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Seanad Éireann debate -
Tuesday, 4 Apr 2017

Vol. 251 No. 4

Companies (Accounting) Bill 2016: Second Stage

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

I welcome the Minister to the House.

With respect to the speaking order, I indicate that I wish to speak.

My speech is being circulated along with an information pack of supplementary documentation, which I hope will be of interest to Senators.

I am pleased to bring the Companies (Accounting) Bill 2016 before the House. It marks a significant milestone in the development of Irish law on financial reporting for companies. It is a milestone because it is a wide-ranging overhaul of this important aspect of Irish company law. It builds on the work of simplification and improving corporate governance that was done in that other legislative milestone, the Companies Act 2014. However, the Bill is most significant because the vast majority of Irish companies will see real benefits and savings as a result.

As Senators know, the context for the Bill is the transposition of the EU accounting directive into Irish law. That directive is notable as it restructured and modernised EU law on company accounting. The directive takes a "think small first" approach and is intended to ensure that the requirements it places on small and very small companies are in proportion to their resources and size.

While both the Bill and the directive are a new departure in some ways, both are based on long-standing and important principles. First, that reporting obligations of companies must be proportionate to the size, complexity or business of the company. Second, that transparency of a company’s financial position is an important protection for third parties, so it must be meaningful. These are the principles that underpin the Companies Act 2014 and they can be seen here too. They have informed the approach in the Bill and shaped the policy choices that have been made.

The main challenge in preparing this Bill is to find the right balance. On the one hand, too many reporting obligations on companies can be costly and time-consuming. They can stifle enterprise and entrepreneurship but, on the other hand, if the law requires too few or inappropriate disclosures, then suppliers, investors and employees are effectively asked to do business with a company on the basis of blind trust. That can undermine good corporate governance and commerce. I believe that the Bill before the Members today strikes the correct balance. This is evident throughout the Bill. In some sections there are reductions and simplifications for small and very small businesses. For those businesses, the Bill will require financial statements that focus on meaningful information and dispense with the unnecessary. These changes will bring tangible benefits to those enterprises. This is appropriate given their size.

At the same time, the Bill introduces new reporting and filing requirements. Again, this is appropriate given the circumstances. In some cases, the new obligations are aimed at certain types of companies where more transparency is justified because of the company’s size and activities. In others, they are intended to close off a gap in the law or are appropriate following other changes in the Bill. Read together, they aim for the same goal, namely, to set the balance between protecting and informing third parties on the one hand, while keeping the administration of companies efficient on the other.

As well as transposing the directive and updating the law on financial reporting, the Bill has a secondary purpose. It is the first companies Bill since the enactment of the Companies Act 2014.

That Act was a major undertaking and, since it was commenced in June 2015, a few issues have come to light. This Bill is an opportunity to address those issues.

I now turn to the structure and substance of the Bill. As it is a technical Bill, I will group together the provisions by theme rather than give a detailed explanation of each section. The supplementary information that has been circulated to Senators gives more detail.

The Bill is divided into four parts. Part 1 contains the preliminary and general provisions. Part 2 is the main part of the Bill as it is concerned with the financial reporting obligations of companies. The existing law in this area is largely found in Part 6 of the Companies Act 2014, which is entitled "Financial Statements, Annual Return and Audit". As the main purpose of the Bill before the House today is to update that law, most of the provisions amend sections in Part 6 of the Companies Act. Part 2 also replaces the two Schedules associated with Part 6 of the Companies Act. These will become Schedule 3, which provides for entity financial statements, and Schedule 4, which provides for group financial statements.

The Bill also inserts three new Schedules. These additional Schedules are provided for clarity, to separate out the reporting regimes for different sizes of company. As a result, a small company can refer only to new Schedule 3A or, in the case of a small group, to Schedule 4A, with all the relevant information in that Schedule. This follows the innovative architecture of the Companies Act 2014, which places all the law relating to a single company type together, for ease of reference. The new Schedule 3B will apply to the new category of micro company.

Section 87 inserts a new Part 26 at the end of the Companies Act 2014, while Schedule 6 inserts a new Schedule that is associated with that new Part 26. These provisions only apply to specific types of company, and refer only to reporting particular payments to Government. Therefore, it is appropriate to give them a separate part in the Act.

Part 3 contains the various amendments to the Companies Act 2014 that are not related to financial reporting by companies. Finally, Part 4 amends sectoral legislation as these types of companies are in the scope of the directive but regulated outside of the Companies Act 2014.

