I move: "That the Bill be now read a Second Time."
I wish to advise the House that I am a member of the Institute of Certified Public Accountants. I am pleased to bring this Bill before the Dáil. Before outlining its content, it should be recalled that it was initiated in the Seanad on 14 February 2003 and completed all stages on 29 May. There were a number of amendments on Committee Stage in the Seanad and these are contained in the text of the present Bill. I propose to refer to the principal amendments in the course of this presentation.
I wish to acknowledge the many insightful, constructive and useful ideas which Senators contributed in the course of the Seanad debates on the Bill. They were helpful to my reconsideration of the Bill and provided some fresh perspectives on a number of its draft provisions. I regret that scheduling logistics did not allow me to translate several of these into amendments of that House. They did, however, facilitate a further more comprehensive and enhanced examination of the measure on my part and, indeed, by my officials in the period since then. For that the Senators have my thanks.
The observations and proposals made by Senators were augmented by a sizeable number of submissions, 50 or so, received from various interested parties. We have done our best to digest this substantial quantity of material and to distil the wisdom, insight and technical improvements it contains and, along with other improvements of our own devising, put them into suitable form to be proposed as amendments on Committee Stage in this House. It was obviously not possible to accommodate all of the requests for amendment contained in the submissions for varying reasons. Some, for example, were simply considered unworkable or unfeasible while others would have delayed progress on the Bill to an unacceptable extent because of the work which they would have entailed. However, all were examined and some will be borne in mind for possible inclusion in future legislation.
One of the latter categories to which I wish to make specific reference is that of legal protection for the term "accountant". This is an issue which would benefit from some further consideration and research and I will request the supervisory authority, when statutorily established, to examine the issue in detail and report back to me when it has completed its deliberations. In that context, I wish to take this opportunity to exhort members of recognised bodies to emphasise their membership of these bodies on all appropriate occasions, as well as the protection which that affords to those to whom they proffer their services. Recognised bodies could usefully promote themselves in a similar way.
In the course of my presentation I intend to give an indication of the more significant areas in which I will bring forward amendments on Committee Stage. Deputies will appreciate that it is not appropriate either to attempt to encompass all amendments which will be brought forward or to have a detailed discussion now on the more significant ones. That is for the later stages of the House's consideration of the measure. I look forward to a constructive and informative debate on the Bill.
The origins of the Bill can be traced back to the report of the Committee of Public Accounts of December 1999 which recommended, among other things, that the Minister and the Department 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, the 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 had its first meeting on 23 February 2000 and concluded its deliberations by the end of June 2000. The group was chaired by Senator Joe O'Toole. The final report of the review group was presented to the Committee of Public Accounts on 11 July 2000 and was further discussed at that committee on 28 November 2000. I would like to place on the record of this House 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, chaired as I have already mentioned by Senator O'Toole, are to be congratulated on its achievements. The report of the review group contains some 80 recommendations covering all aspects of the matters under review. I would like to clarify at this point 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 further legislation that he will be introducing regarding the new Irish Financial Services Regulatory Authority.
Following a public consultation on the report and its recommendations, the Government endorsed the report and also approved the establishment on an interim basis 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 and her Department on the implementation of the recommendations in the report. The recommendations contained in the report of the review group have provided the blueprint for the legislation before the House today. Its evaluations and recommendations underlie the Bill and, in what I hope is a schematic way, provide for a new regime in the auditing and accounting area which clarifies and, where it was felt appropriate, redefines the roles of the various parties involved in those processes.
At the time when that blueprint was developed, those 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 proposals themselves and the thinking behind them were not in vogue elsewhere at the time. However, some time after the recommendations of the review group had been placed in the public domain, several financial crashes occurred in international business, most notably Enron and WorldCom, because of issues including compliance failure and supervision. Those collapses focused attention in jurisdictions worldwide on those subjects, and indeed many of the administrators in those countries, charged with the task of developing governance systems aimed at preventing a recurrence of those situations, looked for guidance to the work which had been going on here, especially the report of the review group on auditing.
Obviously it has been necessary to transform the recommendations of the review group into draft legislation, and that required time, but it is probably fair to say that the road map devised should ensure that Ireland will remain at the forefront of prudential initiatives in the commercial arena. That is imperative if we are to maintain international confidence in Ireland as a place in which to invest and do business.
I will give a very brief summary of the legislation which I am bringing before the Dáil to try to convey an overall sense of what is proposed. One of the Bill's key features is the proposed establishment of the Irish Auditing and Accounting Supervisory Authority, or IAASA. The authority will have a wide range of oversight functions regarding accountancy bodies, as well as, for example, examining the accounts of defined companies for compliance with the Companies Acts. In the case of prescribed accountancy representative bodies, certain aspects of the disciplinary procedures operated by them in respect of their members are to be given statutory underpinning.
