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Seanad Éireann debate -
Wednesday, 16 Apr 2003

Vol. 172 No. 13

Companies (Auditing and Accounting) Bill 2003: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

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 directorship ex-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.

I welcome the Minister of State to the House and thank him for the comprehensive overview of the Bill. This Bill puts into effect the recommendations of the review group on auditing, which sat between February and July 2000 and was chaired so ably by our colleague, Senator O'Toole. The review group on auditing was established following the inquiry by the Committee of Public Accounts inquiry into DIRT and was asked to address a number of issues about the regulation of accountants and the independence of auditors, which the Minister of State has dealt with at some length.

The review group on auditing did its work in four months and produced a 300 page report with 80 recommendations. That speaks for itself. It was a fantastic achievement. Its output represented a broad consensus among the diverse bodies represented on the review group and provided an effective plan for moving forward. It should be remembered that the review group met and did its work before the Enron and WorldCom collapses and before the accountancy scandals in the US were made public. In that context, its work was far-seeing.

On the issue of regulating the accountancy profession, the core of the review group's work was that we need to move to a new model. The other model was effectively based on complete self-regulation by the profession of the profession. This had developed over the years for two reasons: first, the accountancy profession wanted self-regulation; and second, successive Governments and the Department of Enterprise, Trade and Employment were happy to leave this responsibility with the profession. There was no inclination or desire within the Department to invest the necessary resources to carry out an effective regulatory role and they were perfectly happy for accountants to regulate themselves.

The review group on auditing decided that this had to change. It came to the view that there was a need for more hands-on involvement. We needed to move from delegated self-regulation to a new model of supervised self-regulation. This new model would see the State playing a much more active role in supervising the way in which the accountancy profession regulated itself and, if necessary, undertaking direct regulation itself.

The involvement of accountants in a number of scandals throughout the 1990s and the inability of the professional bodies to demonstrate to the public that they could regulate their members in an open and effective way made some change inevitable. There are no doubts that self-regulation does have some benefits. It can be done at no cost to the State, and it involves professionals who understand the nature of the work and the technicalities of the work in the regulatory process. It also has many disadvantages. It creates a perception of ‘chaps regulating chaps', and it is easy for the public to believe that when a profession is faced with a choice between the members' interest and the public interest, the members' interest will always win out.

The Bill is welcome because it provides us with a structure – the Irish Auditing and Accounting Supervisory Authority – which can rigorously examine how the accountancy bodies carry out this self-regulation, can ensure that the right procedures and processes are in place, and can make sure that fair, independent decisions are made.

This is detailed and complex legislation. It is, however, disappointing that it has taken so long for it to reach the floor of the Oireachtas. The review group on auditing reported in July 2000. Since then, the Tánaiste has issued many press releases about the action which she is taking on the regulation of the accountancy profession. She even took the unusual step of publishing draft heads of a Bill a year ago, before the election, to show what she was doing, but that does not hide the fact that it has taken almost three years for this Bill to reach us. That is an indication, perhaps, that the Tánaiste is more interested in public relations than the actual delivery of public service reform.

This Bill also contains a number of measures which will strengthen the regulation and independence of auditors. These will have to be teased out in detail on Committee Stage, but in broad terms they are to be welcomed, especially when they bring Ireland into line with best practice internationally. However, we should be careful to ensure where we impose additional regulation that it is solidly based, it is the minimum required and is not an unfair or undue burden on business.

As the long title of the Bill makes clear, this supervisory authority will exercise power and responsibility only on accountancy bodies. The simple fact is that anyone can call themselves an accountant. There is no restriction on somebody with no qualifications whatsoever setting up a shop in the High Street and putting the sign "Accountant" above their door. This Bill will do nothing for people who are the customers of such unqualified accountants. The Bill, therefore, is not about supervising the regulation of the accountancy profession, and this should be addressed. Supervision is confined only to the accountancy bodies and people who are members of those bodies.

The review group on auditing considered the issue of whether to protect the title "accountant" and failed to come to a conclusion on the issue, but surely this Bill provides us with an ideal opportunity to bring the entire accountancy profession, or anyone who wants to call themselves an accountant, within the scope of the new supervisory authority. Perhaps in his reply to the debate, the Minister of State might indicate how the new authority will impact upon unqualified accountants who are not members of any body. Rather than making it easier or giving an incentive to stay outside, the Minister of State should be trying to bring them into the fold.

How will the Bill prevent any of these people setting up and portraying themselves as accountants when, in fact, they have little or no qualifications? If a customer of one of these unqualified accountants has a problem with them, there is nobody to whom he or she may complain. Surely this legislation provides us with an opportunity to throw the net over the entire accountancy profession or anyone who wants to call themselves an accountant. This could be done with a relatively straightforward amendment and I am sure we will come back to this on Committee Stage. In the meantime, I would be interested to hear the Minister of State's views.

I mentioned earlier that this Bill imposes new requirements on companies. In some cases these requirements only apply to large companies, but in others they apply to all companies, large and small. The reality is that it was the actions of large companies, and specifically financial institutions, which led the setting up of the DIRT inquiry, which in turn led to the setting up of the review group on auditing. Small companies have been subject to an increasing amount of legislation in recent years. The Office of the Director of Corporate Enforcement and the revamped Companies Registration Office have increased the amount of paperwork with which small companies must now comply. It is right that anyone enjoying the benefit of limited liability should comply with basic minimum legislative requirements, but in recent years these have been growing and growing.

The company law review group, in its report, made various recommendations about simplifying the company law needs of small business but we have not seen that legislation. The emphasis in all the legislation seems to be on increasing regulation, not reducing it. Increased regulation means increased costs to business, either through directly hiring staff to deal with regulatory compliance or hiring consultants to deal with it for them. The cost to business means ultimately loss of competitiveness and a loss of jobs. Each single piece of legislation may not be critical in itself, but the cumulative effect is that those trying to run small businesses and make a living from them are finding themselves spending more and more time filling in forms and complying with State regulations. This Bill again provides the Government with an opportunity to lift the burden on some of those smaller businesses, and perhaps we can do something about this on Committee Stage. The Minister of State might have some preliminary thoughts in this regard when he replies.

The core principle of all regulation is that it should be proportionate to a clearly stated public interest. The Companies (Amendment) (No. 2) Act 1999 introduced the concept of audit exemption and allows companies to avail of audit exemption if they satisfy a number of criteria. This removes the chore of having a statutory audit completed for many small companies. I understand the direct costs of an audit are difficult to estimate but one survey has indicated that the average cost for a company with a turnover of €1 million is in the region of €3,000. These costs will undoubtedly increase if the Bill is enacted as presented to us. If a similar figure is applied to all small companies in Ireland, the overall cost to business will be significant.

As many small companies are owned and managed by the same person, there is little need for an independent audit of their stewardship. Owners or managers can decide whether to have an audit for their purposes based on their own information needs. In some cases third parties such as banks might require the company to prepare an audit as part of loan conditions.

Research into exemption thresholds in other European countries clearly highlights that the thresholds in Ireland are considerably lower than those in most of our neighbours. In Northern Ireland the current threshold for turnover is £1 million, compared to €317,000 in the Republic. This means that a company trading in Newry with a turnover of £900,000 is not required to have a statutory audit while a company trading across the Border in Dundalk with the same level of turnover is required to do so, incurring additional costs. This is hardly something that creates a climate conducive to cross-Border trade or an all-Ireland economy. I understand a consultation paper has been published in the North suggesting that the threshold be increased from £1 million to about £4.8 million and that this is under consideration. This would put us at a clear disadvantage. The Minister of State might have some preliminary thoughts on this but we should deal with it on Committee Stage.

Much of the Bill is about the establishment of the Irish Auditing and Accounting Supervisory Authority. The explanatory memorandum to the Bill states the State contribution to the budget of the IAASA in 2003 and 2004 will be just over €600,000. This suggests that the total budget will be €1.5 million, with the balance being contributed by the accountancy bodies. In reality, it is not the accountancy bodies which will pay the additional €1 million but businesses, which will pay increased charges to accountants, which will pass it on to the bodies. I would be grateful if the Minister of State could indicate whether he has seriously considered the idea of assigning the functions proposed for the IAASA to some other agency, either the Irish Financial Services Regulatory Authority or the Director of Corporate Enforcement. Both bodies have the administrative structures to support the functions being allocated to the IAASA.

I am not sure that a convincing case has been made for the IAASA to have its own administrative structure and all the overheads that go with it. This is not to quibble with the work of the IAASA but the structure being put in place to support that work could be done in a more cost-effective way than is being planned. Do we really need another agency when some other body could carry out the same work?