One of the most significant provisions of the Bill is the increase in the thresholds for categorising companies as small or medium. This is set out in section 15. These thresholds refer to annual net turnover, balance sheet total and an average number of employees. A company must exceed any two of the thresholds in order to move up into the next size category. The directive harmonises the maximum thresholds for medium companies across the EU. There is no choice here. In the case of Ireland, this will lead to a significant increase in those thresholds, with two of them doubling.

To qualify as a medium company, the company must not exceed any two of the following: an annual net turnover of €40 million, up from €20 million currently; a balance sheet total of €20 million, up from €10 million currently; and an average number of employees of 250, which is unchanged. When it comes to the thresholds for small companies, the directive allows some discretion and the Bill provides for the maximum levels. Again this is an increase on the levels set in the Companies Act 2014. To qualify as a small company, the company must not exceed any two of the following: an annual net turnover of €12 million, up from €8.8 million; a balance sheet total of €6 million, up from €4.4 million; and an average number of employees of 50, which is unchanged.

As a result of these increases in section 15, some companies that are currently classified as medium will now qualify in future as small. Similarly, other companies that are currently in the large category will come within the new thresholds for medium companies. This change brings one of the more notable benefits of the Bill, as those companies that will be reclassified as small will then become eligible for the fewer reporting requirements that apply to small companies. These include the fact that there is no obligation on small groups to prepare consolidated financial statements, there are fewer requirements for the content of their directors’ reports, and there is no obligation to file a profit and loss account or the directors’ report with the Companies Registration Office. Another benefit of changing from a medium to a small company is that it will become more eligible to qualify for the exemption from the requirement to have an annual statutory audit.

As well as bringing more companies into the scope of the small company category, the Bill will simplify further the existing financial reporting obligations on small companies. Unnecessary and disproportionate administrative costs can hamper economic activity and impede growth and employment. Company law recognises this and already exempts small companies from many of the obligations that are considered necessary for larger enterprises. While it is difficult to quantify the savings that these exemptions bring to business, it is widely acknowledged that they are important in keeping the cost of doing business down.

The Bill reduces the number of note disclosures that small companies must give in their financial statements. As a result, small companies will be allowed to prepare a profit and loss account and balance sheet with a limited number of accompanying notes to provide information on the results and financial position of the company. Only the balance sheet and notes must be filed. These are seen as practical improvements for small business.

By way of balance, the Bill also requires some financial disclosures that are additional to the basic requirements set out in the EU accounting directive. When it comes to the disclosures that small companies must make, the directive does not allow member states to go far beyond its basic provisions, but the Bill avails of what discretion there is. I believe that this is appropriate to ensure that key information, necessary for an understanding of a company’s financial position, is not lost in the drive for simplification.

Another factor in deciding to include these in the Bill is the fact that some of these will not be new for Irish companies. The additions are: an analysis of the movements in fixed assets - this obligation is not onerous; the name and registered office of the holding company of the smallest group that includes the small company in its consolidated financial statements - this is basic information and is not onerous; the nature and business purpose of material off-balance sheet arrangements - this will only arise where the company has such arrangements; material post balance sheet events - this information is essential to understanding the financial position of a company regardless of its size; details of transactions with specific related parties including the amount - the nature of the relationship with the related party; and any other information about the transactions necessary for an understanding of the financial position of the company.

The Bill goes on to make a new distinction between small and very small companies. It does this by introducing a new category known as the micro company. These are companies with turnovers of €700,000 or less, balance sheet totals of €350,000 or less and ten or fewer employees, on average.

For these micro companies, the financial statements will comprise a highly-condensed balance sheet and profit and loss account with few notes. Furthermore, there will be no obligation to prepare and file a directors' report. The Bill also deems their financial statements to give a true and a fair view. This will save time for the directors of these micro companies. Micro companies will also qualify for the audit exemption.

The establishment of the new micro company category is a choice for member states under the directive. I believe that the Government decision to introduce this will bring real benefits for a significant number of companies in Ireland.

Alongside the many benefits for small and micro enterprises, the Bill introduces some important improvements in corporate transparency. As I mentioned earlier, two of the thresholds for qualifying as a medium-sized company will double. This means some companies that we currently consider to be large will qualify in future as medium-sized. In recognition of that fact, the Bill removes two existing provisions that will become inappropriate. Under the Companies Act 2014, the scope for medium-sized companies to abridge their financial statements was reduced. The Bill removes the remaining scope for abridgement. As a result, medium-sized companies will have to prepare and file full accounts in future.

