. I am not arguing that it is necessary for the auditors to ensure and certify that accounts are properly prepared. Of course, it is necessary that somebody would certify that the accounts are properly prepared. All I am seeking to do and which the Minister did not do, is to define "properly prepared". In addition, I am seeking to restrict the definition of "properly prepared" to a particular definition and restrict it as to meaning that the accounts in question are consistent with the main accounts of the company and that any summary or omission from the accounts necessary in order to conform with the format does not mean the accounts are not properly prepared. All I am trying to establish is that what is meant by "properly prepared" in relation to the auditors is the restrictive understanding of that statement. The expression "properly prepared" must mean something. If it is not defined, it will be taken to mean a true and fair view. In other words, not alone, as we argued in the past are we putting undue responsibility on the directors to give a true and fair view but we are putting the responsibility on the auditors as well in respect of this restricted format. This will not be possible. I am not arguing with the other provisions in the section at the moment. All I am seeking to do is to define "properly prepared"?
I did not mean to be non-informative. I was at pains to give a comprehensive view of what is contained in section 18 (4). What "properly prepared" means in subsection (4) is that the accounts have been properly prepared pursuant to the provisions of sections 10 to 12 of this measure which allows the company to abridge their profit and loss account or balance sheet. All we ask here is that the auditors would provide the director of a company with a report in writing stating that the accounts had been prepared properly and comply with the provisions of sections 10 to 12. Of course, sections 10 to 12 refer back to section 3.
It is entirely consistent with the views I have been putting forward all along on this Bill in that the auditors should not find it too difficult to be able to say to the directors of the company: Yes, we are satisfied that you can avail of the provisions of sections 10 to 12 and that the accounts can be submitted in an abridged form.
I do not see what the great problem is. Generally speaking, an auditor gives a certificate that he has access to the books and that the accounts give a fair and true view of the company's state. The directors could not say unless they were satisfied that the accounts were properly prepared. I am not saying anything other than in respect of the words used in section 18 (4) here which mean that the accounts have been properly prepared in relation to the provisions of sections 10 to 12. This is not a major problem for auditors. I do not think it leaves them open to litigation as suggested by the Senator. If the company are to rely on the exemptions of sections 10 to 12, the measure should properly require an auditor to certify that the accounts were properly prepared in respect of sections 10, 11 and 12 and that the directors are entitled to avail of the exemptions. I do not see this as a major problem or as being cumbersome on auditors. I do not see the legal liabilities as suggested by the Senator falling on the shoulders of the auditors because of the references in sections 10 to 12 to section 3. This is a simple requirement of a company seeking exemption. The Registrar of Companies would be entitled to see that the provisions of sections 10 to 12 have been fairly used.
I thank the Minister for that reply. It is much clearer than his earlier reply. The position is as follows: "properly prepared" means properly prepared pursuant to sections 10 to 12. Sections 10 to 12 impose an obligation on the directors and, I think, by extension on anybody who certifies that the accounts have been properly prepared pursuant to those sections. The reduced format accounts give a true and fair view of the company. In other words, "properly prepared" means a true and fair view. This comes back to the view I expressed earlier. I do not think such accounts can give a true and fair view.
It is not true for the Minister to say that this will not give rise to difficulty. He will be well aware of the fact that many representations have been received from the Consultative Committee of Accountancy Bodies on this. The Minister is also aware that he has received many representations as, indeed, all Senators have, too. It is only right that it should be put on record what they think the position is. They are the experts.
I did not raise any great objection to remarks made on the floor of the House.
As I understand it, considerable objections have been made by the consultative committee of accountants which is a joint committee, including the Institute of Chartered Accountants, Certified Accountants in Ireland and the Institute of Cost and Management Accountants, the latter one, of which I am a member.
Those three bodies come together and examine matters which are relevant to the accountancy profession. They have particular expertise in that area and in the area of auditing. They have made representations to the Minister in particular with regard to section 18. They have made representations on the basis that section 18 poses significant problems for a high percentage of small companies which will be put into the position of having to file unabridged accounts, whereas it is clearly the intention of the Minister under the measure to permit small companies to file abridged accounts. In other words, their summary of the position is that in order to protect themselves they are going to have to force small companies to file their full accounts, if this goes through. I understand they made representations to the Minister that section 18 was a section to which they would like to make reference. This concentration by them on section 18 was quite separate and distinct from my own analysis of the position. My analysis of the position was that this was a crucial section as well. I understand that they have homed in on, quite coincidentally, and I say it is quite coincidentally because I drafted that amendment myself, on the question of whether accounts have been properly prepared. I understand they have expressed the view that the provision will pose severe problems for small companies and their auditors.