There is always a balance to be struck between proper and effective regulation and unnecessary burdens on business. Striking that balance is not easy and often it is only with the benefit of experience that changes can be made. I have been told via representations that the compliance statement required by section 43 of this Bill is unique to Ireland. Perhaps the Minister of State can clarify this. We need to be careful that we are not imposing conditions which will make Ireland a less attractive proposition for inward investment or for people to take up directorships of companies. Good non-executive directors are a tremendous benefit to any board. If we make it difficult or unattractive for companies, particularly growing companies which need that additional external expertise, to attract people to provide advice, we will ultimately inhibit the growth of the company, the economy and jobs. While I agree with the concept of the compliance statement, I would like to hear the Minister of State's assurance that it is not an unduly arduous task for directors to perform. I would also like to hear to what extent it is in place in other jurisdictions.

I welcome the Bill which is long overdue. It needs a very long and considered Committee Stage debate. Although it is directed at the accountancy profession, in reality, the cost being imposed by it will be felt by every business in Ireland. We should bear this in mind in looking at the Bill and only be prepared to impose those additional regulations that are necessary and proportionate.

I would like to have dealt more with the exemption and compliance thresholds and the need to have registered accountants in order that the Bill can deal with anyone who calls himself or herself an accountant. I also wanted to mention the money-laundering directive soon to come our way, which is another indication that we must deal with the issue of accountants, and to stress that the board should have a minimum of 40% representation from the accountancy profession.

I welcome the Minister of State and thank him for his detailed analysis of the Bill. Like the Opposition, we have received many submissions on it. I could summarise them very fast by saying the main concern is the level of turnover at which the appointment of an auditor is required. The Companies (Amendment)(No. 2) Act 1999 puts the level at €317,000. When it comes to the drafting of amendments, the Minister of State should bear in mind the points made by the Opposition spokesperson, Senator Coghlan, and I and ensure we have a level playing field. We should raise the threshold of turnover to about €1.5 million.

We need to go much further if it is to be increased across the Border.

The Senator said the threshold across the Border was £1 million, which equates to between €1.5 million and €2 million. That level should be set by order rather than constant changes in legislation because in ten years, €2 million will represent quite a small turnover. In fact, the turnover of a small builder, building about three houses per year, could be over the threshold set down in the Bill. If an effort is being made to discourage small companies from becoming limited liability companies, that is fair enough and according to the recommendations of the report of the review group on auditing. Many small limited liability companies have acquired very bad reputations. There have been scandals recently in which limited liability companies have been established and then gone into liquidation within a very short period, leaving an amazing number of debts.

I commend our colleague, Senator O'Toole, who chaired the review group on auditing. Its report is a weighty document. The review was carried out between February and June 2000. The group had 18 members, all of whom played a very important role. The report is an excellent research document and provided a good backdrop to the preparation of the Bill.

I congratulate the Tánaiste and Minister for Enterprise, Trade and Employment, Deputy Harney, the Minister of State, Deputy Michael Ahern, and the Department for bringing the Bill before the House. It arises directly from the report and the recommendations contained therein. The group was established by the Minister following the DIRT inquiry of the Committee of Public Accounts to examine the regulations and professional rules governing the auditing profession. I congratulate all those involved in the production of the report.

The main function of the new Bill is to provide for the establishment on a statutory basis of an independent regulatory body, the Irish Auditing and Accounting Supervisory Authority. The IAASA has already been set up on an interim basis and has been operating in that capacity since April 2001. I pay tribute to the work of the interim authority since its establishment and I believe this legislation is a testament to its fine work in this area, based on the case it made to the Department. Contrary to what the Opposition spokesman stated, the Tánaiste acted expeditiously in establishing the interim authority shortly after the report was presented to the Government.

The powers conferred on the regulatory body in this legislation are extensive, but they are also appropriate. The principal function of the IAASA under the new legislation will be to supervise how the prescribed accountancy bodies regulate and monitor their members. In addition, the IAASA will have the power to: intervene in the disciplinary process of the accountancy bodies where it deems it necessary; carry out independent investigations in public interest cases; and apply to the courts to compel the directors of a company to amend accounts that are not in line with accounting standards. Many of those issues also arose at the ongoing public inquiries. It was felt that many accountancy firms did not carry out their duties. They will have to comply with the wishes of this organisation in the future.

I am pleased that the supervisory authority will be given the responsibility of promoting adherence to high professional standards in the auditing and accountancy professions. On the whole, they have very high standards and have, through their excellent work, contributed greatly to the development of Ireland's economy. While I do not necessarily believe these professions are particularly corrupt or inefficient, in light of certain events concerning offshore accounts and fraud exposed at the various tribunals – together with the Enron scandal and, in particular, the trouble AIB had with its American subsidiary, Allfirst – it is fitting that the Government is making a firm move to encourage compliance with our tax regime and laws. This legislation will be very positive for the profession, in general, and for its reputation, in particular, because it will protect the industry as a whole from damage caused by any non-compliant members.

As has been the practice to date, this legislation aims to ensure that the IAASA will be independent of the accounting and auditing profession, while still having at its disposal the necessary expertise required for effective regulation. The number of accountants on the board of the IAASA will be strictly limited to no more than two. The Minister should reconsider the position in this regard and he may be sympathetic to increasing that number. I note, however, that if the chief executive is a member of the accountancy profession, the number may be three.

If the organisation is to have the goodwill of the auditing and accountancy professions, there should be a review of its membership. Most boards would have a higher number of practitioners. Medical boards, such as An Bord Altranais, contain a significant number of professionals from that field. The accountancy and auditing professions feel it would be appropriate to review this section and increase their representation on the board. It is unusual for a profession to be so under-represented on its own supervisory authority.

The new body will be funded to the tune of 40% by the State and 60% by the accountancy companies. This is a realistic and fair system and very much in line with the report of the review group on auditing, particularly when the supervisory authority will be obliged to obtain prior approval from the Minister for criteria for apportioning the levy among the accountancy bodies. There will be efforts to have large public companies contribute to particular audits.

This legislation introduces a system whereby company directors will be required to draw up a compliance statement which will cover a company's policies and procedures concerning its compliance with its statutory obligations – including its obligations under company and tax law – and which will be reviewed by auditors. It is important that this matter, which will affect small companies, is dealt with quickly. Given that compliance applies to small companies, very few accountancy firms will sign off the accounts on the basis that they must also be audited. It will be a restriction and could be detrimental to the continued viability of some companies.

Under the new legislation, the accountancy bodies will have to submit their by-laws – including their ethical rules and disciplinary and investigation procedures – to the IAASA for approval. This will lead to a significant strengthening of such rules and procedures, including rules governing auditor independence, while making directors much more aware of their obligations under the law. Many SME directors will see this as a burden and I agree with that view. There are many forms and regulations which small companies must complete. I met an accountant recently who said he would not take on any more limited companies because of the number of regulations that must be complied with and the consequent responsibilities placed on him. He recommended that such companies should change their status and revert to being single trader companies.

The Companies (Auditing and Accounting) Bill also contains provisions whereby directors of certain companies will be required to establish audit committees. I worked in the Department of Industry and Commerce with Des O'Malley during the passage of the Companies (Amendment) Act 1990. This was detailed and excellent legislation, if I may say so, which has been amended somewhat in the interim.

Considerable background work went into the drafting of the Bill. Senator O'Toole chaired the review group, which produced an excellent report. Very few amendments are required, although I have received some submissions, mainly from small companies. Larger companies do not seem to be too concerned about the Bill. I am a member of the Joint Committee on Enterprise and Small Business, which will consider submissions on this Bill in May, prior to Committee Stage.

The Minister of State indicated that this is draft legislation. Given the vast experience of the Minister of State and the Tánaiste in this area, I feel the Government will be open to amendments from all sides of the House in the best interests of the Bill. As the former chairman of the review group, Senator O'Toole will have tremendous input to make. Given that he was immersed in the detail, I would be interested to get his view on exempting companies with small turnovers. This would lend weight to my arguments and those of Senator Coghlan.

I am delighted that Members of the House are being employed in a particular way. I refer to the manner in which the Tánaiste decided to appoint Senator O'Toole to chair the 18-person committee. Contrary to the provisions of most of the Bills that go through the House – under which Members of the Oireachtas are restricted from being members of State bodies—

We very much welcome that fact.

—I welcome the fact that the Tánaiste was prepared to appoint an Independent Member of the House to chair the group.

We will work with the Minister of State and the Tánaiste to bring the Bill through the House as expeditiously as possible. In the meantime, the interim committee is working very well.

An Leas-Chathaoirleach

I call Senator O'Toole, who might find it difficult to speak after all that praise.

It ill behoves any politician to refuse words of credit and praise, whether or not they are entitled to them. While I put much effort into chairing the audit review group and co-ordinating its activities, credit is due to those who have produced the goods. The report was published some time ago and the work of converting it into legislation has been done effectively by the interim Irish Auditing and Accounting Supervisory Authority, which has been established and of which I am a director. The work of co-ordinating and leading that authority is being done by Ms Karen Irwin who is present in the Chamber. She has done tremendous work and has had an extraordinary input to ensure that the report's findings are reflected in the legislation.