Second, current company law exempts medium-sized groups from the requirement to consolidate their financial statements. Again, in recognition of the forthcoming increase in size of medium-sized groups, the Bill will remove that exemption.

Many Members will be familiar with so-called country-by-country reporting. Section 87 introduces a specific form of such reporting. The new obligation is designed to enhance the transparency of payments made to governments throughout the world by companies active in mining or in the logging of primary forests. The objective is to provide public access to information to enable society to hold governments to account for income arising from the exploitation of natural resources. The scope of the Bill in this area is confined to specific types of companies. As well as being in particular sectors, they must also be large companies or companies that are known as public interest entities. These include companies such as banks, insurers and companies that are listed on the main market. The Bill will require such companies to prepare annual reports on specific payments that they make to the governments of the countries in which they have mining, quarrying or certain logging operations. In the case of Irish registered companies, those reports are then filed with the Companies Registration Office, where they can be inspected by the public. The specific payments that must be reported are set out in section 87. They include: taxes levied on income, production or profits of the companies, excluding VAT, sales tax or personal income tax; bonuses paid that are related to signature, discovery or production; and certain fees, such as licence fees and payments for improvements in infrastructure.

The last of the main new reporting requirements are in sections 78 and 80. These sections are related to one of the most significant features of our current company law, namely, the benefit of limited liability given to owners of companies. This benefit is in legislation to encourage entrepreneurship and the creation of businesses. However, it comes with obligations, most notably the obligation for the company to disclose its financial position to third parties. This obligation to disclose is important because a limited company is a separate legal person and the assets of that company's owners are not the assets of the company. As a result, the only security that limited companies offer to third parties doing business with them is the assets that the company itself owns. Disclosure of that company's assets in its annual financial statements allows third parties to assess the ability of a company to pay its way. For this reason, the obligation to file financial statements in public is well accepted as an important protection for employees and others, such as suppliers who do business with a limited liability company.

The vast majority of companies in Ireland are registered as limited liability. They manage to conduct their businesses and grow while meeting the standards of transparency.

When it comes to unlimited companies different considerations apply. In this case, company law exempts unlimited liability companies from the obligation to file financial statements in public, as the assets of the owners and of the company are one and the same. This exemption is significant and is based on good reasons. However, it is still an exemption from the general principle of transparency and therefore we need to ensure that the criteria for using the exemption are clear cut and fit for purpose.

As things stand, there is a gap in the law here. The gap arises when companies set up structures that mix limited and unlimited liability companies. In some cases, these structures include companies registered outside the EU. In other cases, they are groups that trade through limited liability subsidiaries. The effect of these layers of limited and unlimited companies in corporate structures is that the owners of companies and groups can get the advantages of limited liability without having to comply with the obligations that should go with that limited liability. Sections 78 and 80 address this gap.

Some provisions in the Bill amend the Companies Act 2014 but are not related to the law on financial reporting. These are mainly technical and do not reflect changes in policy. The Bill clarifies some definitions, reinstates some provisions that were inadvertently left out in the consolidation that led to the Companies Act 2014, corrects some typing errors and addresses issues that have come to light since the commencement of the 2014 Act. For example, section 92 restores the priority and standing of various creditors, such as employees and the Revenue Commissioners. This was necessary following a recent judgment of the Supreme Court that resulted in the holder of a floating charge being able to leap-frog preferential creditors, contrary to the intention in the Companies Act 2014.

I am keen to outline another issue that is of practical concern to many stakeholders. The EU accounting directive applies at the latest to financial statements for financial years that start in the course of 2016. The directive also allows member states to apply the provisions earlier, for financial years that started in 2015. However, we are now in April 2017 and the Bill is not yet enacted. For many businesses, the new financial year will have begun and they may already have prepared financial statements for 2016. Given the savings that the reduced reporting regime in this Bill will bring to small businesses, it is important that enterprise gets to avail of those at the earliest opportunity.