Existing controls on auditors are being enhanced, and they will be subject to new audit-related requirements. Other procedures are being put in place which are designed to ensure that auditors are genuinely independent of those companies whose accounts they audit. There will be greater strictures and impositions on companies themselves regarding the preparation of accounts. Moreover, directors of companies are being required to confirm their company's compliance with all statutory obligations relevant to it, not just those arising in company law. The company's auditor is to vet that statement. I will return to that issue later.
One hopes that it will 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 strives for a balance between objectives of unduly high standards and those pitched at a very low level, and indeed, in the apportionment of new responsibilities between the various parties involved in corporate governance.
I will now turn to the provisions of the Bill and explain in greater detail what each is designed to achieve. Obviously this is not intended as an exhaustive account of the contents of each section, but one hopes that it will give a feel for the essence of the provision. Part 1 of the Bill contains some preliminary technical matters. In that regard, the first three sections contain provisions that are found in most Bills where there is existing legislation. 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 things, 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 that are 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 Part 2. Of particular interest are the definitions of “designated body” in the context of bodies that will nominate persons to be directors of the new supervisory authority. “Prescribed” accountancy bodies include “recognised” accountancy bodies, which 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 that 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 those designated bodies. In that regard, it will be noted that various parties interested in accounts and auditing matters will be members. By way of amendment in the Seanad, the Law Society was added to the list of designated bodies. I wish to draw particular attention to the fact that section 46(1)(a) enables the Minister to prescribe any other body that may subsequently be identified as having an interest in the 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 of association and articles of association. Section 7 provides that, following the incorporation of the company, any subsequent amendments to the memorandum or articles of association can take effect only with the Minister's prior approval.
Section 8 sets out the principal objects of the supervisory authority. Those 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; to provide for adherence to high professional standards in the auditing and accounting profession; to monitor whether the accounts of certain classes of companies and other undertakings comply with the Companies Acts; and to act as a specialist source of advice to the Minister on auditing and accounting matters.
Section 9 sets out the main functions to be discharged by the supervisory authority. In that regard, the functions will include certain matters relating to the recognition of bodies of accountants which up to now have been undertaken by the Minister. Deputies will see that the section also makes provision for: the approval of the constitution and by-laws of each of the prescribed 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; and reviewing whether the accounts of companies and other undertakings referred to in section 26 comply with the Companies Acts and, where that does not turn out to be the case, to seek High Court directions to secure compliance.
Section 10 of the Bill empowers the supervisory authority to carry out its functions and, where necessary, to adopt rules and issue guidelines concerning any matters that relate to its functions or powers. In addition, subsection (4) of that 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 supervisory authority. Section 11 deals with the appointment of directors of the supervisory authority by the Minister. In that regard, and arising from changes which I brought forward in the Seanad to deal with concerns in some quarters about the perceived underrepresentation of accountants at board level, there will now be 14 directors appointed by the Minister, nine 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 four of the directors appointed by the Minister may be members of prescribed accountancy bodies. Three may come from the accountancy bodies and one of the nominees of the designated bodies may also be an accountant. There is no restriction of that sort regarding the chief executive officer. The outcome, therefore, is one of enhanced board representation for members of prescribed accountancy bodies of up to five directors.
When the Bill was published, there were differing schools of thought as to the appropriate level of representation by accountants on the board of the supervisory authority. Some considered that the original apportionment was just about right, while others disagreed. I deliberated at some length and with considerable care before altering the permissible level of representation by accountants. The formula which I devised in so doing was designed to achieve what I am convinced is a fair, realistic and equitable balance in terms of overall representation on the board. I am still of that view.
The number of directors can be altered by means of a ministerial regulation under section 46(1), as a consequence of changes made in respect of prescribed or designated bodies. Moreover, while enjoying the right of nomination of directors, 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 supervisory authority. This is designed to secure the independence of the authority. The term of office of a director will be not less than three years and not more than five years. It will be possible to re-appoint directors.
Section 12 deals with the appointment of the chief executive officer to the new authority and also sets out in summary what will be his or her functions. Essentially, these are to carry on, manage and control generally the administration and business of the supervisory authority as well as performing any other functions 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, the board of directors will take that 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 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 on which it is submitted to the Minister. It is worth noting that 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. The authority 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 accountancy bodies and that is the basis on which section 14 has been drafted. In acknowledgement of the financial contribution of the prescribed accountancy bodies to the funding of the supervisory authority, an amendment was made on Committee Stage in the Seanad requiring the Minister to consult with them before agreeing to the imposition of a levy under this section.
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 absolutely imperative that when such issues arise, they can be examined immediately and that the absence of funding does not delay 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 enable the accounts of certain companies to be examined for compliance with the Companies Acts. The provision will apply to all public limited companies, other than those used as investment vehicles by the financial services industry, and certain private companies or undertakings which meet a threshold of a €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 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 authority from one year to the next.
Section 17 provides for the engagement of staff by the authority and makes it clear that advisers can be engaged, if necessary or appropriate, to assist it to discharge its functions. Sections 18 and 19 provide for the disclosure of interests by directors and staff of the authority and will ensure that conflicts of interests will be avoided. Section 20 will enable 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. It 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 that report should be laid before the Houses of the Oireachtas within six months of the year-end. It also contains provisions that would require 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 exercise of the powers of the supervisory authority.