It is not true to say that these matters have been recognised as difficult. I understand that they have, indeed, been recognised as difficult. I understand also that the people concerned found considerable difficulty but not at departmental level, where I must say from the brief conversation I had with them, they got nothing but co-operation.
Obviously, they were not satisfied with regard to section 18. I think they had severe difficulty with regard to making the legislators understand the problems they were faced with. That is a pity but it is reality. They had severe difficulty in getting sufficient people to understand what their problems are. That is a reflection on us and it is also a reflection on the fact that they went about it in a too technical way.
Leaving that aside, it is important that we should recognise that these difficulties exist. The Minister has been advised that small companies will not be able to take advantage of the exemptions he wants to provide for them. The reason for this is that their auditors will not be able to say that their accounts give a true and fair view in the restricted format. That will not be true in every case but it will be true in a significant number of cases. The Minister should know that most audited certificates in this country at the moment are subject to substantial qualification and that will continue to be the case. Most accounts are subject to some qualification and these qualifications will become clear because the report of the auditors, under section 163 of the principal Act would be filed anyway and it is right and proper that that should happen.
I understand that it is the feeling of the only body who represent the auditing and accountancy profession in this country that the definition of "properly prepared", if left unamended by this Bill, is going to restrict the beneficial aspects of the Bill as it relates to small and medium-sized companies. I understand the Minister has been so advised. All I can say to the Minister is that I share that point. I am anxious to know whether he can assure everybody that that is not the case.
I am aware of the submission made by the consultative committee of the accounting body. They had meetings with senior officials in my Department so I am aware of their views. I have tried to allay your concerns in this regard and, indeed, their concerns in this regard, also. I said earlier — and I do not want to repeat it — that "properly prepared" in relation to this subsection applies to the manner in which summaries of accounts are done, abbreviated accounts or whatever you like to call them, but that they are properly prepared in accordance with sections 10 to 12 of the Act. I do not think that is unreasonable or imposes an undue burden on accountants. I do not think it will cause any major problems for small and medium-sized firms.
There is a separate and distinct point to which the Minister referred arising out of section 18. That is that the question of "properly prepares" has been fully discussed and I do not intend going into that again. There is another point. Under subsection (4) which reads:
Where the directors of a company propose to annex to the annual return accounts for any accounting period prepared pursuant to any of the provisions of sections 10 to 12 of this Act and the auditors of the company are satisfied that "the directors of the company are entitled, for that purpose, to rely on the exemptions specified in sections 10 to 12..."
In my view that poses a very strict obligation on the auditors. The directors of a company should be made primarily responsible for that decision. I have no objection to it being drafted in such a way that the auditors have to in some way accept it or agree to it but it appears to me that the way this is drafted it puts all the ultimate responsibility on the auditors of the company. I think the ultimate responsibility should remain with the directors of the company and not with the auditors of the company.
It places the responsibility on a company's auditors of having to attest to the rights of company directors to avail of the exemptions under sections 10 to 12 of the Bill in filing modified accounts with the Registrar of Companies and confirming that such accounts have been properly prepared and dealt with.
I do not see any reason why auditors, who are in the professional consultants and professional advisors, the professional outside experts in relation to a company, should not be satisfied that the directors of a company are entitled to rely on the exemptions. That is a necessary and fair balance. I am talking about a balance here because directors may, for commerical reasons, want to do one particular thing, take undue exemptions, for instance, because it is classified a small firm rather than a medium firm. It is a fair balance to be required in law that the auditors would have an input here to ensure that the Act is seen to flow in a fair way, In other words, that companies would not wrongly avail of small companies status when it should clearly be a medium company. I see nothing unfair in seeking or requiring the auditors of a company to express an opinion that the company directors are entitled to avail of these exemptions. I do not believe it places an undue burden on the auditors. For the fairness of operation of this Act it is a logical and necessary component of it that the auditors should act in a clearing house fashion which will determine whether a company shall be a small company or a medium company or whatever.
The Schedule runs from pages 21 to 49.
An Leas-Chathaoirleach
We have to take it as one Schedule. We are not confining you, Senator O'Leary, in any way in discussing any point in any page. There is one Schedule to the Bill.
Might I suggest to Senator O'Leary that, if he is troubled about this problem of taking the Schedule, he could indicate whether he has any point on Part I. That could be dealt with and since we are on Committee Stage, we could then move to Part II. Even though formally we are discussing the whole Schedule, it can in effect be discussed Part by Part if the points on each Part are made together. I see no difficulty from the debating point of view.