Indeed, since the publication of the Bill last August a good deal of interest has been expressed in applying the new measures as soon as possible. New accounting standards for small and micro entities have been developed but cannot be used until this Bill is on the Statute Book. Therefore, section 14 of the Bill provides that directors may decide to apply the reduced reporting requirements to financial statements for financial years beginning in 2015 and 2016. This is not retrospective legislation as we would usually understand it. Rather, the Bill is permitting companies to apply new reporting requirements to activity that has already happened. It is the form and content of reporting, not the actions of the company, that we are addressing here. While most financial statements for 2015 will have been filed by now, there may still be a benefit in section 14 for any company whose financial year started in late 2015. When it comes to financial years that began in the course of 2016, section 14 should be of benefit to a wider group of companies. It is hoped that this provision will mitigate some of the effects of the delay in transposing the EU directive.

I am pleased to introduce a Bill that brings real and meaningful benefits to the vast majority of companies in Ireland and that will ensure that our law on financial reporting is fit for purpose. I commend the Bill to the House.

Fianna Fáil supports the transposition into Irish domestic law of the Companies (Accounting) Bill 2016, which implements a 2013 EU directive. I accept that the current Minister inherited this Bill midstream but it is a damning indictment of successive Governments that this Bill was only published in August of last year, three years after the EU accounting directive was finalised during the Irish Presidency of the EU in 2013. Ireland has badly missed the deadline for transposition, which was 20 July 2015, and this has caused a lot of angst in the accounting community. It is also a source of dissatisfaction for small and medium businesses. The directive states that the new rules must apply for the financial year beginning on or after 1 January 2016 at the latest. I welcome the clarification from the Department that there will be early application of the Bill's provisions before it is enacted, thereby allowing companies to apply the provisions in the financial year beginning 1 January 2015. According to Chartered Accountants Ireland, the delays have caused difficulties for many small and micro companies in Ireland in meeting their financial reporting requirements.

The EU directive was enacted in the UK in 2015 and I would like the Minister to explain why there has been such a delay here. I know that the Bill was kicked around for quite a while before the current Minister took up her position and in fairness to her, she has fielded calls and dealt with queries on the Bill. That said, I ask her to explain why this issue was not dealt with in 2015. This has put Irish small and medium enterprises at a disadvantage because at present, the qualifying thresholds are not as set out in the directive. While Fianna Fáil Members support the Bill, we are not happy with the delay and I ask the Minister to explain it to the House.

Senator Boyhan is sharing time with Senator McDowell.

I welcome the Minister to the House and wish her well. This is a very comprehensive Bill containing 92 sections which will have a major impact. I try to simplify everything I do - it is my style and the way I operate. I took this Bill, gave it to three micro business people and asked them to comment on it. I had to chase one of them last Sunday for feedback. I want to share with the Minister the feedback I received from three people who are at the coalface of business, one of whom runs a very small shop employing only eight people. They made three comments regarding the Bill. They said it is encouraging responsible business, facilitating entrepreneurship and attempting to cut red tape, particularly for small to medium-sized enterprises. The comments were as simple as that, which is quite impressive. It is important for the Minister to hear that feedback. Despite all of the jargon contained in a lot of legislation, business people get on with doing their business and they want support. I know of the Minister's commitment to local businesses in her own constituency. I am regularly contacted by the 31 councils all over the country who have told me that small issues can have a big impact on business.

Having consulted with business people, it is clear that one of the main objectives of the Bill is to reduce the administrative burden and enhance simplification of accounting requirements, targeting mainly small companies. The second objective is to increase the clarity and comparability of financial statements targeting company categories for which these considerations are important. The Minister has outlined very well today the designation of a new type of company, namely, the micro or very small company, which is very important. The Bill aims to relieve the administrative burden on new micro companies and existing smaller companies by making accounting disclosure requirements less onerous. The Bill puts in place new thresholds and criteria to determine a company's classification and disclosure requirements based on company size. In simple terms, that is my take on the legislation and it is important to keep the messages terribly simple.

I welcome section 84 in particular, which deals with improved transparency of payments to governments by those engaged in the extraction industries or the logging of primary forests. This is important because large and multinational companies that are active in the mining, extraction and logging industries will now be required to prepare and file annual reports on payments to governments with the Companies Registration Office.

I also particularly welcome section 92. I wish the Minister well with this very comprehensive legislation. Anything that allows entrepreneurs to get out, make profits and not have to apologise for it is a good thing. The Minister deserves support for that and I am happy to give it.

I welcome the Minister to the House. I wish to dwell on a number of points that I am anxious to have clarified in the course of this debate. This is a transposition measure in the main and I share the disquiet expressed by Senator Davitt that it took so long to transpose the relevant directive into Irish law.

