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Special Committee Companies Bill, 1962 debate -
Tuesday, 12 Mar 1963


I move amendment No. 56.

To delete subsection (1) (b) and substitute the following :

(b) he is qualified to be so appointed either as having obtained similar qualifications otherwise than from such a Body or as having obtained adequate knowledge and experience prior to the operative date in the course of his employment by a member of a Body of Accountants recognised for the purposes of paragraph (a), or as having before the operative date practised in the State as an accountant.

The purpose of this amendment is to try to lay down minimum qualifications for persons who will be appointed as the auditors of companies. I recognise, at the outset, that it is not entirely satisfactory to try to lay down professional qualifications in a measure of this sort. On the other hand, the Bill deals generally with company law and one of the objectives of the Bill is to try to secure that proper accounts will be presented, and that these accounts will be audited by persons who are properly qualified.

The practice up to the present, as I understand it, has been to recognise here two bodies—the chartered accountants and the corporate accountants. This section as it is drafted allows the Minister to approve, as qualified for appointment, a person : (a) who must be a member of a body of accountants for the time being recognised for the purposes of the paragraph by the Minister or (b) who is for the time being authorised by the Minister to be so appointed, having obtained similar qualifications otherwise than through such a body or having obtained adequate knowledge and experience prior to the operative date in the course of his employment for the purposes of paragraph (a) or who, as having, before the operative date, practised in the State as an accountant. It is in the last part of the section that I think the weakness lies. We are, of course, all familiar with the fact that quite a number of successful accountants—indeed in some cases senior partners—have practised here without any professional qualification : indeed, some of them are quite eminent. But, we are legislating for a new situation and I think we should either confine the calculation to recognised bodies—whatever they are : I have mentioned the two principal ones—or ensure that a person, before being approved, would have practised in a firm or with a person who was a member of one of these recognised bodies. It is for that reason that I have drafted this amendment to ensure that a person, before being appointed, is qualified as having obtained similar qualifications otherwise than from either of the bodies or having obtained adequate knowledge and experience prior to the operative date in the course of his employment by a member of a body of accountants recognised in paragraph (a) or as having, before the operative date, practised in the State as an accountant.

As members of the committee will see, the provisions in paragraph (b) as it stands and those in the proposed amendment are very much the same. In essence, the difference is that Deputy Cosgrave has the words at the start of his amendment—" he is qualified "—as against the words " he is for the time being authorised by the Minister" in the paragraph as it stands. The difficulty that I see in adopting Deputy Cosgrave's amendment would be this. Somebody will have to be responsible for recognising what a qualified person is. In Deputy Cosgrave's amendment, as I see it, there is nobody who can determine how a person is to be qualified. For example, if you take the last part of Deputy Cosgrave's amendment " having, before the operative date, practised in the State as an accountant " without placing the responsibility of authorisation on somebody, any person could come forward and say: " I audited the accounts of Blue Rovers Football Club. Therefore, I practised in the State as an accountant and, therefore, I am entitled to be recognised as a qualified person under Section 162 of the Companies Act." I think it is better that some authority should be able to decide whether the practice that the person claims to have had as an accountant was of a nature that would be enough to qualify him to audit the accounts of companies. Therefore, the only difference, as I see it, is to delete the reference to the Minister as the responsible agent for deciding these questions. I think it is wrong that we should leave it so wide as virtually to enable anybody to act as the auditor of a company. I think that is really the difference in essence.

Would the Minister explain how he proposes to discover that this person has, in fact, the qualification of an auditor?

We have not worked out that procedure yet. If I may come back to subsection (1): " A person shall not be qualified for appointment as auditor of a company unless (a) he is a member of a body of accountants for the time being recognised for the purposes, of this paragraph by the Minister ". That is clear. One might ask how the Minister recognises a body of accountants. That can be done by some suitable public announcement. So far as the recognition of a person who is not a member of such a body is concerned, I think the procedure would be that if somebody claimed for example, to have practised in the State as an accountant, then the Minister would, through some appropriate means, establish whether or not he has so practised. Any person seeking authorisation would apply to the Minister. The Minister would ask him for the evidence to support his application and arrive at a decision accordingly.