Members should recognise that the Bill is not a negotiating document; it is a compromise document. It is not what the politicians or the general public wanted, it is a compromise that was arrived at in the aftermath of listening to the views of all the different groups to see how we could meet their needs. It is not exactly what anybody wants. If I was asked to draft the Bill, I would take a much stronger view on some of the issues than that which is reflected in it.

Accountancy bodies and business groups have a view and, like us, they held the same view two years ago. If people want to reopen the issue, we will resume the ball game. However, I remind Senators that the legislation arose from a report to the Committee of Public Accounts. That committee gave us certain instructions and its views were very clear and represented those of Members on all sides, including Deputies Ardagh, Durkan and Rabbitte who made a strong input into the proceedings. The late Jim Mitchell was the Chairman and a former Deputy, Seán Doherty, was also a member of the committee. All of them had a major input into the process.

When we produced the report of the audit review group, which has been warmly accepted by Members, the Committee of Public Accounts was less than enthusiastic and had real difficulties because it felt it did not meet its demands. The committee believed that the report did not go far enough and was described by the Chairman as being "more like a pussycat than a tiger". It was only after absolute assurances were given by me, as chairman of the committee, and the Tánaiste, as the appropriate Minister, that we believed this would work, that Deputies Rabbitte and Jim Mitchell said they were prepared, on that basis, to see if that would be the case. I wish to underline that because it is how we came to our current position. If people want to start raising the bar, it can be raised in all sorts of ways.

No Bill is ever perfect on Second Stage, but certain issues can be tweaked and altered as we proceed through the subsequent stages. The accountancy bodies have made a strong case for more representation, but I will only support that case when they support the thrust of the Bill. I was glad to hear their spokesperson doing so this morning, although their views have certainly been very negative for the past month. All we have heard from the accountancy bodies is negativity, but that is not the way to play the game at present. The Bill comes from a time when the public was appalled by and aghast at what emerged from the DIRT inquiry and other tribunals concerning the involvement of accountants and auditors in all sorts of nefarious activities that created various difficulties.

I still believe in self-regulation and I hold to the position that accountancy bodies can do a good job. I defended that position before the Committee of Public Accounts. Members of that committee felt, for example, that self-regulation was not working and that it would not work in future either. They believed that auditors should not be allowed to serve for more than five years in any company and that they should never be allowed to do non-audit work. However, we managed to convince the Committee of Public Accounts that it was not appropriate to go that far and that there were other ways of adjusting those issues.

We should remind ourselves of the position from which we started in terms of framing the legislation and dealing with these issues, in respect of which there have been long and difficult discussions in the audit review group and the interim Irish Auditing and Accounting Supervisory Authority board. If a Member or somebody from the accountancy bodies or other interest groups raises any issue that has not already been discussed, pulled apart and dealt with by one of those groups, then we will have to listen. That is the yardstick by which we should judge the Bill.

On the question of limited liability, it was interesting to listen to Senator Leyden who has got the point precisely. I am delighted to hear what that auditor, to whom he referred, said. The country has forgotten that limited liability is a gift. During the 1970s and 1980s, RTE's "Seven Days" produced many programmes about people who closed down companies that owed money all over the place and then opened up the following day with a change of name or address.

That is correct.

We were just being made fools of. People should remember that limited liability was granted by society to the business community on the basis of trust and confidence that people would not lose out. If people cannot comply with that, then, quite rightly, they should not trade under limited liability.

People are genuinely concerned about issues, including compliance. Some of the interpretations of this legislation that I have seen ascribed to various people in print are incorrect. Directors are required to do a number of things within the Bill's compliance provisions. They have to tell investors, shareholders and consumers that a company is compliant and can be relied upon. They are not required to search under stones or in every corner of a company. The most honest board of directors can be scuttled by a dishonest middle or senior manager. I would make a distinction, however, between responsibility and accountability. Directors are responsible for certain things but, if they go wrong, someone else may be held accountable. Under the provisions of the Bill, directors have to ensure that accounting standards are met, that structures are in place to ensure compliance and that they are satisfied that those structures are effective. That is all they will have to do, but I am appalled to think that is considered to be new because I always believed that was the function and duty of company directors.

Some company directors have been misled during the past month to the effect that, since these matters are to be legislated for, they could lose their homes or find themselves in court or in jail because their company was not compliant. However, that is not the aim behind the legislation. The Bill will ensure that company directors assure themselves that their companies have put in place compliant structures, as far as is practicable, and they will be required to sign up to that.

I have read articles by people who are trying to make money by establishing training courses for directors. They want to make a few thousand euro a day telling people about the difficulties they are in, including in respect of health and safety regulations on food, but everybody is supposed to comply with these regulations. Although the Bill focuses on taxation and the finance issue, I find it extraordinary that directors suddenly feel under threat because they cannot tell whether their companies are complying with health and safety legislation. This raises a new issue that, if it becomes a problem, we may have to examine in a different context.

The necessary structures are in place, but the next question is what the auditor must do. The auditor has to say that, as far as he or she is concerned, the compliance statement, which has been signed off by the directors, is okay. Auditors are now being told – by the same people who will be earning a few thousand euro a day telling them how they should do their business – that this will cause all sorts of problems and that they could go out of business unless they establish a sheaf of consultants to ensure a company complies with health and safety regulations, etc. That is not the case, however, because the Bill is very clear. It says the auditor makes his or her decision on the basis of information formed by the auditor while undertaking an audit, non-audit work or other work for the company. He or she is not required to go looking for new information to do the work differently.

This matter is about compliance. It is also about ensuring that the work required by law is done in a compliant fashion in which we can have trust and confidence. There is no additional work intended. That is the clear intention of the audit review group, the IAASA and this legislation. That is the way it is set up. One body of accountants wrote to me and, apart from indicating that I was unfair in my comments, which is fair enough, stated this compliance statement was unique to Ireland. That is a powerful phrase. I am unique to Ireland. There is nobody exactly like me. Everybody in this House is unique. If that body of accountants is trying to give the impression that there is nothing like this anywhere else in the world, it is wrong.

The Sarbanes-Oxley Act signed by George Bush last July is clear. It requires that a company account report signed off by the directors will include a statement by the chief executive officer and the chief finance officer to the effect that the company is compliant. It is a criminal offence not to supply that statement. That is included in US legislation. I make that point in case someone says we will be less than competitive if we introduce similar legislative provisions here. Within ten years no fund manager or stockbroker anywhere in the world will invest a schilling of anybody's money in an economy which is not clearly compliant, clear of corruption and in which we cannot have full trust and confidence. That is the reality. A casual glance at the business or investment pages of any finance magazine will reveal that is the way matters are going.

In terms of the audit committee, what is involved here is the question of independent directors. I recognise what people are saying about the constraints being imposed in terms of independent directors which are difficult to get. That is something the Bill will put up over the parapet. What we are requiring in the Bill is no different from what people in investment groups have been seeking for the past ten to 15 years, that there should be genuinely independent directors of companies. Senator Coghlan made a valid point that needs to be considered in terms of small companies. I am talking about large companies in this context. Directors must be independent. We are requiring in this legislation that they meet the external and internal auditor on their own without management, executive directors or others being involved. We are saying they also have to say that as far as they are concerned, the company auditor in question needs to be renewed. This is how we moved away from the demand that they hold their positions for a period no longer than five years. We considered there were problems in that regard, in that people could stop doing their job properly after four years if they knew their position was only for five years. There are swings and roundabouts. The independent audit committee will make a recommendation on who should be auditor, whether that person should continue or otherwise and whether the work has been done satisfactorily and in accordance with accounting standards.

In terms of self-regulation, it was not the intention of the audit review group, this legislation, or the directors of the board of the IAASA that the members of the board would interfere with the work of accountancy bodies on a daily basis. What is intended is that – this point was dealt with by Senators Leyden and Coghlan – the rules, by-laws and constitution would have to comply with certain broad, general principles on which the IAASA will be insistent. If they are not reflected in the constitution, those concerned will be required to reflect them in it before they are given or secure continued recognition.

It is not correct to say members of the board will interfere with the disciplinary process. The position is clear and the Minister of State set it out clearly. They will intervene only where issues are brought to the attention of the board. This legislation emerged from people writing to Members of these Houses and others pointing out that they had brought complaints to bodies but they were not dealt with and asking how high profile accountants could continue to be in operation, etc. We know what was going on.

I wish to deal with the issue of accountants being directors. They have a strong argument to make but they need to be careful about the basis on which they make it. I do not accept the argument they have made for various reasons. They have made the case that we need accountants because of all the work being done by the board. The legislation makes it clear that the board is required to have the staff and the resources to do what it is doing. Members of the board, like me, will not be examining the accounts of businesses, drafting practice notes or setting accounting standards, on which we will be advised. It would be helpful to have accountants and auditors on the board, on which there are two already. I would support the idea provided that everything else was in order. There is a strong argument to be made in that regard, although not on the basis that members of the board need to have the necessary experience and knowledge to do the work of accountants. Members of the board will not become accountants tomorrow morning. Their job is to act very much like any regulator does; he or she examines the situation, the problems, the advice and comes to a conclusion. That is how the work of the board will be done. It will be done in close contact, which is the only way it can be done.

