I would like first to declare an interest and at this stage a non-interest, in that I am retired from my auditing and accountancy profession – just in case anyone would attack me afterwards.
I am very pleased to bring this Bill before the House. The origins of the Bill can be traced back to the report of the Committee of Public Accounts of Dáil Eireann of December 1999 which recommended, among other things, that the Minister of Enterprise, Trade and Employment establish a review group to examine in detail a number of matters, including auditor independence, the auditing of financial institutions and the role of the external auditor in ensuring statutory compliance.
That same month, having considered the recommendations of the Committee of Public Accounts the then Tánaiste and Minister for Enterprise, Trade and Employment, Deputy Harney, decided to establish a review group on auditing with 12 terms of reference. Besides dealing with all of the issues suggested by the Committee of Public Accounts, two of the terms of reference were new and dealt with self-regulation in the auditing profession.
In summary, the review group was asked to examine the following principal issues: self-regulation in the auditing profession, auditor independence, the auditing of financial institutions, and the role of the auditor in ensuring compliance with statutory provisions.
The review group, chaired by Senator O'Toole, had its first meeting on 23 February 2000 and concluded its deliberations by the end of June 2000. The final report of the review group was presented to the Committee of Public Accounts on 11 July 2000 and was further discussed at the Committee of Public Accounts on 28 November 2000.
I would like to record the Government's appreciation for the professionalism and dedication with which the review group addressed its task and the scope, quality and timeliness of the report which it produced. The members of the review group are to be congratulated on its achievements. Its report contains some 80 recommendations covering all aspects of the matters that were under review. I should perhaps clarify that those recommendations of the review group that relate specifically to financial institutions will be dealt with by the Minister for Finance in the context of the legislation he will introduce in relation to the new Financial Regulatory Authority.
Following a public consultation on the report and its recommendations, the Government endorsed the report and also approved the establishment of the new oversight board recommended by the review group – the Irish Auditing and Accounting Supervisory Authority, primarily for the purpose of advising the Minister for Finance and his Department on the implementation of the recommendations in the report.
When this blueprint was developed, these concepts and solutions were particularly novel and pioneering and, depending on the perspective of the commentator, some might have said audacious and unwarranted. The latter comments would arise from the fact that the thinking behind them and the proposals was not in vogue elsewhere at the time. However, some time after the present set of propositions had been put into the public domain, a number of financial crashes occurred, most notably Enron and Worldcom, because of issues which included compliance failure and supervision. These collapses focused attention in jurisdictions worldwide on these subjects.
Many of the administrators in the countries in question charged with the task of developing governance systems aimed at preventing a recurrence of these situations looked for guidance to the work which had been ongoing here. Obviously, it has been necessary to transform these proposals into draft legislation. This required time but it is probably fair to say the road map devised should ensure Ireland will remain at the forefront of prudential initiatives in the commercial arena. This is imperative if we are to maintain international confidence in Ireland as a place in which to invest and do business.
I will attempt a very brief summary of the draft legislation which I am bringing before the Seanad today to try to convey an overall sense of what is proposed. One of the key features of the Bill is the proposed establishment of the Irish Auditing and Accounting Supervisory Authority, or IAASA as abbreviated. The authority will have a wide range of oversight functions in relation to accountancy representative bodies as well as, for example, examining the accounts of defined companies for compliance with the Companies Acts.
What about other links in the compliance chain? In the case of prescribed accountancy representative bodies, disciplinary procedure operated by them in respect of their members is now being given statutory underpinning. As regards auditors, existing controls are being enhanced and they will be subject to new audit-related requirements. There will be greater strictures and impositions on companies in relation to the preparation of accounts. There are procedures designed to ensure auditors are genuinely independent of those companies whose accounts they audit. Also, directors of companies are being required to confirm their companies' compliance with all statutory obligations which are relevant to them, not just those arising in company law. Each company's auditor is to vet this statement.
It will, I hope, be clear from this compressed account of what is proposed that an interplay between the relevant parties is provided for, based on their respective roles. The legislation is striving for a balance between objectives of high standards and limited regulation and in the apportionment of new responsibilities between the various parties involved with corporate governance.
I will now turn to the provisions of the Bill and explain in some greater detail what each of these is designed to achieve. Obviously, this is not intended as an exhaustive account of the contents of each section. Part 1 of the Bill contains some preliminary technical matters. The first three sections contain provisions found in most Bills where there is existing legislation in being. In this instance, it sets out how the Bill will relate to the existing Companies Acts.