The thing which disturbed me is that in the Department of Industry and Commerce there is a list which is, I think, published. I am nearly certain I saw a recent list of public auditors on which there were some individuals who were not qualified. I am talking of professional qualifications. I think that it was the practice for some reason that only when a vacancy occurred in that list was somebody's name added. I forget the actual reasons but it seemed to be the practice that if a person was appointed on it, whether he was qualified or not, he stayed on it unless he disqualified himself or did something improper. But a number of people who were professionally qualified could not get on it. I do not think it desirable that sort of situation should continue.

I am thinking of a person employed for a number of years by a particular firm of auditors or accountants. Then he would have been at the business so long on his own that he thinks he has a reasonable chance of going into business on his own. He may not have had any of the formal qualifications to qualify for membership of these recognised bodies but, nevertheless, as Deputy Cosgrave said in his opening speech, he has all the necessary mental mechanism and practical experience to enable him to audit accounts. He wants to start on his own. He applies to the Minister to be recognised under the section. What does the Minister do when he gets that application or what does he envisage doing under the section ?

There is a provision in paragraph (b) that would seem to cover the case Deputy Norton has in mind. Again, it would be a matter for the Minister to have evidence submitted to him by that person who seeks to be authorised, to show how he has got the adequate knowledge provided for in paragraph (b). I think the Minister would act reasonably. Somebody would have to act. Somebody would have to decide. And while, personally, I would not like to have to decide, I do not see anybody better than the Minister for the time being to make such a decision.

Would it be intended, for example, that a list should be prepared and will the list be controlled or will a person, once having demonstrated his ability to audit accounts, get the O.K. then ?

Once authorised, I would say that the person would have that authorisation for life. He would have to receive, I take it, some form of letter or certificate from the Minister that he is so authorised. Therefore, he would not have to prove his qualifications a second time.

He would not run into the danger of being told : "There are so many on the list already" ?

There would be no question of an exclusive list.

That is a point worrying me. My recollection is that the list of public auditors was kept at some sort of a limit and, say, if a practitioner died or retired in a town maybe then somebody was added. I certainly recollect that the general tenor was not to increase it beyond a certain point. I do not know if there has been any change since.

There has. The practice now is that there is not any limit to the number approved. When a person applies the practice is that the Minister seeks from a competent authority a report on that individual's qualifications. So long as he has the necessary minimum qualifications, he is added to the public auditor's list, without limit as to numbers.

There is a difference between an application for appointment as a public auditor and an application envisaged in this section. You can earn your living as an auditor without being a public auditor.

On the other hand, some firms hold it as a sort of symbol of status that you have certificate, or that you are named in Iris Oifigiúil. I am not wedded to this amendment in its present form. I had considerable difficulty in framing it. There are at present some non-qualified people but whether it is desirable to continue granting sanction and approval to nonqualified persons in the future is another thing.

The amendment starts off with an assertion which may not be true but it is a legitimate human aspiration : " he is qualified ".

Someone has to decide.

In the case of the Minister it says : " he is for the time being authorised by the Minister to be so appointed ", but Deputy Cosgrave's amendment seems to start off with the declaration that he is qualified. The Minister goes back to an earlier stage.

Surely this is very much an academic question ? There will not be many applications.

I doubt if there will be.

It will be a reducing number. As the section is drafted I feel there is sufficient uncertainty to discourage people from relying purely on qualification by practice. They will not honestly know what way the Minister's mind will work so the only safe thing is to get a professional qualification. For that reason I would leave it vague. If you make it more specific you set out the different forms of qualification and make the Minister like the Register of Chartered Accountants.

The idea was to have the section drafted widely enough to ensure that no hardship would be caused to unqualified people for whom the Act might otherwise cause serious upset, people who had genuinely achieved some right to practise. In the long run the idea would be to induce people to seek proper professional qualifications from one or other of the recognised bodies.