Section 23 empowers the authority to intervene in respect of 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 it and the power to certify cases where relevant persons have refused to cooperate with an investigation by the 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. Under section 26, the supervisory authority will be exercising a role other than supervising the activities of prescribed accountancy bodies. Under its provisions, the authority will be able to examine the annual accounts of companies falling within the definition of relevant undertakings. Essentially, these are: public limited companies, other than investment 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 matters before the courts, seeking to have an order made directing that the accounts be brought into compliance with the Companies Acts. The section also provides that, subject to any more specific directions that may be applied by the court, any provision of the Companies Acts relating to the preparation, auditing and disclosure of annual accounts applies, with the necessary modifications, to the revised accounts.
Section 27 is in the nature of housekeeping to enable the authority to delegate its functions to a committee of its directors, employees or professional or other advisers, as it considers necessary or appropriate. This provision is particularly important in the context of the authority having available to it the requisite expertise when reviewing the compliance of accounts with the Companies Acts under section 26.
Section 28 sets out the procedures when the authority, or parties subject to rulings by it, need to bring matters specified in the section before the court for determination. In particular, it will be noted that court confirmation is necessary before any monetary fine imposed by the supervisory authority takes effect. 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 confidentiality of information obtained by the authority. It also sets out the specific bodies to which information can be communicated where the authority believes the 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 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 an existing recognised body of accountants for the purposes of its members, who are appropriately qualified, being authorised to act as auditors.
Arising from judicial proceedings taken against the Minister in respect of the recognition of the Institute of Incorporated Public Accountants in 1996, subsections (3), (4) and (5) of this section provide that the institute must apply to the supervisory authority for recognition, as soon as is reasonably practicable, after the commencement of the section. In the meantime, however, persons who are members of that body and who were authorised to act as auditors will be able to continue to act in this capacity. I intend to introduce some adjustments to these subsections on Com mittee Stage to take account of other elements of the settlement of the judicial proceedings to which I have just referred.
Section 32 is designed to protect the supervisory authority and any of its members, directors or employees from any liability for damages for anything done or omitted to be done, unless the act or omission is shown to have been done in bad faith, and includes the authority indemnifying members, directors, officers and employees in carrying out their duties.
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. While some of the amendments are essentially implementing recommendations of the audit review group, others are inserting into primary company law provisions that were already introduced by way of the Companies Act 1990 (Auditors) Regulations 1992 – SI 259 of 1992 – which are then being revoked.
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 the new provisions being inserted into the said Part X. I draw attention in particular to the definition of "affiliate", which covers relationships an auditor may have with individuals or firms.
Section 34(a) implements in primary law some of the provisions of the 1992 regulations which were designed to facilitate the manner in which recognised accountancy bodies regulate their auditor members. 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 it, persons who hold individual authorisations to act as auditors 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 is designed to give 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 such statutory backing as is now proposed. The provisions contain the usual checks and balances and, where necessary, matters can be appealed to the courts for final determination. I should say that arising from submissions I have received from the accountancy bodies and amendments which were tabled in the Seanad, it is likely that I will be bringing forward some amendments to this section on Committee Stage.
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. I am reviewing the draft provisions that enable the Director of Corporate Enforcement to apply to the High Court to have a person's name removed from the register of auditors and it is likely that I will be bringing forward amendments regarding this aspect of the section on Committee Stage.
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, namely, 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 had been provided for in the 1992 audit regulations. Section 38 makes similar adjustments to section 200 of the 1990 Act.
The background to section 39 is as follows. At present, the Companies Acts require that when a company prepares accounts these must give a "true and fair view" of the financial state of the company. There is no specific obligation in law to say 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 that are applicable to a company are those that are 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, other than investment 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 to state in the annual directors' report that they have decided not to do so and explain the reasons for that decision. In other words, there is no mandatory obligation on large private companies or on other relevant undertakings that meet the turnover and balance sheet totals of €50 million and €25 million, respectively, to establish audit committees. However, where they decide not to do so they are required to say why they made such a decision.
The section also contains the matters that 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. This section attracted significant comment and debate in the Seanad and I undertook in that House to look at and further reflect on the provision in light of the discussion. I have considered the provision as a whole and its various elements in detail during the intervening period, and placed in the balance the clear and comprehensive nature of the recom mendations of the review group on auditing on the one hand, and some of the observations from Senators and submissions to me on the other. Based on this exercise, I will be proposing certain amendments on Committee Stage.
Section 41 introduces for the first time in statute law a requirement for companies to disclose the accounting policies that are adopted in determining in particular the amounts included in the balance sheet and profit and loss account.
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 information in their annual report that they are responsible for securing the company's compliance with their relevant obligations, what procedures they have in place to achieve such compliance, and confirm that they have, where necessary, reviewed the procedures. Under subsection (5), the directors are required to give their opinion regarding compliance with their obligations.