Self-regulation is on the basis of there being a proper balance between the accountancy bodies and the IAASA. That is the basis on which it should work. It is not a case of somebody standing over a accountancy body and telling it what to do all the time. The approach is that the body must reflect certain standards. If complaints are made to the IAASA that matters are not being dealt with properly, we will be required to look into them. That does not mean it will automatically overturn matters. Such matters must be dealt with in a structured way. Like any formal complaint, such a complaint would have to be dealt with at different levels.

I do not know anybody involved in the IAASA and did not know anybody in the audit review group who did not hold accountants in high regard. The motivation for this legislation stems from the fact that the vast majority of accountants and auditors are thoroughly honest, utterly committed and compliant to the last detail. This legislation is about protecting their good reputation.

I came here today to welcome the Bill and commend the work of Senator O'Toole. I regret that he is leaving the Chamber because I was going to say something about him and the committee of which he was a member. I am in a bit of a quandary because he has described this legislation as a non-negotiable document. If that is the case, why it is before the House and why will there be a Committee Stage debate? Such a comment seriously questions the role of the Oireachtas in this regard. I would not attribute such sentiments to the Senator but if such a comment had been made by anybody else, I would regard it as slightly arrogant for somebody to say we do not have a role in this matter. I have often been a member or head of a committee which has made reports such as this. One does ones best, tries to get a meeting of minds and, so far as possible, a consensus but at the end of the day it is for this and the other House to decide in this regard.

I have a number of declarations of interest to make. I am a director of Independent News and Media, Regtel and the Ireland Fund. The first is a large international company, the second a small regulatory body and the third a charity. It might be worthwhile discouraging charities and such bodies from taking on company status. They only clutter up the Companies Office and the work of a body such as this. This debate points to the need for a decent regulatory system for charities and such bodies. The current system brings them into the ambit of procedures with which they do not need to be involved.

I support what Senator Leyden said to the extent that the auditing profession should be more represented than it is on the proposed body. One needs to bring the profession along. I am not a member of it but we need the general support that would bring. If one considers this body in the context of bodies in other professions, it might be advisable to reconsider this matter.

I thought it would be helpful if I spoke about my experience as a non-executive independent director – not because this is where the issue pinches me, but because of the importance of independent non-executive directors. I take seriously the role of protector of shareholders, particularly small shareholders. They are not necessarily always represented by large institutional investors who have the capacity to influence customs in a way that does not always suit small individual investors. That is part of my job, which is also to see that the executives do their job and are compliant with the law in all respects with regard to accounting so that the company is run properly.

I have been a member of an audit committee in one company which acted in almost exactly the way specified in the legislation. As Senator O'Toole said, most large companies act in accordance with accounting standards because they must deal in international markets which require that compliance. It is important that there should be consistency between Irish and international standards so that some company does not trip up because an Irish requirement is more specific than requirements in other countries.

My difficulty with the legislation relates to the requirements for compliance. Senator O'Toole eased my concerns to a certain degree, but this is still difficult. A few weeks ago a company I am involved with sent me an important document of 50 pages which was accompanied by a 70-page note of advice from the company's solicitors detailing all the things I should and should not do. It scared the wits out of me because I was trying to be honest and stand over what I could say or do. The legislation is in danger of creating a cottage industry of advisers to advisers to advisers or of requiring people to scrutinise things too deeply before they can act.

Directors are supposed to give certificates of compliance. I presume this means that directors will act as a group and not as individuals. I get uneasy in church when people say: "We believe." I am prepared to confirm what I believe, but how do I know what other people believe? There is a danger that if one spreads responsibility around to a lot of people, one diffuses authority. I was an accounting officer in a department and knew what I had to do, namely, to set up systems and to see that the work was done. That is the most anyone can ask and it is the responsibility of the chief executive and the others, including non-executive directors, to see that that is carried out. Anything that makes this more discouraging or frightening is regrettable and the Minister of State should examine this, particularly in the case of companies that have subsidiaries all over the place.

I totally support the proposition that companies should abide by company law and tax law. One is gravely derelict in one's duty if one does not ensure that a company does so. It is when that is extended to responsibilities under environmental law, health and safety regulations, equality legislation and so on, across a wide range of jurisdictions and legislation, that it becomes more difficult.

The Bill is an attempt at social engineering on a monumental scale. Without picking on old sores, it is like the Freedom of Information Act. That Act was profoundly important but lost focus when its ambit was increased. There is a danger with this legislation that the reach of the provisions extends beyond its grasp. It might take the focus away from what we are really after, which is ensuring that people behave properly when it comes to financial and company law. I ask the Minister of State to consider that matter.

There is also a danger, in respect of non-executive directors, that the Act will force people to consider whether they are financially numerate and literate. I am not so numerate or literate, but I bring other experiences of the wider world to the role of non-executive director with companies I deal with. This is another narrowing of the focus the Minister of State should examine.

I commend the Bill and the intentions behind it. It is hugely important and, despite my earlier remarks, I admire the work done by Senator O'Toole and his colleagues. However, the focus would be improved if the compliance requirements were restricted to compliance with tax, company law, etc., as well as material breaches of same. Those requirements should not extend to subsidiaries which will have boards in their own companies that will be required to secure compliance. There is also a problem for companies with many subsidiaries as, from my reading of the Bill, they will be forced to replicate procedures. It might be sufficient for a compliance statement to be issued by the group parent on behalf of the subsidiaries.

It is a good Bill, but it needs a little fine-tuning. Despite Senator O'Toole's remarks, I hope that fine-tuning can be done on Committee Stage to improve the legislation. I thank the Minister of State for his attention and I wish him and the legislation well.

I welcome the Minister of State. As other speakers said, this Bill is a long time coming but it is welcome nonetheless. I listened with interest to the passionate defence by Senator O'Toole of what he obviously regards as his "baby" and I share much of his philosophical approach to this issue. He is clearly used to the process of partnership practised here for some years, whereby one talks issues out behind closed doors with interested parties. When a compromise is reached one then says: "That's it, take it or leave it. There will be no further talks on this." In those circumstances it must be inconvenient to have to put legislation through the processes of the Oireachtas and subject it to a Committee Stage debate. No doubt Senator O'Toole will come to terms with this on Committee Stage.

The Bill seeks to do different things which are complementary but distinctly different. It places the disciplinary procedures of the accountancy profession on a statutory basis, which is important. It puts the IAASA, which has been operating with an interim board, on a statutory footing and, as the Minister of State and other speakers indicated, deals with corporate governance.

As someone who has occasionally practised as a solicitor, usually depending on the wishes of the people of Dublin North-Central at any given time, I am obviously a member of the Incorporated Law Society. As a result I have perhaps a more benign view than many of self-regulation. There is a general view among members of the public that all professions are conspiracies against lay people and that they are necessarily self-protective, self-protecting and bordering on the corrupt. Unfortunately, there have been all too many cases in recent years in virtually all professions which tend to support that view. However, examples of that kind do not necessarily make for good generalisations and that is the case here.

There is merit in self-regulation and in relying on the expertise of people who know how business is done. There is merit in one accountant judging another. They know what the pressures of work are and what can reasonably be expected of another accountant in particular circumstances. It is very much in the interests of accountancy bodies and individual accountants to ensure others do not bring the profession into disrepute. By and large, they know the rules of the game, and it is in their interest to uphold them. That applies to other professions also. Therefore, I can see serious merit in the proposal and would be very reluctant to go down the road of tearing up a system that has, by and large, worked reasonably well.

In fairness to all concerned in producing the Bill and those who conducted the various consultations which preceded it, the structure which we have got is not a bad one. The notion that self-regulation is effectively maintained, put on a statutory basis and that an oversight system should be put in place is a good one. I share what I understood to be the general understanding of what was intended, namely, that the oversight was intended as just exactly that, not as daily involvement in disciplinary procedures against accountants. I would like to hear the Minister of State's assurance that that is the intention. I see it as an appeal mechanism and background safeguard rather than the IAASA as having day-to-day involvement in disciplinary procedures, or for that matter setting down the rules for such procedures to be operated by the accountancy bodies. I see it as a safeguard, certainly as a body which will deal with the accountancy profession in agreeing a method by which they should go about their procedures, occasionally coming into play when need be as a sort of court of appeal.

