In April 2005 the Company Law Review Group (the CLRG) was asked by the Minister for Trade and Commerce, Michael Ahern TD to perform a â€Regulatory Impact Analysisâ€ (RIA) on Section 45 of the Companies (Auditing and Accounting) Act, 2003 (the 2003 Act). The CLRG was asked for its views on the proportionality, efficacy and appropriateness of Directorsâ€ Compliance Statements as set out in Section 45 of the 2003 Act, having regard to the following factors:
â€˘ Ensuring the integrity of the corporationâ€s accounting and financial reporting systems, including the independent audit and ensuring that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control and compliance with the law and relevant standards
â€˘ The scope of application and the requirements of Directorsâ€ Compliance Statements
â€˘ Potential cost issues
â€˘ Potential competitiveness issues
â€˘ Potential implementation issues
Directorsâ€ of private and public limited companies raised high levels of concern during the RIA process as they faced what they considered to be unnecessary and costly implementation measures arising out of the obligations under Section 45 of the 2003 Act. Had Section 45 of the 2003 Act been implemented in its original form, it would have cast a very wide net and quite a substantial number of small to medium sized companies would have come within the parameters of its provisions.
In the early part of this decade a number of high profile disclosures of non compliance with company and tax law by leading Irish banks and companies were uncovered by the media. New legislation to combat this non compliance culture was required and formed the basis for the drafting of Section 45 of the 2003 Act. In July 2004 the Office of the Director of Corporate Enforcement (the ODCE) issued a guidance paper seeking input and comments from directors of affected companies but confined responses to the contents of the guidance paper and did not seek any comments on Section 45 of the 2003 Act itself. Arguably, if the RIA process had commenced in July 2004 Section 45 of the 2003 Act should by now, have had a positive impact on corporate compliance culture generally. Instead, it is back at â€square oneâ€ and has yet to be implemented.
The original requirements under Section 45 of the 2003 Act were as follows:
â€˘ Obligations applicable to company directorsâ€ of all public limited companies
â€˘ All private companies limited by shares with: a turnover exceeding âŹ15.23 million or a balance sheet total exceeding âŹ7.6 million
â€˘ The definition of â€relevant obligationsâ€ was defined to include the Companies Acts, tax law and any other enactments that provide a legal framework within which the company operates and that may materially affect the companyâ€s financial statements
â€˘ Directorsâ€ would have been required to provide a Compliance Policy Statement identifying present and future policies, arrangements and procedures in place to secure the companyâ€s compliance with all its obligations
â€˘ The Annual Compliance Statement required directorsâ€ to report on the companyâ€s compliance with its obligations during the preceding year
â€˘ The companyâ€s auditors were required to annually review Directorsâ€ Compliance Statements to determine if in their opinion the Statements were â€fair and reasonableâ€.
Due to the ODCEâ€s consultation process and the CLRGâ€s RIA it quickly became apparent that the original draft Section 45 of the 2003 Act was far too prescriptive and required substantive amendment prior to implementation.
The CLRG completed its RIA on the scope of Directorsâ€ Compliance Statements required under Section 45 of the 2003 Act in September 2005 culminating in the production of a comprehensive report containing a new model for Directorsâ€ Compliance Statements.
The CLRGâ€s RIA report finally went before a Cabinet meeting on Tuesday 29th November, 2005 with the Minister for Trade and Commerce, Michael Ahern TD issuing a subsequent press release on Directorsâ€ Compliance Statements on Thursday 1st December, 2005.
A summary of the CLRGâ€s recommendations to be adopted is as follows:
â€˘ The exemption thresholds for companies have been raised thus the requirements will only apply to public limited companies and private companies limited by shares with both a turnover exceeding E25 million and a balance sheet total exceeding âŹ12.5 million which represents a significant increase on the original threshold figures
â€˘ The definition of â€relevant obligationsâ€ under Section 45 of the 2003 Act has been amended considerably and now only includes indictable offences under the Companies Acts and tax law
â€˘ The prescription surrounding Directorsâ€ Compliance Policy Statements has been removed by allowing Directorsâ€ discretion (â€directorsâ€ opinionâ€) to determine what Compliance Policy Statement, arrangements or structures and review are appropriate to their company on a â€comply or explainâ€ basis
â€˘ Auditors are not required to assess the reasonableness or otherwise of the proposed â€Annual Statement on Complianceâ€ in Directorsâ€ Reports
â€˘ Non-commencement of Section 45 of the 2003 Act and the enactment of the CLRGâ€s proposed alternative â€Annual Statement on Complianceâ€ as part of the Companies Bill, 2006.
The introduction of this new model of Directorsâ€ Compliance Statements is a positive step in taking reasonable measures to foster and encourage a more positive, healthier compliance culture across corporate Ireland. The new model has significantly reduced the number of companies within the original provisions of Section 45 of the 2003 Act requiring the preparation of Directorsâ€ Compliance Statements. With the removal of its prescriptive element, once implemented Section 45 of the 2003 Act will undoubtedly lead to an increase in public confidence in the financial services industry of Ireland. Companies that fall within the new parameters should not be complacent and Directorsâ€ of those companies must consider and appreciate fully their duties and obligations under these requirements.
Brief update on the Financial Regulator Compliance Statements
With respect to Section 26 of the Central Bank and Financial Services Authority of Ireland Act, 2004 (the 2004 Act), the Financial Regulator has indicated it will issue a Consultation Paper outlining its requirements regarding Compliance Statements before imposing any regulations under Section 26 of the 2004 Act. This is not expected to occur until a final decision regarding the implementation of Section 45 of the 2003 Act has been made.