Part 2 of the Bill contains the provisions dealing with the establishment of the new authority, the Irish Auditing and Accounting Supervisory Authority. In summary, this new body will take over certain functions relating to the granting of recognition to bodies of accountants under section 191 of the Companies Act 1990 which forms the basis for the supervision and regulation of auditors. Additionally, the IAASA will have the power, among other matters, to intervene in the disciplinary processes of the accountancy bodies where it deems it necessary; carry out independent investigations of possible breaches of standards of prescribed accountancy bodies by their members and apply to the courts to compel directors of a company to amend accounts not in compliance with the Companies Acts.
The establishment, powers, functions,modus operandi and practical aspects of the functioning of the supervisory authority are provided for in the sections which follow. Section 4 contains interpretations used in this Part of the Bill. Of particular interest are the definitions of “designated body” in the context of bodies which will nominate persons to be directors of the new supervisory authority. The term “recognised accountancy bodies” already has a particular meaning in the Companies Acts and is the basis on which members of such bodies can act as auditors. Section 5 deals with the manner in which it is proposed that the new supervisory authority will be established. Under this section, the Minister will be empowered to designate a company incorporated as a public company limited by guarantee to be the supervisory authority.
Section 6 deals with the membership of the supervisory authority. Subsection (1) provides that each of the prescribed accountancy bodies will be a member, as well as designated bodies. Subsection (2) identifies these designated bodies. In this regard, it will be noted that various parties interested in accounts and auditing matters will be members. I should mention that section 46(1)(a) enables the Minister to prescribe any other body which may subsequently be identified as having an interest in this area to be a member of the supervisory authority. As the supervisory authority is being set up as a company limited by guarantee, it will have to have a memorandum and articles of association. Section 7 provides that following incorporation of the company, any subsequent amendments to the memorandum or articles of association can only take effect with the Minister's prior approval.
Section 8 sets out the principal objects of the supervisory authority which will have to be enshrined in the memorandum of association of the authority. The objects are to supervise how prescribed accountancy bodies regulate and monitor their members; provide for adherence to high professional standards in the auditing and accounting profession; monitor whether the accounts of certain classes of companies and other undertakings comply with the Companies Acts, and act as a specialist source of advice for the Minister on auditing and accounting matters.
Section 9 sets out the main functions to be discharged by the supervisory authority. These functions will include certain matters relating to the recognition of bodies of accountants which up to now have been undertaken by the Minister. The section also includes the approval of the constitution and by-laws of each of the accountancy bodies; the ability to undertake investigations into prescribed accountancy bodies; monitoring the effectiveness of provisions of the Companies Acts; co-operation with prescribed accountancy bodies and other interested parties in developing auditing and accounting standards and practice notes; reviewing whether the accounts of companies and other undertakings referred to in section 26 comply with the Companies Acts and, where this does not turn out to be the case, seeking High Court directions to secure compliance.
Section 10 empowers the supervisory authority to carry out its functions and, where necessary, adopt rules and issue guidelines concerning any matters that relate to its functions or powers. In addition, subsection (4) of this section enables the supervisory authority to apply to the High Court for an order compelling a prescribed accountancy body to comply with a rule adopted or a guideline issued by the authority.
Section 11 deals with the appointment of directors of the supervisory authority by the Minister. There will be 12 directors appointed by the Minister, eight of whom will be nominees of the list of designated bodies at section 6(2), with the chief executive officer holding his or her directorshipex-officio. To ensure the independence of the new supervisory authority, no more than two of the directors appointed by the Minister can be members of prescribed accountancy bodies. As there is no restriction of that sort in relation to the chief executive officer, three of the directors can be members of prescribed accountancy bodies under the Bill, as drafted. The number of directors can be altered by means of a ministerial regulation under section 46(1), as can the limitation of membership of the supervisory authority by members of prescribed accountancy bodies to two.
The intention is that the executive of the supervisory authority will have the requisite expertise to carry out all of the functions assigned to the authority. Bearing in mind that some of the duties of the board will be delegated to sub-committees of the board, there may, nonetheless, be grounds for considering the possibility of greater representation on the board of members of prescribed accountancy bodies and the appointment of experts to sub-committees where deemed necessary. Moreover, to secure the independence of the supervisory authority, the members of the body, unlike the position in a normal company, are not permitted to instruct directors in the discharge of their duties as directors of the authority. The term of office of a director will be not less than three years and not more than five years and it will be possible to re-appoint directors.