In that connection I want to ask the Minister what are the bodies which it is proposed to recognise under subsection (1) (a) ?

I have not decided what those bodies are, and I think it would be premature for me to decide on those bodies in advance of the passing of the Act.

Will we have some intimation on this point before the Bill finally passes ?

Surely the answer the Minister must make is that they will be persons competent to judge the standards at the time ? You cannot anticipate, because there may be amalgamations of those bodies, or changes in their charters, or something else.

Apart from the information as to the number of those bodies, there are two main ones, and what are the others ?

I believe there are several bodies which might claim recognition, but I do not think that it is likely that all such bodies would get recognition. I have here a copy of a speech I made some time ago before the Dublin Society of Chartered Accountants on this point. I said that I had not yet decided what societies should be recognised for the purposes of the new Act but that all organisations of substance would have little to fear in that respect. That is as far as I can go at this stage.

Can the Minister tell us the total number of organisations that may claim ?

I cannot, offhand. There may be a dozen.

There are two well-known associations, and there are probably other reputable associations which may claim.

Are the two well-known ones divided from the others on questions of high principle or low qualifications? Low qualifications, I take it.

Amendment, by leave, withdrawn.

I move amendment No. 57 :

In subsection (3), page 97, to delete paragraph (b).

Amendment No. 59 appears to be related to amendment No. 57 and amendment No. 58 appears to be an alternative. If the Committee would agree we could take amendments Nos. 57, 58 and 59 together.

Amendments Nos. 57 and 59 are consequential and I think Deputy Costello's amendment, No. 58, is on the same lines. The reason for this amendment is that I think as the section is drafted it might involve small private companies in unnecessary expense and trouble. I think we are all familiar with the fact that it has become the practice very often for a member of an accountancy firm to be a director, or the secretary, of the company, and for another member of the firm to act as auditor. I feel that with the safeguards in the Bill it is unlikely that there would be any possibility of abuse of that practice. I think there are a number of advantages in it. It is relatively simple for a director, or the secretary, as the case may be, to keep in touch with the person doing the auditing.

If the Bill is enacted as this section stands, it will mean that a partner, a director or a secretary, or a person who is an employee of the company will not be able to act as accountant or auditor. For that reason I am moving this amendment. The provision in amendment No. 59 would ensure that a statement would be made to the shareholders, and they would know beforehand that the person proposed to be appointed as auditor was a partner, or a director, or was in the employment of the firm. That would be known before the appointment was made. In other words, there would be a full disclosure. If that were done, I feel that any suggestions of the likelihood of improper or fraudulent operations by any of the persons concerned would be obviated.

My amendment was intended to meet the situation which Deputy Cosgrave envisages. A great many small companies have their auditors either as the secretary or as a partner on the board. I do not know whether the Minister has any information which would indicate that this practice has led to abuses. If he has, perhaps he could let us know. I do not think it has. It is obviously in the interests of a small private company that it should be retained. It is cheaper for private companies if they can get another member of their firms to act as auditors. Many of the companies in this country are small private companies. I think this practice has not led to any fraud or any malpractice, and I think it should be retained.

The principle underlying the provisions set out in paragraph (b) of subsection (3) is that the auditor should be independent so that he can perform his statutory duties in the best possible manner. His function is largely to act as a check on the directors and, therefore, I think that his independence of the directors should, effectively, be beyond question. I know, of course, that both Deputies have said that it is not uncommon practice for an accountant to be a director of a company while his partner in the accountancy business is auditor of that company. While I am not suggesting that any malpractices have taken place—certainly none that I am aware of —nevertheless, I suggest that the independence of the man acting as auditor in such circumstance could be questioned. I think it is important that there should be no danger of a conflict of interests in the performance of the auditor's duties. There could be a conflict of interests in the case of the example I have quoted of the auditor being an accountancy partner of a director. I think this is a principle that should appeal to the accountants and that it is in harmony with a number of other provisions included in the Bill which are designed to strengthen the auditor's position. That is the opposition I have to these amendments.

