Special Committee on the Companies (No. 2) Bill, 1987 díospóireacht -
Tuesday, 12 Jun 1990

SECTION 198.

Mr. J. Bruton

I move amendment No. 242:

In page 148, subsection (1), lines 9 and 10, to delete "on a continuous and consistent basis".

These are amendments to section 198 which relate to the obligation that is placed on accountants and auditors to keep the accounts of a company on a continuous and consistent basis so that, at any time, the financial position of the company can be determined accurately. We are proposing here to remove the reference to "on a continuous and consistent basis" which would mean that the accounts would have to be kept essentially as they are at the moment — annually rather than being constantly updated. I know that from the point of view of company supervision it would be desirable that you should know exactly where you stand at any given time. I know from my own experience in running a very small business, that if I were to try to know exactly where I stood every week it would not be possible. It is only when you sit down and analyse your assets and liabilities — as you do normally each year when you are preparing your accounts — that you can answer the sort of questions that the Minister wants answered on a consistent basis at any time under section 198. If you require every company to have the books up to date all the time that means that they are going to have to spend a lot more money on accountants. The more money they spend on accountants, the more their customers are going to have to pay for what they buy from them. The more customers have to pay, the more inflation goes up and the more costs go up, and the more we become uncompetitive. I think we should have the minimum regulation necessary to achieve our objectives, not the maximum regulation necessary. In section 198 there is a sort of officious over-regulation and over-exacting provisions. I know that they can be justified and will be justified but that does not mean that they are necessary.

Mr. Leyden

Section 198 replaces with amendments section 147 of the Principal Act. Subsection (1) provides that every company in keeping accounts must do so on a continuous and consistent basis. The amendments tabled by Deputies Bruton and Barrett would remove this particular requirement. While it is difficult to be precise regarding the magnitude of the problem, various sources over the years have drawn attention to the inadequacy of record keeping in some companies. Some companies seem to take the view, for example, that the accounts are a matter to be written up only when they get the chance or solely for the purpose of preparing annual accounts. This is clearly unsatisfactory, since such practices must inevitably result in wholesale inaccuracies and the likelihood of directors being unaware of the true financial state of their company throughout the year. Regrettably this often only comes to light when it is too late to do something about it, in other words when a company goes to the wall. We are all aware of the debate over the years as to why companies fail and we often hear it put down to the old reliable, bad management. In my book however, bad bookkeeping is generally a convincing symptom of bad management.

It is with a view to ending this undesirable situation that the present subsection requires companies in general to keep books on a continuous and consistent basis. Both aspects are important — continuous to ensure an end to occasional bookkeeping and consistent to ensure comparability between various entries arising from the trading activities of the company. I appreciate that the section does not specifically define what is meant by continuous and consistent. At the same time companies should have no difficulties in recognising what this would mean in their own particular context. I would reject any argument that this requirement would place an undue burden on companies. If we are serious about tackling the inadequacies in existing record-keeping such a provision is urgently needed. In the circumstances I am afraid I could not delete the phrase "on a continuous and consistent basis" and accordingly I am opposed to this amendment. In fairness, I feel that on reflection Deputies Bruton and Barrett who put forward the amendment would feel that it is better to have this provision in the Act because it is a major problem in companies. Many companies have got into difficulties as a result of not having proper bookkeeping in place.

Mr. J. Bruton

If you were to remove the words "on a continuous and consistent basis" you will still have a requirement as follows:

Every company shall cause to be kept proper books of account, whether in the form of documents or otherwise, that—

(a) correctly record and explain the transactions of the company,

(b) will enable the financial position of the company to be determined with reasonable accuracy.

And so on. I am not proposing therefore, as you can see, to remove the requirement to keep proper books. I fully agree with the Minister that the keeping of proper books is very important to the proper management of a company. I am however saying that section 198 could be interpreted by the accountancy profession, if they wanted to inflate their fee income, in such a fashion as to say to companies that to be on the safe side we had better have a man in with you all the time to ensure that your accounts are consistently and continuously up to date, particularly if you are talking about a monopoly company in a monopoly market where they can pass their costs ad lib to the consumer.