Section 12 deals with the appointment of the chief executive officer to the new supervisory authority and sets out in summary what will be his or her functions. These are to carry on, manage and, in general, control the administration and business of the supervisory authority as well as performing any other functions that are determined by the board. The chief executive officer will hold office on terms and conditions approved by the Minister, with the consent of the Minister for Finance. If the chief executive officer is to be removed, it is the board of directors which will take this decision.
Section 13 deals with the work programme of the supervisory authority. The authority is required to draw up and submit a work programme setting out its strategies, planned activities and intended outputs for a three-year period. This programme will also give information on the staff and resources required, including an annual programme of expenditure. As it is intended that the authority will be funded by the State and the accountancy bodies, the Minister will consult the prescribed accountancy bodies before approving the annual programme of expenditure. Provision is also made to ensure that the work programme is laid before each House of the Oireachtas not later than 60 days after the date of which it is submitted to the Minister. Subsection (10) provides that the Minister may not give directions concerning the discharge of a work programme, or, if it arises, of any amended or supplementary programme.
Section 14 deals with the funding of the supervisory authority. It will be funded by the State and the prescribed accountancy bodies. The review group on auditing recommended that the split should be 40% from the State and 60% from the accounting bodies and that is the basis on which section 14 has been drafted.
Section 15 provides for the establishment by the supervisory authority of a reserve fund exclusively for the purposes of carrying out investigations under section 24 or conducting reviews of whether accounts of companies that fall within the scope of section 26 comply with the Companies Acts. It is difficult to estimate in advance the likely nature, extent and cost of recourse to these provisions and, in particular, those relating to investigations under section 24. However, it is imperative that, when they arise, such issues can be examined immediately and that the absence of funding will not delay the IAASA taking appropriate action. This is the basis for the development of a reserve fund, as provided for in section 15.
The second of the functions in respect of which the reserve fund is being developed is to examine the accounts of certain companies for compliance with the Companies Acts. These are all public limited companies and certain private companies or undertakings which meet a threshold of €25 million balance sheet total and a turnover of €50 million. In the circumstances, it is considered reasonable to impose a levy on such companies to fund this aspect of the supervisory authority's activities. However, before any levy is imposed, the supervisory authority will have to establish criteria and submit them to the Minister for approval.
Section 16 is in the nature of good housekeeping and simply provides that any excess revenue will be carried forward by the supervisory authority from one year to the next. Likewise, sections 17, 18, 19 and 20 have all to do with housekeeping matters and deal with the staff that the authority will have, the disclosure requirements of both directors and staff and the ability of the authority to establish appropriate superannuation arrangements for the chief executive officer and the staff of the supervisory authority.
Section 21 obliges the supervisory authority to prepare accounts and submit these for audit to the Comptroller and Auditor General. The section also requires that the Minister lay copies of the accounts and the Comptroller and Auditor General's report before the Houses of the Oireachtas and provide them to the accountancy bodies.
Section 22 requires that an annual report on its activities be submitted by the supervisory authority to the Minister and that this should be laid before the Houses of the Oireachtas within six months of the year's end. The section also contains provisions that would require both the chairman and the chief executive to appear before the Committee of Public Accounts or any other committee of the Oireachtas to account for the performance of the functions and exercises of the powers of the supervisory authority.
Section 23 empowers the supervisory authority to intervene in relation to the investigation and disciplinary process of a prescribed accountancy body to ensure that it has complied with such procedures approved under section 9(2)(c). Depending on the outcome, the supervisory authority is given the power to advise, admonish or censure the prescribed accountancy body. Provision is also made for the publication of decisions of the authority.
Section 24 empowers the supervisory authority, where it considers it appropriate or in the public interest, to investigate the possible breach of a prescribed accountancy body's standards by a member. The section contains the necessary powers to facilitate such an investigation by the supervisory authority, including requiring the production of documents, the attendance of relevant persons before the supervisory authority and the power to certify cases where relevant persons have refused to co-operate with an investigation by the supervisory authority to the court, with a view to the court determining the extent to which they should co-operate with the authority. Appropriate appeal mechanisms are also built into the section.