That opposition is based on theory, if I may say so ; the theory that the auditor may not be so independent if he is, in fact, a member of the firm, secretary to the company, or a director. In theory one could see that as a possible argument and the argument would be that because of his lack of independence some type of fraud or malpractice is involved or some type of overbearance, or alternatively, that the directors are not as carefully watched as might desirable.

To overcome that theoretical objection there is, first of all, the fact that there is no evidence to show that that has occurred in practice. I wonder is the Minister right in thinking that the duty of the auditor is to act as a check on the directors ? Very frequently it is their duty to help them in the running of a small business. Very frequently they are more of a guidance and a help than a check in the running of a small business. Of course, they are a check also, but by means of guiding and helping in the ordinary running of the business. If there was a strong body of evidence to show this had been leading to malpractices I could see the theoretical basis of this argument as having been borne out in practice, and accordingly, the necessity for this legislation; but, when it has not been borne out in practice, I think it would be a mistake to get rid, because of a theoretical objection, of these practical advantages which have existed here-tofore.

Do you not think, Mr Chairman, that the admission that the auditors take part in the business destroys the funtion of the auditor, which is to be a check, for the shareholders' benefit, on the proper conduct of the business ? In the case of a small private company I understand the force of Deputy Costello's remarks but, if any exception were to be made, it would have to be restricted strictly to this case because the danger would be, in public companies, of the auditor getting involved in any way in his functions ; if he were to be mixed up with managerial functions that would be, to say the least of it, disastrous.

My amendment is designed purely in regard to private companies and private companies that are not subsidiaries of public companies.

I would agree with that. I think what Deputy Costello says is a fact. It should be provided for private companies. My recollection is that the Company Law Reform Committee were not in favour of this as applied to private companies.

That is so, although they did not adduce any reasons.

No, but if evidence had been adduced they would probably have made some recommendation.

It is a mistake to think of private companies as small from the point of view of the shareholders. A private company may do a very large amount of business with the public. We must have all the protection we can of the public and one of the guarantees for the public in dealing with a company, private or otherwise, is the state of the company as shown in its accounts. The same principle applies, irrespective of whether it is private or public; the audited accounts are the guarantee of integrity, both internal and vis-�-vis the world at large. If you accept that principle, then you are in difficulty in accepting the private company, no matter how small in numbers, unless you differentiate between small in business, which is something you cannot practically do here.

I would go a certain distance with Deputy Cosgrave and Deputy Costello, particularly on the question of the secretary of the company being a member of a firm of chartered accountants because I feel that, with this new Bill, the secretary will have to do a tremendous amount of routine guidance of his board. I can imagine very many companies .being rather shaken by the possible penalties which the board may incur by reason of their failure to do certain things as laid down in the Act. I can imagine them saying: "Let us appoint as our secretary a qualified accountant, or somebody from the accountant's office, who will be able to guide us, as an expert, on matters of procedure."

They could always appoint their solicitor, of course.

They could, but solicitors do not usually act in that capacity. I would be the first to admit it would be just as good, but it is much more common to employ some member of a firm of accountants to act as secretary to a number of companies. I cannot feel there would be the same conflict of interests there because a secretary is purely an officer who carries out certain personal routine duties. I would have every objection to there being any connexion between the auditor and one of the directors just as I would have some suspicion of any auditor who was a partner or a substantial shareholder, even though that is not provided. That is something that might be considered, though it is not relevant to this amendment. I wonder is there any way in which we could get over this question of a company secretary being a member or an employee of the firm which is also the firm of auditors?

No. There is nothing in subsection (3) (b) to prevent a member of the staff of the auditing firm from being secretary to a company.

As long as he is not a partner.

As long as he is not a partner, yes.

At once a case comes to my mind where an auditor acted as secretary of a company. He is a partner in the firm, but another partner acted as auditor. It is a private company. He has to give a separate certificate signed by himself. As this is drafted at the moment either of them would have to sever his connexion.