Unfortunately, the bottom line is that it is often the big, important cases – those that are the focus of most public interest – where internal disciplinary procedures fail. That is the primary reason we have to put the existing processes on a statutory footing because they are only as good as the worst case. In very many cases ordinary accountants against whom complaints are made will co-operate. It is in their interests to do so, it is almost like a guilty plea if they do not. They would see it as their ethical and professional duty to co-operate with the professional bodies, of which they are members. However, as matters stand, those bodies do not have statutory power to oblige compliance. It is important that it is given to them. It is in the important cases where there is serious non-compliance – serious fiddling, for the sake of argument – where when an investigation starts one will get partial information or co-operation from those against whom a complaint is made. One does not very often get a refusal to co-operate but one will get partial co-operation with a little of the information one needs in order to make a judgment. Therfore, it is important that the bodies are in a position to use the statutory powers that the Bill gives them in order to ensure full compliance, co-operation, delivery and discovery of documentation and so on. I am glad that that is being done.

There are a few issues regarding the Bill to which others have referred which have been the cause of some controversy heretofore. I will share my preliminary thoughts with the House. The first relates to the independence of auditors. Again, we must remind ourselves, as Senator O'Toole so eloquently did, of where we are coming from. We are coming from a position where at public hearings before the Oireachtas subcommittee on DIRT, it became crystal clear that auditors in very large companies – in this case, financial institutions – either had not come across serious non-compliance with the law or did not disclose it in their reports. That was quite rightly the cause of public scandal and the impulse behind the setting in motion the process which brings us this Bill. The bottom line must be that we must be able to say at the end of the process that what we are now putting in place will stop this happening and that, even with the Bill, it cannot continue. I am not totally convinced that that is the case.

I have sympathy with the view of members of the DIRT sub-committee that the provisions for the independence of auditors are not as thorough as they should be. There is a compelling case for saying auditors should not do non-audit work for the same company. I know that there is a process in the Bill whereby there is a requirement on companies to note the non-audit work done by auditors in a particular year and, for that matter, the preceding year. I wonder whether that will be sufficient to establish the independence of auditors. As I was not part of the independent review group, I do not know what the argument was. I suspect it ran something along the lines that there were so few big accountancy firms in the country that it would be impossible to enforce a rule whereby one could not have the same company – I will not name any – doing all sorts of work for the same firm. Nonetheless, the principle is an extremely important one because the conflict of interest is self-evident to everybody. If one is working for a company, it is not in one's interest to start pointing to faults in the way it does things. Unfortunately, although one might say good practice and professional ethics should dictate otherwise, there have been all too many examples where accountancy firms have been reluctant to do even what would be their statutory duty in other jurisdictions. I am not totally convinced that the section 42 procedure set out in the Bill will be sufficient to have the effect that we want it to have.

Senator Maurice Hayes dwelt at some length on the certificate of compliance in section 43. This is an interesting departure, though I am not totally sure that it will have the desired effect. However, I support its general thrust. Like Senator O'Toole, I am a little concerned at some of the opposition to it. As I read it, the primary thrust is to ensure compliance with tax and company law legislation. It goes on to talk about "any other enactments . that may materially affect the company's financial statements". It would help if the Minister was to spell this out. It has been represented to us that legislation as diverse as food safety and health and safety regulations could conceivably come under it. That is probably pushing it and would not be my reading of it. However, it would obviously be useful to get an indication from the Minister of State ex cathedra as to what he sees it affecting.

Nonetheless, even if it does, these are Acts of the Oireachtas, put in place for a reason, which impose obligations on companies, be they in the interests of customers, workers or whomever. It is worrying when we are told that directors of a company should not have any responsibility for ensuring those Acts of the Oireachtas are adhered to because surely they must be. We have always had a problem – I believe the Minister of State has some experience of this – with health and safety, for example, where we are effectively told that the splendid laws and regulations are to all intents and purposes non-enforceable or not enforced.

Perhaps by creating a pressure point and explicitly saying this is the responsibility of directors and requiring them to sign off a statement once a year stating, "These are our practices and as far as we can see, they are working well", we would give the regulations more effect. Perhaps that would bring it to the attention of directors on an annual basis that these are legislative responsibilities imposed by the Oireachtas which have to be taken seriously. If it did that, it would be no bad thing. My sympathy is very much with the review group and the recommendation that it has made. My concern would be whether a once-a-year statement, perhaps a practice statement to be made even less often, would be sufficient to create the pressure point about which I was talking.

The argument has been made about the composition of the board. To be perfectly honest, I have no view on this. If it is effectively an appeals board, it is right that it should have representation from the profession on it but with a majority from outside. Two members out of 12 or 13 seems a relatively low level of representation. If the accountancy bodies are of the view that that is important, perhaps we should look at it again. I am sure that the Minister of State will be open to doing this.

We have had some discussion of the whole issue of limited liability, which is central to the argument about the threshold one uses for imposing auditing requirements and so on. I very much hold to the view that Senator O'Toole articulated. Limited liability is a privilege which includes, among other matters, effectively being able to walk away from one's debts in certain circumstances. We should require companies which receive that privilege to adhere to certain regulations. Business will always state regulation is somewhere between a pain in the neck and an anti-competitive measure and so on. They will say this. I would not expect them to say anything different. If I was involved in business, I would say it, too. However, there is a responsibility on those of us who, in a sense, put the regulations in place to, first, explain the reason they are necessary and we are making them – we so often do not do this – and then ensure they are reasonable and can be easily complied with. Regulation, if it has a good reason and is put in place in a fashion which makes sense, is important. I certainly support the sort of regulation which the Bill looks to put in place.

It strikes me that issues such as the threshold for auditing should be dealt with at a European level. These days much of our company legislation is centred on directives from Brussels. It is surprising that this is an issue that has not been dealt with in that context. If it is providing a competitive advantage, for the sake of argument, to companies incorporated in the UK and Northern Ireland, it is not then in the overall interest of the European Union that this should be the case. We should press this matter on an international basis. It would make sense that auditing requirements be levied on a reasonable basis according to internationally agreed standards.

I support the thrust of the Bill. I sense in the Minister of State's initial statement that he is open to amendments and I look forward to Committee Stage after the Easter recess.

I congratulate the Minister of State, Deputy Michael Ahern, and the officials in the Department of Enterprise, Trade and Employment for presenting what I term real legislation to the House. I commend the initiative by the Tánaiste and Minister for Enterprise, Trade and Employment, Deputy Harney, to regulate the accountancy profession.

Self-regulation within the profession did not work. It is claimed by some Senators that self-regulation does work, but it has been proven otherwise. There have been rogue accountancy companies and companies with ambiguous roles within large companies. It was Senator McDowell, I believe, who spoke of transparency. The new rules will impose additional disclosure requirements on companies with regard to fees paid to their audit firms for services other than the audit itself. It is clear to us now that there should be transparency as to whether the audit company is providing other services, such as management strategic plans for the company rather than just doing the audit.

I have observed mega accountancy companies who have had extraordinary relationships with some of the companies that they are auditing. The tribunals of inquiry showed that proper relationships did not exist regarding companies and auditors. Auditors were getting big fees and overlooking serious problems in the companies. It is all transparent now, but we did not think of it at the time.

It took two women with guts to whistleblow on the Enron case and expose the companies that were receiving mega fees and responsible for the audit at the same time. We are talking with 20-20 vision but it did not seem to be a problem then. I remember encountering a similar situation ten years ago and thinking that a company was getting special treatment because they were big payers.

I want to refer to the role of directors in companies. Senator Leyden referred to the turnover threshold of €317,000. We have a high rate of failure in business and the number one requirement of a start-up company is to have a board, a chairman and strict financial management. A small company cannot have an audit committee, but the rules should apply to large and small companies. From my business experience, our customers have to trust our company. If there is a failure of trust, people will not do business with the company. From day one, very strict accountancy procedures have to be introduced to enable the company to survive. Part of the reason for the rate in failures is that companies are not keeping tight accounts of expenditure and costs. People cannot blame too many regulations for failure.

Company directors must now take responsibility for issues such as health and safety regulations and company law. It is about time, because directors were able to receive fees of between €15,000 and €20,000 from small companies for representing their investors, when all they had to do was to sit at company meetings and not take responsibility. It may seem extreme or over-regulated but it is good that the directors now cannot sit there and look at figures and not give proper professional advice to companies. My company was built on trust and integrity. Without it no other company would deal with us. I am not sure of Senator Leyden's point on the €317,000 threshold.

People approach me asking what to do about the businesses in their area where 95% of them are failing and claiming that the Government is over-regulating industry. More importantly, it is a matter of trust. It is not complicated but is common sense.

When I was on the audit committee of Bord Bia, we had to make sure that we complied with all the EU regulations. Unless Bord Bia was transparent in its operations, it would not receive any funding. Auditing and compliance are positive. I support the Tánaiste and Minister for Enterprise, Trade and Employment, Deputy Harney, when she says that she wants Ireland to be at the forefront of the best international practice on corporate governance.

Can the Minister inform us what type of audit committee is required for a small company up to the turnover threshold of €317,000? I would hold that at the threshold of €317,000 directors should have to be compliant because these small companies will not survive if they do not get their financial position correct and above board. There are so many obstacles to overcome.

I was fascinated that the chairman of the committee told us this was a compromise document. It seems to me to be a strict document, but it was presented in an atmosphere where there was recognition that not everything had been done properly in the State.