Section 25 allows the supervisory authority to undertake a review of how the members of recognised bodies are being regulated. As regards sanctions that can be applied against a member who refuses to co-operate, the reference in subsection 2(c) essentially relates to the new section 192A – being inserted into the 1990 Act by section 35 of the Bill – which effectively gives statutory backing to the disciplinary procedures of prescribed accountancy bodies.
Under section 26, the supervisory authority will be exercising a role other than supervising the activities of prescribed accountancy bodies. Under this section, the supervisory authority will be able to examine the annual accounts of companies falling within the definition of relevant undertakings. In essence, these are public limited companies, large private companies, and unlimited companies and partnerships, all of whose members have effective limited liability and which were brought within the requirements to prepare and submit accounts to the Companies Registration Office under the EU regulations of 1993.
Arising from its examination, the supervisory authority would send a notice to the directors of the companies specifying the manner in which the accounts were considered to be defective and seeking to have them brought into compliance. Failure to comply with such a direction could result in the supervisory authority bringing the matter before the courts to have an order made directing that the accounts be brought into compliance with the Companies Acts.
Section 27 is in the nature of housekeeping to enable the supervisory authority to delegate its functions to a committee of its directors or employees, as appropriate and as specified in the section. Section 28 sets out the procedures for instances when the supervisory authority, or parties subject to rulings by it, need to bring matters specified in the section before the court for determination. Section 29 provides for the recognition of the supervisory authority's seal and instruments in any court processes.
Section 30 deals with the issue of confidentially of information obtained by the supervisory authority. It also sets out the specific bodies to which information can be communicated where the supervisory authority believes that information is connected to the functions of the body to which the disclosure is made.
Section 31 deals with the transfer of functions to the supervisory authority. These are set out in the Schedule to the Bill and include the recognition of a body of accountants for the purposes of its members being able to act as auditors. The section also deals with the continued recognition of the existing recognised body of accountants. In the case of the Institute of Incorporated Public Accountants, arising from judicial proceedings taken against the Minister in relation to the recognition of this institute 1996, subsections (3), (4) and (5) of this section provide that that institute must apply to the supervisory authority for recognition as soon as reasonably practicable after the commencement of the section. In the meantime, however, persons who are members of that body and who are authorised to act as auditors will be able to continue to act in this capacity.
Section 32 is designed to protect the supervisory authority and any of its members, directors or employees from any liability for damages, unless the act or omission is shown to have been done in bad faith.
Part 3 of the Bill contains a number of provisions which, having regard to the future consolidation of the Companies Acts, as recommended by the company law review group, primarily amend provisions of Part X of the Companies Act 1990, which deals with auditing matters. The first of these amendments, section 33, inserts a number of definitions into section 182 of the 1990 Act. These definitions are of terms subsequently used in a number of provisions in the said Part X.
Section 34(a) implements some of the provisions of the 1992 Regulations. Paragraph (b) of this section adds to the provisions of section 187 that specify circumstances where a person is not qualified to act as auditor of a company. Paragraph (c) is in the nature of a transitional provision. Under that subsection persons who hold individual authorisations will have a three year period during which they have to become a member of, or become subject to, the regulation of a recognised body of accountants or cease to be qualified for appointment to act as an auditor under the Companies Acts.
Section 35 gives statutory backing to the disciplinary procedures of prescribed accountancy bodies. Members of such bodies are already subject to such arrangements but they did not have the statutory backing now proposed. The provisions contain the usual checks and balances and where necessary matters can be appealed to the courts for final determination. Section 36 implements the recommendations of the audit review group that persons should not act, advertise themselves or hold themselves out as being able to audit unless they comply with the requirements of the Act.
The section also contains provisions that enable the Director of Corporate Enforcement to apply to the High Court to have a person's name removed from the Registrar of Auditors. As some recognised bodies operate their recognition procedures in respect of firms rather than individuals, the section also contains the necessary provisions that will enable an individual member of the firm to be struck off without causing the firm itself to lose its recognised status to act as auditor.
Section 37 contains a number of specific technical amendments designed to update section 199 of the 1990 Act having regard to the new approval mechanisms that are being put in place – the supervisory authority rather than the Minister will be the authority recognising bodies of accountants in the future. It also updates the notification procedures and the manner in which information is to be forwarded to the CRO as provided for in the 1992 Audit Regulations.