The point I want to make above all is that in 2014, we enacted the Companies Act which was supposed to be "the" Act. It was supposed to be kept up to date and to be a one-stop shop for somebody reading it. As far as I can see, on reading the text of this Bill, it respects that principle. All of the amendments are textual amendments to, or insertions into, the main Act. It should be possible to have it in a form which is readable as one continuous document. That was the whole purpose of the Company Law Review Group and of the 2014 Act, which took so long to get on the Statute Book. In that context, I ask the Minister to clarify whether it is proposed to publish the amendments made by this Bill to the 2014 Act as a single, coherent text.

Will it be available between two covers for consultation or are we going back to where one must go hunting among a series of documents to find out what the law is? In that context, I am conscious of the fact that while I was Attorney General, the idea of the statute law restatement route of having one simple revised statute in available form incorporating subsequent amendments was advanced. I ask the Minister to indicate if she proposes to avail of the statute law revision method, which is now laid down in law, to produce one authoritative text or if, on the contrary, she proposes to simply have an informal, non-statutory consolidated text available.

I notice from my practise in law that it is now becoming quite common for Departments to keep their own consolidated legislation and it is very useful for practitioners because the State's Department usually hands it over in the context of presenting the case to simplify the case to a judge. It would be a terrible pity if we went back to having multi-sourced company law legislation. Whether we employ the statute law revision route or some less formal system, I hope there can be an absolute guarantee that there will be one single text available for everybody doing business in Ireland, for students learning company law, for accountants looking up company law, for lawyers practising company law, for directors carrying out their businesses in accordance with company law, and that there would be one bible available without having to search through various subsections of later Bills to see what amendments were made to an earlier Bill. That is of crucial importance. I ask the Minister to clarify what her intentions are in that respect.

I welcome the Minister to the House again on another important Bill that is awaited eagerly by small companies. I welcome the Bill. We would all agree that we want to support small and medium enterprises and entrepreneurs, and to help them exercise their imagination and their ability to create jobs. This Bill is very important in that regard. Increasing the size threshold for small companies will help many companies that are currently in existence and it will encourage others. Simplifying the existing financial reporting requirements for small companies must be welcomed. Many people have difficulty dealing with those requirements initially when they are faced with the complexity of the current system. This reduction in red tape, as others have said, is truly welcome. The introduction of the new category of micro companies is very important also.

I wish to cite an example. The Minister was away on a trade mission and the previous Minister in her role substituted for her at an event involving a company in Swords which was set up in 2010 by a local man, Tommy Kelly, who had previously run a company called Two Way Forwarding and Logistics. He came up with an idea in 2010, set up a company with six employees and it had a turnover of €48,000. Today its turnover is €220 million. He has 120 employees and he hopes to grow that number to 400. If there was ever an example of "mighty oaks from little acorns grow", this company is it. This Bill goes a long way to supporting people like Tommy Kelly and his company, eShopWorld. Senator Boyhan's contribution was welcome in pointing out that those who are at the coalface welcome this Bill.

I want to pick up on one or two other areas that are particularly important and I want to speak specifically on them. Section 87 is designed to improve transparency of payments associated with the exploitation of natural resources that are made to governments by companies active in mining, quarrying and logging of primary forests. This is very important. There has been concern in this country for a long time about activities, certainly those abroad and here also, around issues of transparency and how our finite and very valuable natural resources are being used. More transparency on this issue is very welcome. I welcome the Minister's initiative on that issue.

I also wish to deal with the elements of section 8 allowing the courts to specify that creditors of a company that is seeking to reduce its capital can be notified as the court directs, for example, by electronic means. Again, this is another simple initiative that will make life easier for companies. It will give them the option of dealing with such matters electronically.

Section 11, which is an amendment to the Companies Act 2014, amends the definition of profit and loss account to take account of the fact that some companies, such as charities, do not make profits. That is an important aspect of this Bill that is helpful for those who are doing good work and find themselves caught in a red tape system that previously was less flexible than the Minister is now going to make it.

Section 27 concerns the disclosure of payments to directors. That is of critical importance. The more transparency around this the better. We all know the concerns we have had realised for us unfortunately during recent years about certain payments and the way they were being made.

Section 94 is also critically important. It gives the court a discretion to disqualify a person from acting as a director of a company in circumstances where the person has committed civil or criminal breaches of the law. I had earmarked another provision that I do not have marked and I will have to come back to it.