I compliment the Tánaiste and the Minister of State and the Department of Enterprise, Trade and Employment for this legislation. It may appear to be heavy-hitting but it is the right type of legislation.

I welcome this Bill and the Minister of State, Deputy Michael Ahern, to the House. I must state an interest in that my son is a chartered accountant and a partner in Pricewaterhouse Coopers. The Minister of State announced his professional qualifications at the beginning of the stage.

Former interests.

Mine is at one remove but at the same time relevant. However, I will speak for myself on this Bill. I did not hear Senator O'Toole's contribution. However, I recall that, at the time he was chairing the group that dealt with this issue, I had taken it upon myself to walk to work every morning. I used to meet him outside the Shelbourne Hotel because as I walked down Kildare Street, he would usually be walking towards me. His meetings took place at 7.30 a.m. which showed a great zeal in tackling the issue. I have no doubt that his commitment to the partnership process over many years has borne fruit in the report the group issued and in the Bill before us. It is right that it took time for the legislation to emerge because the proposal and the various recommendations required careful deliberation. Some might say that the Bill was slow in coming forward but, given the importance of the topics it covers, I do not believe that to be the case.

There are a number of points I wish to make. I hope we will get another opportunity to speak on the Bill again when the Minister of State returns for the Committee Stage debate. I am particularly interested in two matters, the first of which is the membership of the board. On "Morning Ireland" this morning, the chief executive of the Institute of Chartered Accountants referred to the membership of the board and, in particular, the number of places assigned to accountants in its membership. I understand that provision is made for two accountants to serve on the board and that the executive director may or may not be an accountant. If he or she is an accountant, that number will be increased to three. In my opinion, the chief executive had a point.

There will be 13 members on the board – 12 members and the executive officer – and it does not seem appropriate that only two of these will come from the relevant profession. I do not agree with what he said when he compared this to a board dealing with medical matters and what would happen if only two of its members were doctors. Financial matters are different to those involving human health. At the same time, however, the allocation of two out of 13 places is quite low and it should be augmented to at least four. I hope the Minister for State will consider making this change because it would only be fair to do so.

The accounting profession and companies needed this Bill. The DIRT inquiry showed that a slackness and a laissez faire attitude had emerged in respect of the rigour which should obtain in companies, in the accountancy profession, in the compilation of accounts and in how directors do their business. I approve of that. I accept that wrongdoing occurred, but I do not believe that the majority of those involved in the accountancy profession set out to perpetrate scams. As a result of the slackness to which I refer, it appeared that scant attention was sometimes paid how business was conducted in various areas.

I wish to comment, in particular, on sections 38 to 43, inclusive, which deal with transparency and how the changes will come about. Section 39 introduces an obligation that accounts will have to be prepared in accordance with accounting standards. The Minister of State indicated that "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."

The Minister of State said, "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." That provision is going to be quite sharp and will require a rigour of attention to detail which will be well worthwhile in the context of the Bill.

The Minister of State also stated:

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.

That is an excellent provision. Section 43 on the compliance statement is also very good.

During my term as Minister for Public Enterprise, I became very friendly with Patricia Hewitt, the Minister for Small Business and e-Commerce at the Department of Trade and Industry in the United Kingdom. She is now Secretary of State for Trade and Industry and she sent me a copy of an interesting discussion document on directors of companies in the aftermath of the Enron and other scandals in the United States. The Bill before us is very good in that it puts the responsibility squarely on the directors of companies, who in turn must say to their audit companies that this is what they stand over as being in good and fair practice and that the figures with which they have been presented are correct, or whatever is the correct terminology. This is important in the context of the furore that arose, and rightly so, over the DIRT scandal and its outcome. Directors deal with their companies on a daily basis and it is quite correct that there should be an increased onus of responsibility on them to say what they do, what they spend, how they run their business and submit correct accounts to their auditors. The double way in which we are effecting that shift in responsibility in the Bill is more appropriate than what is happening in the United Kingdom, where the authorities are going after the directors and not dealing, as yet, with the accountancy profession. We have managed to marry the two, which is a good development.

The Bill will be seen as headline legislation throughout Europe and I note that the United States has marched ahead since the Enron scandal. The legislation has been carefully thought out. I pay tribute to Senator O'Toole for his role in that regard and to the Department of Enterprise, Trade and Employment, the officials, the Tánaiste for taking the decision and to the Minister of State who is going to deal with it from now on. It is a worthwhile Bill and I look forward very much to being in the House for the Committee Stage debate.

We are glad that the Bill was introduced in the Seanad, which, I believe, is a tribute to the work of Senator O'Toole.

I must express my deep concern at only being granted seven minutes in which to contribute. I will try and say what I have to say in that time.

I welcome the establishment of the Irish Auditing and Accounting Supervisory Authority on a statutory footing. I also welcome the sentiments the Leader expressed in regard to Senator O'Toole. However, I am horrified and concerned about the implications of the Bill. It has not been thought through and has not been understood. The implications in respect of some of its stipulations will make us uncompetitive in an area of major importance.

Let us consider foreign direct investment. We compete in this area with many other countries and we are now suddenly putting in place a regulatory regime that is more stringent than any that exists elsewhere. I really am horrified by the implications of this. Let us consider the position of multinational companies, particularly those big concerns operating in Ireland at present. They are going to have to find two non-executive directors who will be obliged to sign up for this. Where will they find them? I assume these people must be Irish – nobody outside the country will accept the stipulations that are required of them – and they will be obliged to sign a compliance statement that is tougher than those which must be completed in any other country of which I am aware.

Let me deal with the example of Scotland, where there will be delight at this legislation because the Scots will tell every multinational thinking of investing in Ireland that it will have to find two non-executive directors who are Irish, who have not worked in the company in the past five years, who are going to have to sign a compliance statement which says a company is guilty unless it proves itself innocent each year. It is unbelievable that we are thinking of doing something like this. It is just not foreseeable that this could happen on that basis.

Let me take one other instance. Where are we to find these non-executive directors? They are difficult to find at the moment. The onus on a non-plc company, a private limited company, is far too great to make sense. The directors will have to be familiar with a level of detail which in order to sign a compliance statement means the only choice they will have will be to get consultants to check on the environment, on tax, on food safety and on everything else, and to say "Yes, I have done this."

I happen to have a company which fits into this category and which does not have non-executive directors who have not worked in the company in the past five years. I would imagine the same applies to the vast majority of other Irish companies. I am speaking today about foreign direct investment, the companies on whom we rely and have relied on for years. When they consider going to Ireland or some other country, they will see that the Irish regime is far tougher than that applied by the Oxley Act in the United States.

Let me take some aspects of the Oxley Act which makes things far less onerous than they are in Ireland. The legislation before us provides that all the non-executive directors must sign up to compliance and may not be on the audit committee. In the US, the only people not allowed to be on the audit committee are the chief executive officer and chief financial officer. In the US, this applies to all public companies, but under the proposed regime in Ireland all private companies will be included as well. This means that Intel and Hewlett Packard and others who operate in Ireland will have to find Irish directors who have not worked in these companies in the last five years and who are going to have to sign up to compliance. Where will they find them? How many such directors are there? I am thinking of the companies that I know. Where will we find people who will sign up to compliance, knowing that if they make a mistake, and do not get in consultants to check on everything, they will be guilty and will suffer the penalties?

In the United States, companies certify to the Securities and Exchange Commission, but in Ireland companies certify publicly in annual reports rather than to a competent authority. That is another nail in the coffin of foreign direct investment in Ireland. In the United States it is required that accounts "fairly present in all material respects the operations and financial conditions" of the business, while in Ireland the requirement under this legislation is that companies "comply with company and tax law and all other relevant obligations that may materially affect the company's financial statements". This is a tougher regime than in any other country.

We are talking about foreign direct investment in Ireland. How many companies will be affected? Has anyone done the sum? Certainly it will affect all foreign companies entering Ireland. How many potential or willing non-executive directors are there in Ireland who would be prepared to take on the role? How many non-executive directors are qualified to take it on? I cannot think of anyone I could ask to go on a board and sign the appropriate statements, unless a huge sum of money is to be paid, because it is not worth anyone's time to take on the job considering the potential penalties likely to be involved.

The foreign companies in Ireland will incur heavier costs than other companies in other EU countries and Ireland will be at a huge disadvantage. I am thinking of foreign direct investment, but also of Irish companies like my own. In the ten years I have been in this House I have never talked about my own company. We compete with foreign companies in Ireland. They will not have to comply with the stipulation at issue. Irish companies will have to find directors willing to sign up to compliance, people who have not worked in the company during the previous five years, people who will have to be paid large sums of money. The company must then find consultants to put those people's minds at rest before they sign up.