Section 38 makes similar adjustments to section 200 of the 1990 Act. Up to now, the Companies Acts required that accounts give a true and fair view of the financial state of a company. There was no specific obligation in law stating that accounts had to be prepared in accordance with accounting standards. Section 39 now introduces such an obligation. It is important to note that the accounting standards applicable to a company are those relevant to its circumstances and its annual accounts. This means that some accounting standards will not be relevant to some companies.
Section 40 introduces a requirement for the establishment of audit committees by certain companies. Under subsection (2), the obligation to establish such a committee will apply to the board of directors of all public limited companies. As regards the directors of large private companies and relevant undertakings, as defined, the obligation under subsection (3) is to establish an audit committee that meets the requirements of the section or state in the annual directors report that they have failed to do so and explain the reasons for the failure. The section sets out the matters the audit committee should deal with in the company. The composition of the audit committee is stipulated and is essentially designed to ensure that it is an independent committee. This accords with international best practice.
Section 41 introduces for the first time in statute law a requirement for companies to disclose the accounting policies adopted in determining in particular the amounts included in the balance sheet and profit and loss account. Section 42 requires the disclosure of information regarding the remuneration paid to the auditor for audit work, audit related work and non-audit work. Corresponding information for the previous year is also required to be disclosed. Where the remuneration for work is of an insignificant amount, below €1,000, the information does not have to be disclosed. The section also imposes obligations on the audit committee, where the remuneration for non-audit work exceeds the aggregate of the audit and audit related work, to state whether it is satisfied the carrying out of the non-audit work by the auditor did not affect the auditor's independence.
Section 43 introduces an obligation on directors of a company to prepare a compliance statement concerning the company's policies respecting compliance with its obligations under company law, tax law or any other statutory law which would have a material impact on the company's financial statement. It also introduces an obligation that these be in writing, be approved by the board of directors and be reviewed every three years. Under subsection (4), the directors are obligated to include in their annual report that they are responsible for securing the company's compliance with their relevant obligations and what procedures they have in place to achieve such compliance, confirm that they have, where necessary, reviewed the procedures and give their opinion on the extent to which they have secured compliance with their obligations.
Section 205F, also inserted by section 43 into the Companies Act 1990, requires the auditors of a company to give their opinion on the directors compliance statement and, in circumstances where the directors have failed to prepare such a compliance statement, report that matter to the Director of Corporate Enforcement. Section 44 is designed to address a particular problem that has arisen with section 127 of the Companies Act 1963, as inserted by section 60 of the Company Law Enforcement Act 2001. Essentially, the provision has the effect of confirming that, where a company makes an annual return on a date prior to its existing annual return date, the anniversary of this new earlier date will be the new annual return date, unless the company opts to retain its previous return date or otherwise establishes a new return date under section 127(9) of that Act.
Section 45 is designed to ensure that for private non-profit making companies that currently do not have to submit any accounting information with their annual return, in future the auditor's report on the annual accounts which has still to be prepared by the company will be submitted to the CRO. This is already the case in respect of public companies not trading for profit or charitable companies.
Part 4 of the Bill contains 6 sections. The first three relate to the powers of the Minister to make regulations in relation to matters referred to in earlier provisions. These include the prescribing of bodies of accountants and designated bodies, as well as varying monetary amounts in particular circumstances, for example threshold levels which trigger particular requirements or levels of financial sanctions. In addition, paragraph (j) is designed to enable the Minister to exempt certain classes of companies and other undertakings from specific provisions in circumstances where and to the extent that they are regulated under other enactments. This will apply in particular to entities that are used by the financial services industry and are subject to regulation by the Central Bank. It is my intention to make such a regulation exempting investment companies used by the financial services funds industry from the seven sections specified at paragraph (j) at the same time as these sections are being commenced.
Section 49 amends the Company Law Enforcement Act to enable the Director of Corporate Enforcement to act as a member of the new supervisory authority. Section 50 is designed to ensure that where the supervisory authority engages in its activities and issues reports and summaries of decisions and directions, that these will have the protection of qualified privilege providing they otherwise meet the provisions of the Defamation Act.
Finally, section 51 revokes the 1992 Auditors Regulations, these having been now incorporated into Part X of the Companies Act 1990, as I have just described. I apologise for having gone on at some length about the provisions of the Bill but it is worthwhile putting on the record what it is the Bill is designed to achieve. I thank the House for its co-operation in arranging this debate.
I look forward to hearing Senators' contributions and I commend the Bill to the House.