Two weeks' ago when I first discussed this Bill, I spoke about small companies and their anxiety about directors' reports. I understand the Bill proposes to include in a directors' report a statement of compliance with all relevant legislation. Some 400 offences were introduced under the Company Law Enforcement Act 2000. The auditor must refer to any breaches of law in his or her audit report. He or she must carry out a legal as well as a financial audit. This will mean further costs for small companies which must employ specialists to ensure the auditor agrees to sign the report.
The Bill extends the reporting requirements to breaches of environmental and employment legislation, Road Traffic Acts, Central Bank Acts, health and safety legislation, food hygiene laws and any legislation considered relevant to the conduct of a company's affairs. This is an extremely serious aspect of the legislation, about which I am worried from the point of view of small companies. Such legislation applies in the United States only to companies listed on the Stock Exchange, the turnover of which exceeds $1.2 billion. This issue must be considered by the Minister before the Bill is enacted.
The core principle of all regulations is that they should be proportionate to a clearly stated public interest. The Companies (Amendment) (No. 2) Act 1999 introduced a concept of audit exemp tion of which it allowed companies to avail if they satisfied a number of criteria. This removes the chore for many small companies to complete a statutory audit. The cost to a company with a turnover of €1 million of an audit is approximately €3,000. Such costs will undoubtedly increase if this Bill is enacted as initiated. If similar figures are applied to all small companies, the overall cost will be significant. As the owners and managers of small companies are often the same people, there is little need for an independent audit of their stewardship. Owners and managers can decide whether to have an audit based on their information needs, for example, if they require a bank loan.
Research into the exemption threshold in other European countries clearly highlights that the threshold in Ireland is considerably lower. The current threshold for turnover in Northern Ireland is £1 million sterling compared to a figure of €317,000 in the Republic. This means that a company trading in Newtownbutler or Lisnaskea in County Fermanagh with a turnover of £900,000 sterling is not required to have a statutory audit, unlike a company trading across the Border in Clones with the same level of turnover. It will mean additional costs.
This hardly creates a climate conducive to greater cross-Border trade. It may be hard to understand the effects of this when one is living a long way from the Border, but there is no doubt that it has the potential to create problems. For example, it could affect a young person's decision whether to start up a company in counties Cavan, Monaghan, Leitrim, Sligo or Louth as against one of the Northern counties. Of course, there are better grants in some areas.
The Bill puts into effect the recommendations of the review group on auditing, which was chaired by none other than Senator O'Toole. I congratulate him and the review group for the work they did. The group was established following the DIRT inquiry of the Public Accounts Committee and sat between February and July 2000. It was asked to address a number of issues to do with the regulation of accountancy. The group did its work in four months and produced a 300-page report containing 80 recommendations. Its output represented a broad consensus among the diverse bodies represented on it and provided an effective plan for moving forward. It should be remembered that the group met and did its work before the Enron and Worldcom collapses and the accountancy scandals in the United States. In that context, its work was far-seeing.
The core of the review group's work on the accountancy profession was that we needed to move to a new model. The model in place was effectively based on complete self-regulation. This had developed over the years for two reasons: first, those in the profession wanted self-regulation; and, second, successive Governments were happy to leave this responsibility with them. The review group decided that this must change. It arrived at the view that there was a need for more hands-on involvement. We need to move from a model of delegated self-regulation to one of supervised self-regulation. This would see the State playing a much more active role in supervising the way in which the accounting profession regulates itself and, if necessary, undertaking direct regulation.
The involvement of accountants in a number of scandals through the 1990s, including that which resulted in the beef tribunal, and the inability of the professional bodies to demonstrate to the public that they could regulate their members in an open, effective way made some changes inevitable. Self-regulation does have some benefits: it can be done at no cost to the State and it involves professionals who understand the nature of the work and its technical side as well as the regulatory process. However, it also has many disadvantages. It creates a perception of chaps regulating chaps. This is the main anxiety of many people in this regard. It is easy for the public to believe that when a professional organisation is faced with a choice between its members' interests and those of the public, the members' interests will win. The Bill is welcome because it provides us with a structure for the Irish Auditing and Accounting Supervisory Authority, which will rigorously examine how the accountancy body carries out its self-regulation and ensure that the right procedures and processes are in place and that fair, independent decisions are made.
Perhaps the Minister could clarify the number of members that will be from the auditing profession, which has become unclear in the course of the debates. A number of previous contributions have given the impression that the number of accountants to sit on the board has been increased from two, as specified in the Bill as originally published, to five. I do not believe this is the case. The current legislative proposals guarantee only a maximum of three accountants out of a board membership of 15. An additional two accountants may sit on the board only if the chief executive happens to be an accountant and the other monitoring bodies happen to nominate an accountant between them. This is an important issue, but it can be discussed further on Committee Stage. Will the Minister guarantee that five seats on the board will be filled by accountants, given the highly specialised and technical nature of the board's remit? International best practice suggests that 40% of the board should consist of experts from the profession. We should not depend on a political appointee from any side of the House to decide whether a decision was independent, judicious or prudent.
This is a detailed and complex Bill but it is disappointing that it has taken so long to reach the floor of the House. The review group on auditing reported in July 2000. Since then the Tánaiste and Minister for Enterprise, Trade and Employment has issued many press releases about the action she is taking on the regulation of the accounting profession. She even took the unusual step of publishing draft heads of a Bill about 18 months ago, just before the general election, to show what she was doing. However, that does not hide the fact that it has taken three years for this Bill to reach us. It is an indication that the Minister is perhaps more interested in public relations than in the delivery of public services.
I was interested to hear the issue of insurance being mentioned once again, along with the fact that the Minister had been working on it for a year and a half. Some people in this House would have us believe that this Fianna Fáil-Progressive Democrats Government has only been there since the last election, but the Minister has been in charge of these matters for the last six and a half years. It is important to remember this.
The Bill also contains a number of measures to strengthen the regulation and independence of auditors. These will have to be teased out in detail on Committee Stage. There does not seem to be a clear indication of who is and is not an auditor. A person can set up an auditing business without being attached to one of the auditing organisations. I ask the Minister to take into account the need for people to be certain that the person they are dealing with is legally covered.