I agree that it is bound to be very difficult for an auditor who has a troublesome situation to deal with in regard to certifying accounts to keep faith with his partner, who may be a director of the company concerned, and keep faith at the same time with the shareholders of the company to whom he has to report on the accuracy of the accounts. I can understand the Minister digging his heels in to an extent, certainly as far as public companies are concerned. I think the Minister is quite right to dig his heels in on public companies. These provisions have caused a great deal of upset in accountancy circles in the city. It might be helpful if I were to read to the Committee, with your permission, Mr. Chairman, what the Institute of Chartered Accountants has had to say about it; the council is in general agreement with this provision—that is, Section 162—but feels that it may cause hardship in the case of small private companies where the shareholders wish a single firm to look after their secretarial work and also the audit, or where a company wishes the keeping of its share register to be done by its auditor. In certain small family companies also the directors depend on their auditor for help and advice and sometimes wish a member of the firm of auditors to act on the board, so as to be available, for example, to look after the interests of young children, on the death of their parents who are directors. The Council recognise (1) that auditors should not be debarred from acting as registrars and (2) that the partner of an officer or servant of a private company should be entitled to act as auditor with the written consent of all the shareholders. Deputy Cosgrave proposes that, if a mere announcement is made at the annual meeting that so-and-so, who is proposed as auditor, is a partner or director, that that should be sufficient, but Deputy Costello, on the other hand, proposes that private companies should be completely exempt from these provisions. Mark you, I think they are exempted from these provisions in Great Britain and Northern Ireland. The Institute made representations to the Minister on this point, not going as far as either Deputy Cosgrave or Deputy Costello; they merely said that the written consent of all the shareholders should be indicated. I should like to read the submission by the Institute of Chartered Accountants on this point. " The council is in general agreement with this provision but feels that it may cause hardship in the case of small private companies where the shareholders wish a single firm to look after their secretarial work and also the audit, or where a company wishes the keeping of its share register to be done by its auditor. In certain small family companies, also, the directors depend on their auditor for help and advice and sometimes wish a member of the firm of auditors to act on the board, so as to be available, for example, to look after the interests of young children, on the death of their parents who are directors.

The Council recommends:—

1. that auditors should not be debarred from acting as registrars; and

2. that the partner of an officer or servant of a private company should be entitled to act as auditor, with the written consent of all the shareholders."

I think that would be a very suitable compromise on this particular issue, if the Minister would consider it.

I do not think I can go as for as the Institute of Chartered Accountants suggest, because one has to take into account the interests of more than the shareholder. The public interest is affected and also the interest of the creditors. But I certainly can see some force in the argument that private companies might be exempted from subsection (3) (b). I should like myself to maintain the principle to which I referred earlier, but if the view of most of the Committee is that I ought to look at it again as far as the private companies are concerned, I can do so.

Would you not think of putting a limit on turnover ?

That would be very difficult.

I have the greatest sympathy with Deputy Byrne's point of view—I see the force of it—but, from the abstract point of view, the most dangerous type of company, the company which is in a sense most liable to fraudulent abuse, is the private company doing a very big business.

Whose accounts the public do not see anyway.

Yes. That is the type of company that is dangerous from the public point of view. That is the difficulty I see, but I do not want to be taken as being a block on the line if the Minister wishes to reconsider it.

The public do not see these accounts, so that does not affect it one way or the other.

Oh, it does.

If the Minister would confine it to private companies——

But the very fact that their accounts are private makes it all the more objectionable because the private company doing big business is in a position to put a confidence trick over the creditors in a way in which no public company is. That is the trouble.

I think this section is, in all the circumstances, probably the best way of dealing with the situation, though Deputy Costello wants to exclude private firms. One could well be confused in thinking of the private firm as a small firm. It is no such thing. It can be a very big firm. It can be a family firm operating a very substantial company, and operating perhaps in a very important field of industrial activity. If that is so, I do not think the private firm should be judged on the same basis as the public firm because, apart from the fact that the private firm has a limited number of shareholders, for all practical purposes it may be a bigger firm in many cases than the public firm in relation to the capital investment in it. When I am thinking of the private firm and the public firm, I am thinking more of the small firm, the kind of firm which down through the years has always got somebody from a firm of auditors to audit its accounts and got someone else in the firm to act as secretary for the company and, in any case, the kind of company that is not financially capable of paying substantial fees for long drawn-out audits. If the small company can be protected, I would leave the general provision as it is. We are, I think, probably going as far as we can in this matter though I think, from recollection, in Britain the private company is out.