An Leas-Chathaoirleach
That arrangement could be agreed to. The awful thing about Senator O'Leary is that——
You never know what I am going to say.
An Leas-Chathaoirleach
I am sorry about that, Senator O'Leary, I did not mean it.
I know you meant it, but you think it was not wise to have said it. It is slightly different from saying you did not mean it.
I would be better if you dealt with the Schedule now.
Could I ask the Minister if he would like to make any comments with regard to the Balance Sheet Formats? Take Format 1 for example. To what extent is that laid down in the actual directive? How have we changed Format 1 and Format 2 from what was in the directive, if we have made any changes?
The transposing of wordings in the directive has been fairly true to the wording in the directive. Apparently there were some archaic wordings used in the directive which we had to change slightly to convey the meaning we know it to have. By and large what is in the directive has been transposed.
Is the directive published in English as well?
It is.
We can actually change the directive with regard to these incidental words?
Yes, we can, because the words used in the directive are used in their generality. We are allowed to transpose it into legislative form because they do not produce a Bill in sections. They work on the general thrust.
There is only one other matter that I want to raise on the Schedule. On page 26, paragraph (7), reads:
The amount for creditors in respect of taxation and social welfare shall be shown separately from the amount for other creditors and in respect of taxation there shall be stated separately the amounts included in respect of income tax payable on emoluments to which Chapter IV of Part V of the Income Tax Act, 1967, applies, any other income tax, corporation tax, capital gains tax, value-added tax and any other tax.
If the Minister looks back at the Balance Sheet Formats, C.8 refers to "other creditors including tax and social welfare." Is it the intention and would it be in order to show the tax and social welfare as a note to the Balance Sheet Formats?
No. If, for instance, the insurance share value of the balance sheet was not being met, a note to the account would be required to ensure clarity and to ensure that the concept of a true and fair view would be maintained.
I am not speaking now about a true and fair view. I am speaking about the fact that there is a specific statutory requirement to show income tax, corporation tax, capital gains tax, value-added tax and any other tax and social welfare payments separately. Is it necessary to show those on the Balance Sheet Formats or can it be included under C.8 as a total figure and included as a note?
I draw the Senator's attention to section 4 (7) which states:
Where items are combined in a company's accounts pursuant to subsection (6) (b) of this section, the individual amounts of any items so combined shall be disclosed in a note to the accounts.
I understand that. May I say to the Minister that I think this is an appalling section? You have to show all the items of taxation separately. I do not mind showing taxation separately but if you are going to show corporation tax in respect of a small company on a year to year basis you might as well tell them what your profit is. I do not mind people being warned as to what tax people owe. That is fair enough.
The Senator was seeking the publication of the profit and loss accounts earlier on.
The Minister is either stupid or vindictive. I do not know which. I did not request the publication of the profit and loss account.
That was better not said.
Then I withdraw it but I think the Minister is misrepresenting what I said, as the record of this House will show. Time and time again during this discussion——
Maybe the Minister misunderstood what you said.
He could not have misunderstood what I said. Time and time again I made it crystal clear that I was happy with the disclosure requirements and what I was seeking to do was to ameliorate the duties and responsibilities which were being placed on the directors of small and medium sized companies and their auditors. I was not, and I made it quite clear that I was not, seeking the publication of additional information. For the Minister to say that is to misrepresent my position in a most disgraceful fashion.
I do not wish to get into an argument with the Senator. I would be happy to withdraw my remark.
Thank you. To get back to the point I was making, I have no objection to the note being put on the accounts indicating what tax is due in general. That is a proper area of concern for the general public. Normally if tax is due there is a substantial amount of interest accruing on it. It would be necessary to show that in order to give a true and fair view of the affairs of the company. But as to whether it is income tax, capital gains tax, value added tax, PAYE or any other tax I think it is quite unnecessary to show that. If you show corporation tax separately on a year by year basis it would be possible to assess what the profit of the company is. If the whole thrust of the limited disclosure requirements in respect of small companies is to provide some measure of privacy for those companies, this is doing away with that measure of privacy or that, together with the other requirements, is combining to do away with it. I do not think there is any reason at all why these things should be separate.
I make the point to Senator O'Leary that this will not apply to small companies because small companies will only have to publish the alphabetic or Roman numeral items. They will not have to publish the small numerals there. It does not apply to small companies.
I accept that.
Next Stage?
It is proposed to take the next Stage on Tuesday, 1 July, in case any amendments may be forthcoming.