I think you could easily see this section used to generate a fine little money spinning operation for the accountancy profession because of the continuity and consistency that is being required. For good or ill we have the concept of annual accounts. Accounts are not required to be kept on a weekly basis, on a monthly basis, on the basis of decades or on the basis of centuries. They are required to be kept annually, once a year. Why, if they are going to be done once a year anyway, do we need to have them kept up to date on a continuous and consistent basis, a term which, as the Minister has acknowledged, is undefined? If the Minister is not satisfied with annual accounts then perhaps he should require companies to bring out six-monthly accounts or quarterly accounts. If that is what he wants, let him say so. But do not have a vague, and I think there is nothing worse than vague legislation, a requirement about continuous and consistent, whatever in God's name that means. Surely the Minister should prescribe a precise requirement for people either to keep them every year as is at the moment or every six months but not something of this kind which is unclear as to what it means. It could mean that if a particular company cannot produce on request any day of the year an up-date of its financial position which would enable them on that day to be readily and properly audited, it would be breaking the law. In other words, you could go to a company in the middle of the year and say: you must produce all the data tomorrow to enable your accounts to be readily and properly audited. If you could not do it "tomorrow", even though your audit was not due for six months, you would be breaking the law under section 198. I do not think that is the sort of legislation we should have.

At the moment there is a clear requirement on companies to have their accounts audited every year and they know where they stand, they can organise their record keeping and their assembly of information to comply with the annual audit, but if the Minister is not satisfied with the annual audit, let him make it a six monthly audit. It is unreasonable to have a situation where at any time, without any reference to notice — there is no requirement here even for companies to be given two weeks notice to be in a position where they can fulfil A, B and C — they could be required to fulfil all of these requirements.

Mr. Leyden

I do not regard it as being unreasonable. What we are looking for is just proper house keeping; we are not looking for end of year accounts. We want the company to be in a position to know exactly what is happening in the company. It is only proper and prudent to have on a continuous and consistent basis proper books of account at all times. Section 198 (1) (b) will at any time enable the financial position of the company to be determined with reasonable accuracy. That is absolutely essential and I think it is prudent and practical.

Mr. J. Bruton

Look at paragraph (d).

Mr. Leyden

Paragraph (d) will enable the accounts of a company to be readily and properly audited.

Mr. J. Bruton

At any time?

Mr. Leyden

If the information is available it will allow the auditor to come in and look at the accounts. I know Deputy Bruton feels that it is important that companies are properly maintained and that records are kept, not just waiting until the end of the year and then there is a rush to get the documents together to comply with that requirement. It is absolutely essential. I would have no room at all for compromise in this.

Mr. Carey

In practice, this section is not workable particularly if companies are having continuous difficulties on the manufacturing side. One might have sales difficulties because of costs where a lot of time is spent on preparation while at the same time, the company will be required by law to have this information available at any time. I do not see how this can be done. I do not understand why there is anxiety about the absolute control that is sought under this section. For instance, the Stock Exchange require people to give their quarterly sales returns and information of that nature; why is it necessary to go beyond that in this Bill? If the Minister wants quarterly or six-monthly audited accounts the outcry from industry will hit him very sharply because people in industry are not aware of what is happening here.

Mr. Leyden

One would get the impression that Deputy Carey has not heard about computers. Even the smallest companies have equipment that gives an up to date picture of what the company is about. I do not accept the arguments about being concerned. It is absolutely essential if companies are to survive and succeed that you have on a continuous and consistent basis, proper book-keeping. That seems very reasonable and it is in the best interest of everyone concerned, from directors to employees. We are talking about internal not external control of the company. We have no reason to bring it down to scare-mongering as far as requiring six monthly or 12 monthly audits are concerned. That provision remains and I have no intention of changing it. It is a reasonable point of view and I do not see any reason to amend this section.