As others have said, this is an eagerly awaited Bill. We had an election in early 2016. This is complex legislation and the opportunity was availed of to correct many other issues that might not seem to be directly related to the Act but which impact negatively on business and on the public good and the public interest. Addressing those matters may have created a drag and made it a little slower for the legislation to be introduced but to miss an opportunity to have those other issues addressed, as the Minister has done, would have been a folly. I welcome the Bill. I hope the House will find favour with it and speedily pass it.

This legislation is admittedly long and dense but it is welcome because it brings Irish law in line with an EU directive and that is to be supported. The Bill will allow for the use in Ireland of sections of the financial reporting standards applicable in the UK for small companies and the financial reporting standards applicable to the micro entity regimes by micro companies.

Under section 15, it is proposed that the thresholds for small and medium companies in Ireland are set at the maximum permitted under the EU directive. This would mean micro companies would include companies which fulfil two of the following criteria - have a balance sheet of under €350,000, a net turnover of less than €700,000 and an average of fewer than ten employees. This is good for both micro companies and companies which would not previously have been considered medium sized or which now fall under the small category and therefore have access to a range of benefits within this Bill. This element of the Bill also represents a shift in our thinking towards business. We are moving from a top down approach where larger companies were considered the norm to a "think small first" approach where smaller companies are the starting point. When we think of promoting local business and entrepreneurship in Ireland, the small first approach will aid the development of many start-up businesses, as well as looking after one of the biggest elements of our economy.

Small and medium enterprises in Ireland represent almost half of Irish corporate entities, employ more than two thirds of all Irish workers and comprise more than half of all Irish private sector turnover.

With this Bill, we see a move within our philosophy away from the preoccupation with taking care of the big multinationals towards looking after SMEs in Ireland. I also welcome in particular the provisions in chapter 10 of this Bill which will bring in several measures that will increase transparency around companies that are involved in extractive businesses. These particular provisions were originally agreed during the Irish Presidency of the Council of the EU in April 2013 and I think that is something we should be proud of. At a basic level, these provisions ensure a large company or public interest entity involved in an extractive industry or in the logging of primary forests must prepare and make available to the public an annual report on specified payments to governments.

The reason this particular element of the Bill is so welcome is because of something known as the “resource curse”. The resource curse phenomenon is when countries rich in natural resources have tended not to perform well economically, for example, many countries in Africa. One possible explanation of this is because of low levels of transparency and accountability and high levels of corruption. This element of the Bill will attempt to ensure that, at the very least, large extractive companies are not conducting business in a way that would further the so-called curse of rich resources in developing nations.

When Sinn Féin talks about equality, we not only mean on the island of Ireland but also overseas, and any legislation that aids the development of nations and tackles corruption and exploitation by large companies is to be commended and welcomed. On this theme of activities across the seas, the Bill is also in line with European policy, and this policy will be good for Europe. When conducting its impact assessment, the European Commission estimated that the implementation of the accounting directive, which this Bill falls under, will give rise to burden reduction savings of up to €1.7 billion per year across the EU. In this very tumultuous time for the EU, I think Ireland should be proud to play a positive role in improving the EU’s financial standing by doing our part to enact this directive through the Bill.

While this Bill has many positives, I have a couple of reservations that also need to be stated. The first is that I am concerned the proposed legislation will allow small companies to give fewer note disclosures in their financial statements. "Notes", of course, refer to the additional explanatory detail supplied with a company’s statutory financial statements to provide a comprehensive overview of its financial health. For example, notes can include such things as information on company debt, staffing, subsidiary undertakings, company share interests and directors’ remuneration. While I understand there is a balancing act between, on the one hand, the time and resources that smaller companies currently give to accounting and, on the other, the need for transparency, I would have a concern this balance is not struck within the Bill. Reducing the level of notes required when providing financial statements from approximately 31 to the mandatory level of eight, plus five optional notes, is quite a leap. Can we ensure transparency will not be compromised to an unsatisfactory degree in lieu of relieving the administrative burden on smaller companies?

