I move amendment No. 18:
In page 14, before section 11, to insert the following new section:
11.—The following section is substituted for section 45 of the Act of 2003:
"45.—The Act of 1990 is amended by inserting the following in Part X:
205E—(1) In this section—
‘amount of turnover' and ‘balance sheet total' have the same meanings as in section 8 of the Companies (Amendment) Act 1986;
‘relevant obligations', in relation to a company, means the company's obligations under—
(a) the Companies Acts,
(b) tax law, and
(c) any other enactments that provide a legal framework within which the company operates and that may materially affect the company’s financial statements;
‘tax law' means—
(a) the Customs Acts,
(b) the statutes relating to the duties of excise and to the management of those duties,
(c) the Tax Acts,
(d) the Capital Gains Tax Acts,
(e) the Value-Added Tax Act 1972 and the enactments amending or extending that Act,
(f) the Capital Acquisitions Tax Act 1976 and the enactments amending or extending that Act,
(g) the statutes relating to stamp duty and to the management of that duty, and
(h) any instruments made under an enactment referred to in any of paragraphs (a) to (g) or made under any other enactment and relating to tax.
(2) This section applies to—
(a) a public limited company (whether listed or unlisted), and
(b) a private company limited by shares,
but it does not apply to a company referred to in paragraph (a) or (b) that is of a class exempted under section 48(1)(j) of the Act of 2003 from this section or to a company referred to in paragraph (b) while that company qualifies for an exemption under subsection (9).
(3) The directors of a company to which this section applies shall include in their report under section 158 of the Principal Act a compliance statement—
(a) acknowledging that they are responsible for securing the company’s compliance with its relevant obligations,
(b) confirming that the company has in place a compliance policy statement that is, in the opinion of the directors, appropriate for the company, and, if this is not the case, specifying the reasons,
(c) confirming that the company has in place appropriate procedures and arrangements that are, in the opinion of the directors, designed to secure compliance with its relevant obligations, and, if this is not the case, specifying the reasons, and
(d) confirming that the company’s procedures and arrangements referred to in paragraph (c) have been reviewed during the financial year to which the report relates, and, if that is not the case, specifying the reasons.
(4) For the purposes of this section, a company's procedures and arrangements are considered to be designed to secure compliance with its relevant obligations and to be effective for that purpose if they provide a reasonable assurance of compliance in all material respects with those obligations.
(5) Where the directors of a company to which this section applies fail to comply with subsection (3), each director to whom the failure is attributable is guilty of an offence.
(6) A private company limited by shares qualifies for an exemption from this section in respect of any financial year of the company if either—
(a) its balance sheet total for the year does not exceed—
(i) €12,500,000, or
(ii) if an amount is prescribed under section 48(1)(l) of the Act of 2003 for the purpose of this provision, the prescribed amount,
or
(b) the amount of its turnover for the year does not exceed—
(i) €25,000,000, or
(ii) if an amount is prescribed under section 48(1)(1) of the Act of 2003 for the purpose of this provision, the prescribed amount.
205F.—(1) The auditor of a company to which section 205E applies shall undertake an annual review of the directors' compliance statement under subsections (3) of that section, having regard to information obtained by the auditor, or by an affiliate of the auditor within the meaning of section 205D, in the course of and by virtue of having carried out audit work, audit-related work or non-audit work for the company.
(2) Where, in the auditor's opinion, the directors have—
(a) failed to prepare, or to cause to be prepared, a directors’ compliance statement as required by section 205E(3), or
(b) failed to include a directors’ compliance statement in the directors’ report as required by section 205E(3), or
(c) made a compliance statement which is either false in a material particular or has been made recklessly to comply with section 205E(5) and (6),
the auditor shall report that opinion and the reasons for forming that opinion to the Director of Corporate Enforcement.
(3) Section 194(6) applies, with the necessary modifications, in relation to an auditor's compliance with an obligation imposed on him by or under this section as it applies in relation to an obligation imposed by or under section 194.
(4) A person who contravenes this section is guilty of an offence.".".
Amendment No. 19 is consequential; it involves a change in the Long Title to respond adequately to it.
The Minister asked me to be calm in how I dealt with this amendment. I will try to be calm, measured and logical about it and I expect a similar response from her in terms of flexibility.
I will put this amendment into context, which has to do with the debate on light touch, heavy handed legislation and so on. What I propose addresses a number of issues. First, it raises the threshold under which companies are required to come in under the new section I propose. As a result, fewer companies are tied into it. Second, it requires directors to disclose material facts which they know. Materiality will be the judgment call for themselves at the time. Third, it requires the auditor to sign off on that. That is what I propose in broad terms.
