Review group proposals welcomed

Comment: Reports that the Company Law Review Group has recommended changes to the so-called directors' compliance statement is encouraging news for much of Irish business. The group was asked to undertake the review by Government in April, when preparations for its introduction rekindled concerns about the additional costs it could impose on Irish companies.

The review group is to be commended for the manner and speed in which it has gone about considering this issue. Reports suggest it has come up with a compromise proposal addressing many of the concerns raised by commentators, including the Institute of Chartered Accountants in Ireland (ICAI).

The existing, but not commenced, Section 45 of the Companies (Auditing and Accounting) Act, 2003, requires company directors to produce two "statements" annually in their directors' report - a compliance policy statement and an annual statement of compliance.

Without dwelling on the minutiae of the section, company directors are required to set out company policies regarding compliance with its "relevant obligations" - defined as company law, all tax law, and the "catch-all", any other legislation providing a legal framework in which the company operates and that may materially affect the company's financial statements.

Section 45 also requires details of the company's internal control procedures, designed to secure compliance, and how their effectiveness has been reviewed. Directors must acknowledge their responsibility for compliance, and provide confirmation of whether appropriate procedures are in place, and whether their effectiveness has been reviewed.

An external opinion from the auditor is also required as to whether statements made by directors are "fair and reasonable".

Sentiments expressed in Section 45 are, of course, appropriate for all companies. Yes, company directors are responsible for ensuring compliance with a company's legal obligations. And yes, they should have in place procedures to address these which, of necessity, need to be reviewed on a regular basis.

However, much of the criticism of Section 45 revolves around:

the highly prescriptive nature of the requirements, resulting in significant costs for many companies;

the inclusion of such detailed requirements in primary legislation which would result in unnecessary formality as company directors saw the need for greater legal certainty. One legal expert described it as an "adviser fest";

a definition of "relevant obligations" which is so extensive as to include any statute that might affect a company's financial statement;

external costs arising from the use of legal advisers, and from the role of the external auditor.

Critics further argued that such a regime was unique to Ireland and would affect Ireland's competitiveness internationally, possibly discouraging inward investment. An ICAI survey indicated that companies might regard the section as an incentive to incorporate outside the State.

Understandably, there was a widely held view that appropriate guidance for company directors and their auditors was needed in advance, but draft guidance produced by a working group under the auspices of the Office of the Director of Corporate Enforcement (ODCE) only provoked further comment, prompting referral of the issue to the review group.

Significantly, the group's proposal recognises changes in other aspects of company law, and other legislation affecting corporate Ireland since the directors' compliance statement was first advocated in the report of the review group on auditing in 2000.

These include:

The Office of the Director of Corporate Enforcement provides an effective mechanism for the enforcement of company law;

additional powers of intervention and enforcement have been granted to the Revenue;

the Irish Financial Services Regulatory Authority has been established;

the imposition of significant new "whistleblowing" obligations on auditors and accountants by virtue of the Company Law Enforcement Act, 2001, the Criminal Justice (Theft and Fraud Offences) Act, 2001;

the amended anti-money laundering legislation now in force in this State, which now includes obligations to report suspected tax evasion;

the establishment of the Irish Auditing and Accounting Supervisory Authority.

Undoubtedly, these measures have had considerable impact since their introduction and many aspects of this "new era" are still "bedding down". The ODCE's own annual report for 2004 cites a survey of its own, showing 95 per cent of auditors and liquidators believe the level of corporate compliance has improved since the establishment of the ODCE, while 97 per cent of company directors believe that compliance is important.

Last year saw the ODCE receive in excess of 1,500 reports from auditors. On a regular basis these days, we see the Revenue rightly taking credit for recouping millions in unpaid taxes.

The directors' compliance statement, as originally envisaged, has been overtaken by recent events. The compromise position, focusing on large companies, arrived at by the review group, demonstrates the commitment of business to achieving a balanced approach to this issue.

The new proposal continues to require directors to acknowledge their responsibilities for compliance with relevant obligations, defined for the purposes of the "new" Section 45, as company law and tax law. Confirmations will also be required of policies and procedures in place to secure compliance with obligations. There is also a reduced reporting role for the external auditor.

However, company directors should not take lightly the requirements of this compromise position. They will undoubtedly present a challenge for some and will require careful scrutiny. No doubt there will be calls for certain clarifications, and perhaps application guidance.

Further enhancement may also take place as the amendment passes through the Oireachtas.

Much of the debate about the regulation of Irish business of late has concentrated, ensuring that SMEs in particular do not bear the brunt of measures designed for European listed companies. It is a debate that ICAI believes has some way to go but this revised directors' compliance statement means we at least have a better starting point.

However, for the moment, the review group is to be congratulated for seeing that common sense has prevailed on this issue.

John Greely is president, the Institute of Chartered Accountants in Ireland.