While Sinn Féin sympathises with the need to reduce accounting time for smaller businesses, we are also concerned with the dumbing down, as it were, of the requirement for a statutory audit. Under sections 41, 43 and 45, micro companies will be exempt from preparing a directors’ report and, therefore, will be exempt from having the opinion of a statutory auditor on the consistency of the directors’ report within the financial statement. Under sections 56 and 58 to 61, inclusive, it is my understanding that both micro companies and small companies will be exempt from audits. If existing medium-sized companies will now be considered "small" under this new legislation, that means many more companies than we might first imagine will be exempt from such audits.

As I have said, transparency within business is of paramount importance, and there is a challenge within this Bill to ensure continued transparency for all businesses, regardless of their size. I would have a concern that a lack of audits and a huge decrease in notes within accounts will decrease transparency within companies, particularly those medium companies which will now be considered small within this legislation.

Overall, Sinn Féin welcomes this long overdue Bill which will have positive effects on Irish business, especially smaller businesses. We also welcome the positive impact the Bill will have on some developing countries. However, we do have reservations regarding transparency and accountability in the context of this Bill and we think that should be noted.

I welcome many of the provisions of the Bill but I have some concerns. The Bill is intended to remove a lot of red tape, in particular, to favour small and micro companies. Article 43 of the directive permits exemption from full statutory audit for small and micro entities. A small company is set out in the directive as having a turnover of €12 million or less and a micro company as having a turnover of €800,000 or less and about ten employees. To avail of the exemption, the only condition laid down in the directive is that the company meets the size criteria as a small or micro entity, and no other conditions are laid down. All of the other EU member states have enacted the directive in full and there are no other conditions laid down, aside from the size criteria that takes away a company’s entitlement to the exemption. However, the main Bill of 2014, at section 363, states that if a company is late filing its annual return with the Companies Registration Office, CRO, it must pay significant late filing penalties and lose its entitlement to the exemption from full statutory audit for two years. This does not happen in any other European country. Let us consider the number of people who are contracted by multinational companies and told to form companies through which they have to bill for their services. If they overlook the filing of an annual return, they are in serious trouble.

Article 43 of the directive states: “The annual financial statements of small undertakings should not be covered by this audit obligation, as audit can be a significant administrative burden for that category of undertaking, while for many small undertakings the same persons are both shareholders and managers and, therefore, have limited need for third-party assurance on financial statements." That is the EU directive, clear and simple. It is supposed to exempt small and micro companies but the 2014 Act, at section 363, states:

Notwithstanding that section 358 is complied with, a company is not entitled to the audit exemption referred to in that section in a financial year unless-

(a) there is delivered to the Registrar, in compliance with section 343, the company’s annual return to which the statutory financial statements or (as appropriate) abridged financial statements for that financial year are annexed.

There is a clear conflict here between the EU directive and the main legislation of 2014. There have been European court rulings on this subject and I draw the Minister's attention to these. For example, one statement from the European Court of Justice states that although the member state and the national court may impose penalties on an individual or company which has not complied with the provision of EC law, this is subject to the condition that the penalties must not be disproportionate and must not undermine a basic Community right. It is a question of not having complied with EC law, not Irish law, yet we are saying a contravention of section 363 of the main 2014 Act imposes these penalties on small companies. That seems to me to be going very much against the spirit of the Bill which is specifically focused on small business and small business accounts. Therefore, it is the right time to remove this section and I have tabled an amendment to do so.

Under the EU directive, a company is entitled to the exemption on account of size and no other conditions are laid down that can take away entitlement to the exemption. The cost and administrative burden of a full statutory audit is referred to in section 43 and I have already put that on the record of the House. I would also like to record the view of the Companies Registration Office which contradicts this. It states that, as a matter of law, if a company's annual return is filed late, audited accounts must be filed in the current year and in the following year, so the loss of audit exemption could entail considerable expense for the company over a two-year period. This is what the CRO itself states, namely, this is going to really harm the financial interests of a company. It goes against the spirit and the letter of the EU directive. It is generally established that enactment by a member state of an EU directive should be full and proper. It is not permitted that enactment can, on the one hand, bestow a right or entitlement laid down by an EU directive and then, on the other, remove that entitlement as a penalty.

This is a penalty not applied in other EU states. The Minister stated that a company can apply to the District Court for an extension to the annual return date but that is routinely opposed by the Companies Registration Office. That is another tangle and it will cost micro companies a great deal of money. The fact of the matter is that, as it stands, advisers now propose to entrepreneurs to incorporate their new businesses in other EU states where this penalty does not arise and the companies can then trade in Ireland having duly registered for taxation here.