In terms of what I am proposing, on four or five different occasions while we were going through the Bill the Minister referred to the Office of the Director of Corporate Enforcement to support her argument. She referred to his office and to him time and again in the Committee Stage debate, in response particularly to Senator Cannon's issues. What I have put before her today is precisely, down to the comma, what the Office of the Director of Corporate Enforcement proposed to the company law review group. On that basis alone it is an open and shut case. This is similar to how one deals with the issue politically. I am putting before the Minister something from the office on which she has relied for all her argument to date, and I believe she should accept it. She should not tell me about the companies Bill, with its 1,350 sections or whatever, she will bring in next year.
During the time of the rows about offshore accounts, when the banks queued up to appear before the Committee of Public Accounts, the argument they put forward time and again was that they did not know. Even though I agreed with the argument made by Senator Cannon on the last amendment, I found it difficult to support what he was saying because it put an onus on directors to find out, or put in place the structures to find out, the position. That is probably the argument he was making also in trying to introduce balance into it. He felt the balance went too far, and made a plausible and cogent case which I did not support subsequently because I felt the argument was more on the Minister's side.
In terms of what I am saying in the amendment, I am reminding the Minister that her predecessor as Tánaiste, the Minister for Health and Children, Deputy Mary Harney, went into the Committee of Public Accounts. I sat beside her. We put forward the proposals on the report of the audit review group and at least six times during that speech she said she never again wanted to hear anybody use the argument that they did not know as an excuse for not dealing with it.
We then had the business to do with Anglo Irish Bank some months ago. The Minister will recall that the day after that blew up all the discussions were on whether those people could be brought to courts and if they were in breach of company law. There was only one voice, Professor Niamh Brennan, a member of the audit review group, who took a different view to that of everybody else. Her view was that there was an issue of the common law based on company law. I made reference to that earlier. The common law is as important as the written company law in many cases. If this issue is moved forward, and I do not want to get into individual issues in individual banks, common law will become very important but if what I am proposing had been in place, that legislation could be used in such a case because there was at least one director who had been a chief executive and a chairperson and who could not deny he did not know the information. It was clearly a question of making a judgment call and the judgment call in respect of what is available currently is whether there is something in place to ensure people are staying within the laws of compliance whereas under what I propose they must say it is appropriate to the needs and that it is material. That is the fallout position on it.
The Minister may choose not to support this amendment but I am proposing what was supported by the Committee of Public Accounts and what was put forward by the Office of the Director of Corporate Enforcement. I am not on my own in this regard. This is not just a throwaway amendment, so to speak, from an Independent Senator. I am speaking Government policy, Committee of Public Accounts policy and the Office of the Director of Corporate Enforcement policy.
This amendment requires us to put in place what people expect us to do. I do not expect it to get one word of coverage from anybody in the Irish media who would be far too lazy to spend any time trying to work out what it is I am saying. They would not bother their heads. I have written to the joint committee on regulation asking it to support this measure. It will not do so but it allows me to say when I am next in the committee that it had the opportunities and it cannot whinge the next time company law is not strong enough to deal with errant directors or that some measure is not in place.
In terms of what I am proposing, the current legislation is section 45 of the 2003 Act, which amends section 205 of the 1990 Bill. We had this debate in 1990. I believe Declan Purcell was the adviser on that occasion. I saw him on "Prime Time" last night. I believe he would still share my views on this issue.
I believe the gods are on my side on this issue. The Minister is in a lonely position in regard to it and nobody will thank her if she does not accept the amendment. This is a simple amendment which also makes the position easier for company directors. It reduces the number of companies involved in it and it makes it easier for them. I am removing large amounts from what is in the legislation currently but the main thing I am doing is this. A section in the current Bill states: "It confirms that the company has internal financial and other procedures in place that are designed to secure compliance". What I am proposing was very close to what was in the original Bill published by the Minister's Department in 2003. Of course, when company directors were required to state to the public that they had put in place something which was secure or material and so forth, there was an outcry from IBEC, various other directors' groups and from what was then called the "big five" accountancy bodies. As the world knows, the big five has been reduced substantially in the meantime. It is down to three at present and getting smaller, due to their involvement in Enron and various other matters.
What I am proposing was in the original Bill, and in that case the Minister and Tánaiste of the day, Deputy Mary Harney, was forced to concede. Pressure was brought on the Government to introduce this. There has been no debate on it in the intervening period but this is what is there. Many of the people, incidentally, who were complaining about the lack of regulation and legislation to deal with Anglo Irish Bank are the people who did not support what they should have supported in 2003. What is stated at present is that the legislation and procedures are designed to secure compliance, but the amendment uses the phrases "confirming that the company has in place a compliance policy statement that is, in the opinion of the directors, appropriate for the company" and "confirming that the company has in place appropriate procedures...designed to secure compliance". In other words, the directors will make a value judgment that what they have in place is appropriate for the company.