If I might interrupt: in Britain they tried to do something which was suggested by Deputy de Valera, namely, to define a small private company and it seems they will have to give it up.

Was any consideration given by the Department to the possibility of devising a via media by which the small company, as distinct from the private company, might be treated in a somewhat different fashion and let out from the provisions of the section, or applied to conform to a less rigid concept of the section than is set out here ?

I would suggest that if the Minister is thinking about this again he might think about it on the lines suggested by Deputy Booth. I think there is a case for exempting the relationship in the case of a secretary of a private company. Indeed, if the accountant of a member of a firm of accountants is appointed secretary of a company he can be available for the purpose mentioned by Deputies and I think the Institute of Chartered Accountants for consultation and advice. But you are not breaching the principle which the Minister is trying to establish and hold.

It is significant that the Company Law Reform Committee which examined this did not recommend that the private companies should be included.

Section 155 of the Northern Ireland 1960 Act excludes private companies too.

That is right.

There is no exempt private company in Northern Ireland. The Northern Ireland Act, simpliciter, by Section 155, exempts a company where it is a private company.

That is so.

Perhaps the Minister would have another look at it as applied to private companies?

I shall have a look at the general question of the application of paragraph (b) to private companies. I would prefer if we could exclude only small private companies but I think it would be quite impossible to do so. It would be very difficult to get a definition of what a small company is. In fact, our Committee commented on this point in paragraph 119 of their Report. Apparently, the definition of small private company has given endless trouble in England.

Amendment, by leave, withdrawn.

I move amendment No. 58 :

In subsection (3) to add after " auditor " in line 49 the following:

" Paragraph (b) of this subsection shall not apply to a company which is a private company except where such company is a subsidiary of a public company."

As the Minister is to consider the matter I will withdraw this amendment.

Amendment, by leave, withdrawn.

I am not moving amendment No. 59 on the understanding that the Minister will consider the point contained in it.

I shall consider it, yes.

Amendment No. 59 not moved.
Question proposed : " That Section 162 stand part of the Bill."

Could the Minister tell us something about the significance of subsection (6): " This section shall not apply to the Comptroller and Auditor General."

The Comptroller and Auditor General is not covered by the section. It is rather funny, all right.

The Comptroller and Auditor General is specifically mentioned in a number of Acts already as being the person to carry out the audit of certain State bodies.

Has the Minister any idea of how many qualified persons are employed by the Comptroller and Auditor General ?

I am afraid I do not know.

It is a matter that would be worth looking into in so far as the audit of State companies is concerned, companies operating under these Acts.

I believe that the staff have good qualifications. I should imagine that any one of them who applied under Section 162 would have very little difficulty in getting recognition.

I am not for a moment casting aspersions on the Comptroller and Auditor General or his staff. They hold a very specialised qualification in regard to the audit of the Civil Service, the Central Fund and the accounts of Civil Service Departments generally. But, in respect of commercial companies, commercial State companies, they cannot possibly have the breadth of experience which outside professional persons have, if I may so suggest, with respect.

Would the Minister consider the other matters referred to in subsection (3)—whether the connection between the auditor and a substantial shareholder of the company is something which should be provided for? It would be possible that a member of a firm of auditors could be a substantial shareholder in a firm of which he or his partner was the auditor.

That point has been raised many times over a long period but nobody has ever felt there was any objection to a substantial shareholder being an auditor because that substantial shareholder, not being a member of the Board, would in fact, be all the more qualified as a watchdog.

Question put and agreed to.

I move amendment No. 60 :

In subsection (3), page 98, line 16, before "times" to insert "reasonable".

Amendment put and agreed to.
Section 163, as amended, agreed to.