Mr. J. Bruton

Is it not the case that an auditor when auditing the accounts of a company — for instance a company which handled house property — would frequently want an up to date valuation of that property for the purpose of the balance sheet of the company? Is that right? Would it not be normal practice if an auditor was auditing accounts and looking at the balance sheet — the assets and liabilities of the company — that he would want up to date valuations of the house property or other marketable properties of the company? It seems to me that section 198 (1) (d) would require many companies with significant assets to have regular professional revaluations of those assets. Section 198 (1) (c) requires the company to keep books in a form that would enable the accounts of the company to be readily and properly audited on a continuous basis. If getting professional valuations of assets is normally required for an annual audit and if now in future the company must have its books in a form that they could be audited at any time, then it would appear to me that companies will be required to revalue their assets almost on a daily basis. That is what the legislation says. I do not think that is reasonable. I do not understand why we need to go that far. It is not simply a question of every company keeping a record of all the cheque payments and lodgements up to date. That is easy, everybody can do that. All you need to do is to have the cheque stubs and the lodgment dockets available but we are not talking about that. We are talking about subsection (2) (b) which requires the company to keep a record of their assets and liabilities, which means an up to date valuation of the company, to comply with paragraph (d) to enable the accounts of the company to be readily and properly audited. That is not realistic.

Section 198 (2) which refers to a record of all goods purchased and statements of stocks held by the company at the end of each financial year and all records of stocktakings from which the statement of stock has been or is to be prepared. If an audit of a company was being carried out, one would have to have an up to date record of one's stocks. I would think that the annual stocktaking, which is referred to here in subsection (2) (c) (ii), will now, in accordance with subsection (1) (d), have to be a continuous stocktaking to comply with the provisions of the first part of the section, which as I say, refers to records being kept on a continuous and consistent basis so that at any time the financial position of the company can be determined with reasonable accuracy. Given that these accounts will have to be kept in the registered office of the company, presumably, under subsection (4), somebody should be able to walk in and look at the accounts at any time, subject to opening hours. I think that is going to be onerous.

Mr. Leyden

First, nobody can walk in off the street and demand that these records be produced on a continuous basis. Deputy Bruton is making the point that somebody can walk in off the street and demand that all these records be made available. Deputy Bruton is labouring this point. Basically, we are setting out principles which companies will be required to follow which, I think, is only right, proper and fair. Section 198 (2) (c) (ii) says: "statements of stocks held by the company at the end of each financial year and all records of stocktakings from which any such statement of stock has been, or is to be, prepared".

Mr. J. Bruton

That is without prejudice to the foregoing, and the foregoing would require that the company's accounts could be audited at any time. That means that stocktaking must be continuous.

Mr. Leyden

Section 198 (1) (d) will enable the accounts of the company to be readily and properly audited. If they keep continuous and consistent accounts they could be audited at any time. The Deputy made the point about valuation of properties on a continuous and consistent basis, revaluing the property almost daily. That would be illogical. A company involved in property might find it necessary to have the properties revalued regularly to keep one informed of what is happening in the company. Stocks and shares are valued on a daily basis. I know that Deputy Bruton is generally very reasonable on these issues and does not want to see companies tied down to continuously doing these things and not getting on with the job of running the company, but it is consistent with running a good company to have on a continuous and consistent basis proper books of accounts.

Mr. Carey

I think the Minister is out of touch with what happens in practice. If you have an auditor who has good practice methods he would probably do that work reasonably, as has been pointed out by Deputy Bruton, but if you have a very finicky auditor, I know exactly what will happen — down the line there will be continuous assessment. When the Minister replied to me earlier he spoke about computers. I would like to find the auditor who is going to accept stock control on computers. I would like to see a man who will not want to see the nuts and bolts. If the Minister requires the auditor to do this continuously, I guarantee that there will be a continuous audit. These lads have to make a living too and in this Bill they will see a reasonable opportunity to do so.

Chairman

We must take into account what is happening outside. The division bells are ringing. Can I put the question.

Mr. J. Bruton

No. I will have to adopt the same technique that the Minister of State, Deputy Leyden, adopted the last time when he found himself in a minority in this Committee, and he succeeded in disrupting the affairs of the Committee to the extent that a vote could not be taken. I can assure you that if there is any attempt to curtail this discussion I shall have to adopt the same approach. I think we should come back.

Sitting suspended at 4.10.

Progress reported; Committee to sit again.

The Committee adjourned at 4.30 p.m. until 4 p.m. on Tuesday 26 June 1990.