I am sorry to repeat my point but I have a reason. This provision is not nearly as harsh as the Minister's last amendment about throwing people into jail. This is about company directors doing what I believe they should. When I put forward this proposal in 2001 and 2002 as chairman of the audit review group to the Government, I honestly did not believe I was raising the bar. I believed that the limited liability which this democracy grants to company directors was a privilege and that the least we were entitled to get in return were declarations on any issues that were material and that the directors would act in compliance with the law of the same democracy that gave them their privileges. I will argue with any group, accountants or otherwise, who say this provision is harder on directors. It is not. It puts one duty on directors — it makes them form a judgment.
What does that mean? How does it work in real terms? Let us say the company falls apart and the directors are brought before a court on the basis of this legislation. They will have to stand up and say they were directors of that company; that as directors they ensured the process was explained, put in place and reviewed each year, as is required in the provision; that they got a report every quarter or six months to the effect it was being implemented and the company was compliant; that they ensured it was put in place and that they got a report; and that they cannot be held responsible for some errant person somewhere else who was acting fraudulently. It must be stressed that this amendment is not like the Minister's last amendment; it does not throw people in jail for something about which they could have known nothing. It effectively provides that the directors act proactively and positively to put in place a system to ensure they are paying their taxes, that the books are a fair and accurate reflection of what they are doing and whereby the directors can form a judgment that they acted as fairly, honestly and correctly as possible in the spirit of and as required by the legislation.
That is what is required of the directors. The next part of the amendment applies to the auditors. What is required of the auditors? One need only reflect on events two months ago when the Anglo Irish Bank problem hit the fan and people were asking about the role of auditors. We know the role of auditors. I must declare an interest because I am a director and member of the Irish Auditing and Accounting Supervisory Authority, so I have been immersed in this issue. In my view, the auditor is a watchdog, not a bloodhound. The same applies to the directors. It is not the case that a director must chase around every office or sub-office of the company to find out if everybody is acting honestly. One can only require the director to do what is appropriate for a director. Directors are not managers, nor should they be required to spend millions of euro on consultants to get this information, as was argued by many of the accountancy bodies at the time, including the big five. They should spend no more than would reasonably be required to put reasonable and practical mechanisms in place to ensure they comply with the law. If the company is Anglo Irish Bank, for example, giving out over €100 million in loans to directors and telling nobody about it, the directors would be required, under this amendment, to disclose anything material and would be required to be told of anything material. There are, therefore, two bites of the cherry.
Let us say the directors are before the judge and are asked what the auditor does. The amendment uses the phrase "in the auditor's opinion". The auditor must form an opinion or make a judgment. What I am seeking through this amendment is that both directors and auditors form judgments. What else are they paid for? What else are they doing in the company? Auditors are the bridge between the company in business and the rest of us. They tell shareholders in the company they are auditors and not part of the company; they have read through the books; and the books are a true and fair reflection of the accounts. They say the same to the Minister, the Revenue Commissioners, the Department of Finance and the political system. The amendment provides that where the auditor forms an opinion that the directors failed to prepare or cause to be prepared a directors' compliance statement or where they failed to include a compliance statement in line with others or where they made a compliance statement which was either false in a material particular or made recklessly, the auditor must report that to the Director of Corporate Enforcement.
I can predict the argument that will be made against this provision. It will be against the use of the word "material". Every accountant, trainee accountant and accounting technician knows what "material" means. Can it be defined? It probably cannot; it is one of those mysteries of accountancy. It is like asking somebody to define an elephant. One cannot, but one knows it when one sees it. The same applies to material. One need not define it but one knows it when one sees it. If somebody is auditing a company and discovers some company directors have received loans of over €100 million which do not appear in the books, one will know it is material without ever receiving a definition of it. Generally, material in the books in accountancy terms would be at 10% but there is also the issue of its impact. As we have seen, the amount of the loans was far less than 10% but the impact was much greater than 10% in terms of profits, turnover, value, equity and so forth.
I hope I have convinced the Minister. I have tried to cover all the angles. The amendment I have put forward is exactly in line with what the Committee of Public Accounts asked of the Government in 2002. It is also in line with what was proposed by the Minister's Department and the then Tánaiste, Deputy Mary Harney, in 2003. Furthermore, it comprises the exact words proposed by the Office of the Director of Corporate Enforcement to the Company Law Review Group some time ago. It deals with a gap in the legislation at present and requires directors and auditors to form judgments. This will give comfort to shareholders, stakeholders, customers, the Revenue Commissioners, the Department of Finance and the political system. It is a no brainer; the Minister should accept the amendment.