If I am hot under the collar about this issues, it is because I believe that while legislation and a supervisory body are needed, as well as rules and regulations, we should not take the step that makes them so much tougher and more stringent than in any other country. If we do, it will mean that when any company considers setting up in Ireland, it will be warned that it will have to endure a regime tougher than anywhere else, a regime very difficult to adhere to. Every Irish company to whom the legislation applies, and I know of one, is competing in general terms with trading companies from outside the State, to whom as far as I know the legislation will not apply. Some Irish companies are in direct competition with such companies. Why then should we put in stipulations that are so much tougher, and a regime that will be so stringent and controlled that it will make it difficult to find anyone to take on the non-executive role?

Non-executive directors will be difficult to find. Their own personal exposure regarding compliance statements will be too great. The requirement of the audit committee for the non-plc is far too onerous. I can understand its being applied to a public company, as it is in the United States, but I do not understand its application to private companies which have not got outside shareholders.

Directors cannot be expected to be familiar with the level of detail required to sign a compliance statement without using teams of consultants. This issue has not received the attention it deserves and the IDA will have very serious concerns when it considers it. We have not had a proposal on this issue from the IDA. Perhaps they have missed it or not done anything about it yet, but every foreign company coming into Ireland will now face the consideration of Irish regulations being so onerous, costly and detailed that they will have to be changed if we are to remain competitive in attracting foreign investment into Ireland.

I look forward to Committee Stage in the belief that we will consider the very serious provisions that this Bill is introducing.

I wish to change this morning's Order of Business. Notwithstanding that we arranged that debate on this Bill would finish at 1.30 p.m. and that the Minister of State would be called 15 minutes earlier, the Leas-Chathaoirleach has given permission to continue into sos time by five or ten minutes. Is that in order?

An Leas-Chathaoirleach

Is that agreed? Agreed.

I propose to share my time. As we are all aware, corporate governance is very much a hot topic at present in light of events in this country concerning offshore accounts and various tribunals, and internationally with the Enron scandal and the trouble AIB had with its American subsidiary, Allfirst. How businesses are run is something in which community and investors alike are taking renewed interest. It is clear that the measures introduced in the Companies (Auditing and Accounting) Bill 2003 are firmly rooted in the public and political response which followed each of these events.

I welcome the Minister of State to the House and I welcome the opportunity to discuss the legislation in the area of the regulation of the accounting and auditing professions. The Companies (Auditing and Accounting) Bill 2003 arises directly from the report of the review group on auditing and the recommendations contained in it form the substance of the Bill. The review group was established by the Tánaiste following the Committee of Public Accounts parliamentary inquiry into DIRT, which examined the regulations and the professional rules governing the auditing profession. I congratulate the Tánaiste on her achievement and her work in the area. The review group was chaired by Senator O'Toole and he too should be congratulated on his superb work in that role.

This legislation heralds important developments for the accountancy profession. The main function of the Bill is to provide for the establishment on a statutory basis of an independent regulatory body, the Irish Auditing and Accounting Supervisory Authority. The IAASA has already been set up on an interim basis, and has fulfilled its role as a supervisory authority. Though the powers awarded to the IAASA in this legislation are extensive, many of them are very appropriate.

The principal function of the authority under the new legislation will be to supervise how the prescribed accountancy bodies regulate and monitor their members. In addition, the authority will have the power to intervene in the disciplinary process of the accountancy bodies where it deems necessary, carry out independent investigations in public interest areas, and apply to the courts to compel the directors of a company to amend accounts that are not in line with accounting standards. In addition, the authority will be given the responsibility of promoting adherence to high professional standards in the auditing and accountancy profession.

I certainly welcome this measure which represents a firm move by the Government to encourage compliance with our tax regime and laws. Undoubtedly, there is sometimes a tendency for companies to try to work around the tax regime. This is a time for legislators to encourage a culture of compliance with our tax regime. We have a shared objective in that all of us strive to promote a situation whereby auditors are trusted as guardians of honesty. This legislation will be beneficial to the reputation of these professions and protect the whole industry from damage caused by any non-compliant members.

As has been the practice to date, the Bill aims to ensure the authority will be independent of the accounting and auditing profession, while still having at its disposal all the necessary expertise for effective regulation. The number of accountants on the board of the authority will be strictly limited to not more than two out of 13 persons. I am aware that, for this reason, a number of accounting companies have criticised the Bill because they fear the authority will lack the necessary expertise to carry out key functions. Though it is unusual for a profession to be so under-represented on its supervisory authority, I understand the independence of the authority must be upheld at all times. Accordingly, I welcome this measure as a move not to prejudice the autonomy of the authority.

Although the Bill has clear aims and will have positive effects, there has been considerable controversy in relation to some of its provisions. I wish to address the relevant sections. Section 43 introduces a system whereby company directors will be required to draw up a compliance statement which will cover each company's policies and procedures concerning its compliance with its statutory obligations, including those arising under company and taxation law, which will be reviewed by auditors. Each company auditor will be responsible for the review of this compliance statement.

While I am satisfied the Minister of State wishes to ensure, as do we all, that the future regulatory system will have a positive influence on standards throughout the profession, we also have a responsibility to ensure the profession can survive in the new regime. I foresee some problems in that regard. I fear the Bill may place an intolerable burden, especially in a financial sense, on directors of small and medium-sized companies. Furthermore, although most accountants and auditors adhere to very high professional standards, a company's auditor may not be sufficiently confident to comment in relation to anything other than auditing, accounting or taxation of a firm. However, this legislation would seem to demand more. We must recognise that an auditor does not have a legal qualification and, therefore, cannot be expected to comment on compliance with anything other than tax law. I respectfully request the Minister of State to review this section, possibly with a view to confining it to larger companies or, at least, delay it until the exemption threshold for audit is reviewed.

I welcome the opportunity to make a brief comment on this Bill. Ministers are sometimes accused of not being totally au fait with the subject matter of legislation they are introducing. That certainly cannot be said in this instance. The Minister of State dealing with the Bill has a great deal of expertise in the area concerned. As an accountant, I have looked at the situation from both sides. Initially, I worked with a firm of accountants for five years during which I had considerable auditing experience. I subsequently worked for 11 years with a company in the fresh food industry, in the course of which I had considerable contact with Senator Quinn's company.

During my term as a Member of the Houses of the Oireachtas since 1989, there has not been any primary legislation in this area, just regulations. I appreciate that there was a companies Act in 1990 but that did not really deal with the area covered by the Bill. During my time in accountancy practice the bible was the Companies Act 1963. Accordingly, I am glad the legislation is now being updated. I agree there is need for a supervisory and regulatory authority for recognised accountancy bodies. Previously, those bodies were self-regulatory and, by and large, did a good job. In my time there were only three or four accountancy bodies whereas there is now a plethora of different bodies and the situation could spiral out of control, with lower standards in some companies if not properly regulated. That could do a great deal of damage to the image of the profession. Accordingly, I am glad the Bill has been introduced.

My initial reading of section 9 gave me some concern that power was being taken from the Minister and given to recognised accountancy bodies. I recall a situation in the past where a particular body of accountants sought the power to sign off on limited companies' accounts. There was a very strong lobby from the established accountancy groups at the time to prevent this. However, the then Minister intervened and, quite rightly, gave the relevant power because the body in question had the required expertise to do the job. I was concerned that, by removing that power in the Bill, something similar could happen again in future. However, section 11 and the composition of the supervisory authority seem to suggest that that cannot happen.

In relation to section 15, I support the concept of a reserve fund to enable the authority to instigate investigations concerning members of prescribed accountancy bodies. How will wrongdoing or bad practice be brought to the attention of the authority? In the case of an accountancy firm, is it envisaged that a client of the firm might report on it? In the case of a business, might the report come from a customer? I am not sure what is envisaged in that regard. There are many accountants in the public service who have no dealings with the general public. If there was a difficulty in that regard, who would make a report to the supervisory authority?

With regard to staff recruitment, I realise it is early days yet in terms of determining the number of personnel to be involved in the new authority. However, I have to ask the question as to where the authority will be located. I sincerely hope it will not be in Dublin, where everything appears to have to be located. Despite much talk of decentralisation and getting people out of Dublin, every newly established body seems to be located in Dublin. That is nonsensical. I am not necessarily making a case for Waterford, although, perhaps I am doing so to some extent.

What about Kilkenny?

If it was just over the county boundary, I would have no problem with it. However, my point is that it should not be located in Dublin. We must get away from that practice.

I welcome the provision in section 34 to correct a previous anomaly whereby a shareholder could be an auditor. I was not aware of this. Even if a person has only a small holding, there would still be a conflict of interest and it is only right that the anomaly should be eliminated. The customary arrangement in an accountancy practice has been that if one of the partners had an involvement with a company, the accounts of that company would be signed off by another partner in the firm. However, that is not at arm's length and I wonder if the arrangement would be outlawed. We have to be very careful in that regard.