I have an example of a case from somebody who briefed me on the issue and I would like to put it on the record. I was contacted by an accountant who prepared accounts for a small wine shop for filing with the Companies Registration Office last year. The company is small and entitled to exemption from audit. The accountant sent the accounts to the two directors, who are a married couple, for signing but they were on holidays. They had not told the accountant they were going away so he had no knowledge of that. The company lost the audit exemption as a consequence of late filing and the accountant in question had to walk away from it. The situation had become so complex that he was advised by his professional association to walk away. The only remedy was to approach a firm of solicitors to represent the company in petitioning the District Court for an extension to the return filing date. However, as I said, the Companies Registration Office is now opposing such applications. I wish to inform the Minister that I will table an amendment to delete section 363 in order to bring us into line with other European countries.

There is one other issue of which I have been advised, namely, the requirement to change the name of a company if it is unlimited to include the word "unlimited" in the name. I have been briefed by Pfizer on this issue. I have no connection with Pfizer, no interest or no axe to grind at all but I have been informed that it deals with a large number of companies, approximately 130, in 36 languages and it is extremely arduous, time-consuming and expensive to make the changes. The Minister has given Pfizer a six-year exemption, which started from last year so there are about five years of it left. I am interested to hear the Minister's response. What Pfizer is seeking is a further exemption from the measure or some tinkering with the legislation. The company has not provided me with a brief but it has suggested that the situation should be examined.

There is a further complication in terms of red tape. There is increased red tape due to the Companies Registration Office not accepting paper filings. Accounts must be filed online. Frankly, as a Luddite, I resent that very much, or I would if I was an accountant. I do not see why that should happen. My main point is that I will oppose section 363. I will study the Minister's reply when she makes it.

I will try to pick up on most of the points that have been made. Senator Morris or Senator Norris - I beg his pardon-----

No problem. I have been called worse. I have been called Senator Ross. That is a hell of a lot worse.

The Senator mentioned the concerns of some companies with respect to the exemptions that were granted under section 1237(5) of the Companies Act. First, I would like to confirm that any of those exemptions that were granted remain in operation and they will continue to be in place until late 2021. Senators may remember that the purpose of section 1237(5) is to allow companies some additional time to adapt to the new requirement in the Companies Act 2014 that all companies include the company type in the company's legal name. Given the complexity and multinational nature of some companies' businesses, it was considered that the general transitional period for adapting to the new Companies Act could be too short. The general transition period of 18 months ended on 30 November 2016 and companies were granted an extension of a further five years. Recently, I have become aware of concerns from some the companies that the five years will not be enough. They have stated that they need more time. The Department is exploring those concerns with a view to finding an appropriate solution.

I thank the Minister.

I will come back to the other question Senator Norris asked.

On the issue Senator Mac Lochlainn raised in respect of fewer note disclosures, we have gone as far as the directive allows regarding what we require from small companies. I agree that balance is needed and I believe the Bill achieves that. I thank the Senator for his comments on the annual reports on forestry and mining. Senators Reilly and Boyhan made similar comments and I also thank them. We want to get as much transparency as possible.

Senator Davitt asked about the delay. The Companies Act 2014 took ten years to draft and two years to enact. I accept that there has been a delay in transposing this statutory instrument and that is regrettable. The directive was quite thorny. It threw up difficult issues and I hope section 14 will ease the effects of the delay. I apologise for the delay but the directive was very complex and complicated.

I assure Senator McDowell that I am open to looking at having a single text. It has been the policy of the Department in drafting that a single text is possible with a single citation. We will look at that.

I again thank Senators Boyhan and Reilly for their comments. I will return to another issue raised by Senator Norris.

It was the question of the exemption for filing accounts.

The Bill does not change that rule. A company has nine months from the end of the financial year to prepare and file annual returns. That should be sufficient time. One must bear in mind that the Bill makes strides in reducing the financial reporting obligations of small and very small companies.

Other EU countries do not have this penalty.

Furthermore, the introduction of the withdrawal of the audit exemption has resulted in a dramatic increase in the rate of compliance with filing deadlines. Since the establishment of the rule, compliance has increased from 13% to 90%. For those reasons, I am in favour of keeping the audit exemption as it stands.

It is very harsh. I will table an amendment. I thank the Minister very much for the information she provided.

Question put and agreed to.

When is it proposed to take Committee Stage?

Committee Stage ordered for Tuesday, 11 April 2017.