There are other points I had hoped to make but, due to shortage of time, I will confine myself to commenting on section 42 which is important in relation to the independence of auditors where substantial accountancy work is undertaken. In my experience, I visited companies every two months in the course of which I prepared VAT returns, wrote up their cheque journals and cash books and, at the end of the year, did their audit. I welcome the provision to introduce a measure of independence in that regard. The Bill is a step forward and I commend it to the House.

I thank Senators for their contributions to this debate in which many interesting points have been raised, of which I will address as many as possible in the time remaining to me. First, I wish to stress that the purpose of the Bill is to promote a culture of corporate compliance in Ireland. I wish to reassure Senators Coughlan and Leyden in relation to their concerns about impositions on businesses, particularly small businesses, by making it clear there is no question of seeking to impose rules, regulations and conditions, the purpose of which serves simply to penalise commercial enterprises. I also wish to make it clear that it is neither my intention, nor the purpose of the Bill, to impose unduly onerous requirements on auditing and accounting practitioners. Above all, the Bill strives to achieve a balance between the need for a climate of minimal State interference with commercial enterprise, at one end of the spectrum and, at the opposite end, the view that all conceivable aspects of commercial operations should be legislated for in detail.

The implementation of many of the requirements that will flow from the present legislation is a matter of good practice and in many instances a restatement or refinement of obligations that are already in existence. Therefore, the effect of the new legislation should not be such as to induce trauma and panic either in commercial enterprises or among the practitioners who are being addressed in the Bill. Most of all, it will introduce a climate of certainty in the commercial sphere.

I agree with the sentiments expressed by Senators Coghlan and O'Toole regarding the move from self-regulation to supervised regulation and on how the balance reflected in the Bill was achieved. Senator McDowell also supported the structure and I am satisfied that the balance is right. However, the authority must have the power to intervene as per sections 23 and 24.

Senators Coghlan, Leyden, O'Toole and McDowell raised points regarding the constitution of the board of directors. It is intended that the board of directors of the supervisory authority will consist of a maximum of 12 directors, in addition to the chief executive officer who will be an ex officio director. The 12 directors will be made up of two persons, nominated by agreement among the prescribed accountancy bodies; two nominated by the Minister and one nominee of each of the bodies set out in paragraph(c)(ii), which are the designated bodies. The provision in section 11 restricts to two the directors appointed by the Minister who can be members of prescribed accountancy bodies. Owing to the fact that there is no restriction as to the profession of the chief executive, the directors could consist of a total of three members of prescribed bodies. These numbers, including the maximum specified in relation to members of prescribed accountancy bodies, can be altered by means of a regulation under section 46 of the Bill.

Several Senators have said that the number of directors who are permitted to be members of prescribed accountancy bodies should be increased beyond the present level of two. As I have already said, this can be achieved by ministerial regulation under section 46 and what the Senators propose could also be achieved by increasing the overall number of directors. However, I am not considering that proposition. I will give consideration to increasing the ceiling set in relation to the number of directors who can be members of prescribed accountancy bodies.

It must be borne in mind that the substance of the work of the authority will be carried out by the executive of the body rather than the board. Furthermore, some of the work will be done by sub-committees of the board which could, if necessary, include members of the prescribed accountancy bodies or experts who are not members of the board. The independence of the authority is an over-riding consideration and it is essential for us, as regulators, to ensure that the authority is constituted so as to obviate any possible claim of bias against it.

Senators Coghlan, O'Toole, Leyden, Maurice Hayes and McDowell referred to the requirement in section 43 of the Bill for companies to prepare a compliance statement and for auditors to endorse and confirm the validity of such a statement. The thrust of some of the interventions has been that this requirement is unduly harsh and punitive, especially with regard to smaller companies. On the other side, Senator O' Toole set out arguments in its support. I expect companies to be in a position of compliance with all of the various requirements on them in relation to all applicable legislation. The move from being in compliance to declaring such compliance appears to be a logical step. Furthermore, the process of verification by auditors of such compliance would not appear to be an inordinate burden. One does not have to carry out an audit to see if it is being complied with. We can go into detail on that when we take Committee Stage.

To argue against such a requirement is to suggest that it is acceptable for companies not be compliant with their various legislative obligations or that somehow or another it is not appropriate for them to state that they are so compliant or that their auditor should equally not have to stand over such compliance. It does not seem to be unfair to ask companies to comply with their legal obligations to state that they are in compliance and that their auditor certifies that such is the case.

It is not the purpose of the legislation to impose undue burdens on companies or professionals acting in the commercial sphere. However, if operators in the marketplace can demonstrate how compliance with this requirement will impose an inordinate cost or other burden upon them and make such a case to me, I will review those aspects of the provision which are considered to present difficulties.

In response to Senator McDowell's question, I can clarify that the compliance statement relates to all statutory obligations of a company. The mechanism provided for in this section will work in practice and achieve what we expect from it.

Senator Quinn raised the issue of non-executive directors and the problems that this section could introduce to the field of foreign direct investment. The committee is mandatory for public limited companies, but not for private companies that meet the thresholds of balance sheet value of €25 million and turnover of €15 million per annum. If those companies do not establish a committee, they have to explain why they have not done so. The compliance statement is not required to be signed by the non-executive directors, but by the directors as a whole.

Senators Coghlan and Leyden asked that the thresholds for audit exemptions should be raised. I am mindful of the need to establish realistic thresholds and I assure the Senators that my Department is continually monitoring the thresholds for audit exemption. I have asked the relevant officials, in the context of the present legislation, to advise in relation to the current threshold and I expect this advice to be forthcoming in the near future. Senators will be mindful of the need for balance in relation to prudential considerations and impositions on small companies.

Senator Coghlan suggested that some work being assigned might be more appropriately and cheaply done by another body such as the single regulatory authority. The decision to establish IAASA was based on the clear recommendation of the review group on auditing. Senator Leyden also supported this in his contribution. I am not convinced that any possible alternative body would possess the necessary expertise to discharge this work, as it is to be carried out by IAASA.

Senators Coghlan and McDowell referred to the time taken to publish the Bill. I guarantee the Senators that considerable work has been going on since the report came into being in order to get it to the House today. As Senators will notice from the submissions that they are no doubt receiving from different bodies and individuals, it will be some time before it is finalised. Hopefully, that will be in the not too distant future. I reassure Senators that the officials have been working strenuously over the past few months and years to bring the Bill to this stage.

Senator Coghlan raised the matter of the regulation of accountants and the use of the term "accountant" to describe individuals who are not qualified and do not come under this legislation. The audit review group considered the issues and was unable to agree on how the matter could be determined and how they could be regulated. However, the interim IAASA body is keeping the issue under review. I am sure the statutory IAASA, when it is established, will also consider the question of people using the term "accountant" in relation to financial matters and we will hopefully be able to come to a conclusion satisfactory to all concerned.

Senator Coghlan also raised concerns about increased regulation. The company law review group has recommended simplification, and it will be a feature of the Bill to implement this recommendation. Our effort is to achieve balance.

Senator McDowell raised the issue of auditor independence and was not sure that the Bill would achieve it. However, section 42 requires full disclosure. Also, the audit committee will oversee matters in companies required to establish them. It is worth mentioning that the EU recommendation addresses this issue. This Bill will improve the independent standing of auditors.

Senator Maurice Hayes said that, based on what Senator O'Toole had to say, the Bill was a non-negotiable document. Senator O'Toole said the report of the review group on auditing, on which the Bill is based, was itself a compromise. He pointed out the dangers of fundamentally unpicking every line of it. I do not think he meant that no changes or amendments could be made to the Bill during its passage through each House.

Senator White asked about the provision by auditors of services other than auditing. Section 42 will result in full disclosure of the fees for audit work, audit related work and non-audit work. I strongly support that provision. People will be able to see the position from the accounts. I thank Senator Leyden for his words of congratulations to all concerned in bringing forward this Bill. Senator White also said she supports the requirement that firms over a certain size should have to establish audit committees. The establishment of audit committees is in line with the recommendations of the review group on auditing. It is important to note that the thresholds set out in section 40 are such that only sizeable companies are comprehended by this requirement.

Section 40(3) provides that the board of directors of private companies that exceed the stipulated thresholds can state in their report under section 158 of the principal Act that they have not established an audit committee and setting out the reason for their actions. The Act does not demand that audit committees be established in all cases involving private companies where it is relevant to do so. It allows latitude in a case where a company decides that it is not in a position to, or prepared to, establish such a committee but instead to explain its decision in this regard.

Senator Kenneally asked how wrong-doing will be brought to the attention of the supervising authority. That could be done by clients, members of the public, the media or personal contacts from any source. I thank Senators Kenneally and MacSharry for their support for the Bill.

I thank all Senators who contributed to this most useful and informative discussion. I hope I have clarified most, if not all, the questions raised. I have undertaken to reflect on a number of points raised, in particular those supported by written submission. Those matters will be revisited on Committee Stage.

Question put and agreed to.
Committee Stage ordered for Wednesday, 7 May 2003.
Sitting suspended at 1.45 p.m. and resumed at 2.30 p.m.