Auditors Duty to Report Suspected Indictable Offences

Auditors’ Duty to Report

Suspected Indictable Offences

under the Companies Acts to

the Director of Corporate Enforcement

What is the scope of the reporting obligation?

Section 74 of the Company Law Enforcement Act, 2001 (CLEA) introduced a new reporting obligation on auditors by inserting a provision into section 194 of the Companies Act, 1990 whereby auditors are now required to report to the Office of the Director of Corporate Enforcement (ODCE) where they have reasonable grounds for believing that the company, or an officer or an agent of the company, has committed an indictable offence under the Companies Acts.

Is guidance available to auditors on their reporting obligations?

Yes. Following the introduction of the new reporting obligation ODCE, in conjunction with the Consultative Committee of Accountancy Bodies-Ireland (CCAB-I) and the Auditing Practices Board (APB), issued guidance to auditors. The guidance, which applies elements of a number of Statements of Auditing Standards (in particular SAS 120 and SAS 620) to the obligation, is available as Decision Notice D/2002/2 from the ODCE and has also been issued as an Audit Bulletin by the APB. Copies of Decision Notice D/2002/2 can be obtained from the ODCE free of charge and can also be downloaded from the ODCE website at the following address:

How can auditors mitigate the potential difficulties that the reporting obligation can cause for auditor/client relationships?

ODCE recognises that the reporting requirement can potentially lead to certain difficulties for auditor/client relationships. It is precisely for this reason that the guidance encourages auditors to afford their clients the opportunity to submit a statement to the Director of Corporate Enforcement in tandem with auditors’ own reports. The rationale for this suggestion is to afford audit clients an opportunity to provide the ODCE with any additional information they consider pertinent to the suspected offence, thereby enabling the Director to make a full evaluation of the facts in advance of determining what, if any, enforcement action should be taken.

As a further measure to reduce clients’ misunderstandings of the role of auditors in this context, ODCE strongly recommends that auditors should, at the earliest opportunity, update their clients’ audit engagement letters to reflect their new reporting responsibilities. In advance of agreeing new engagement letters (and particularly in advance of the commencement of new audits), auditors should fully explain their reporting obligations to clients.

While the ODCE recognises, and has sought to address, the potential difficulties posed to auditors by the reporting obligation, the fact remains that actual or potential difficulties with the auditor/client relationship do not constitute valid grounds for non-compliance with legal obligations. Moreover, as readers will be aware, auditors’ wider legal obligations, together with their ethical standards, require that they act independently and carry out their audit functions with professional integrity.

How many indictable offence reports have been submitted to the ODCE to date?

As of the 29th January 2003, ODCE had received 489 indictable offences reports. The 489 reports contain a total of 663 suspected offences.

What have been the sources of the reports received to date?

The table below sets out an analysis of the sources of the reports received by ODCE to date.

While the ODCE is pleased with the volume of reports submitted thus far, there are some disappointing features of the data. One of these is the relatively low incidence of reporting by small practitioners when compared with the larger audit practices. The ODCE hopes to see the rate of reporting from smaller practitioners improve in the coming year.

Which offences are being reported?

An analysis of the 663 offences referred to above is set out in the table below. After annual return related offences, which account for 81% of reported offences to date, the most frequently reported offences have been:

• breaches of the legislative provisions governing companies’ transactions with directors and persons connected with directors, and;
• the failure to convene Extraordinary General Meetings in circumstances where companies have sustained a serious loss of capital.

Offence

How are indictable offence reports dealt with by the ODCE?

In agreement with the Registrar of Companies, where the subject matter of a report relates to a matter more appropriate to the Companies Registration Office (CRO) e.g. failure to file an annual return, ODCE forwards the report to the CRO for appropriate enforcement action. In other cases, reports are dealt with in the following manner:

• An initial review of each report is conducted to determine whether the information provided by the auditor is sufficient to facilitate an evaluation by ODCE staff. Where the report is deficient in any respect, the auditor will be requested to provide additional information. Full details of the information that should be provided in auditors’ reports are set out in the Decision Notice. To assist auditors in providing the required information, ODCE has drawn up a standard report form which auditors will find useful in submitting their reports. The report is contained in an appendix to the Decision Notice and can also be downloaded from the ODCE website.

• Such other information as is required to fully and properly evaluate the subject matter of the report is requested of the relevant parties e.g. the company, directors, other company officers etc. Similarly, other information such as the company’s annual returns and other public documents (where these have been filed) are normally obtained from the Companies Registration Office. In addition to the foregoing, the ODCE also has information sharing arrangements in place with other State agencies and, where appropriate, information may be sought from relevant bodies.

• In the light of the available evidence, each report is evaluated with a view to determining whether enforcement action is warranted and, if so, the most appropriate form of enforcement action to be taken.

Where, as a result of the ODCE evaluation process, it is decided to pursue enforcement action, the action taken may be civil or criminal. Civil enforcement measures will generally seek to compel the company/officer in default to remedy the default e.g. to convene an AGM of the company or to make certain information (e.g. registers) available. Where civil enforcement is judged to be ineffective or inappropriate, ODCE will pursue criminal enforcement i.e. prosecution. Where prosecution is considered to be the most appropriate course of enforcement action, ODCE will investigate the matter in greater detail including, for example, the interviewing of individuals and taking of statements by Gardaí attached to the Office and the inspection of books and records.

ODCE prosecutes offences summarily in the District Court where that course of action is deemed to be appropriate. Where an indictable offence is judged to be sufficiently serious as to warrant trial in the Circuit Court, ODCE will refer the available evidence to the Director of Public Prosecutions for a determination in that respect.

What has been the ODCE experience of auditors’ reports to date?

On the basis of the reports received to date, ODCE has experienced a number of problems with auditors’ reports:

Information Deficiencies

Under the reporting obligation, auditors are required to provide the Director with details of the grounds on which they have formed their opinion. The joint guidance makes clear that auditors’ reports should provide sufficient information in support of their opinion to enable the ODCE to evaluate properly the circumstances suggesting the commission of an indictable offence and this is supported by SAS 620 which requires auditors to report ‘…in a form and manner which will facilitate appropriate action by the regulator’ (SAS 620.5).

Despite the foregoing, it has been ODCE’s experience that a number of auditors’ reports have not contained a sufficiency of information. This inevitably results in ODCE having to revert to auditors seeking additional information, thereby inconveniencing both the auditors in question and ODCE. In order to reduce the necessity for further such requests, auditors should refer to the guidance when compiling their reports and ideally complete the report form included therein.

Delays in Reporting

Under the legislation, auditors are required to notify ODCE ‘forthwith’ having forming their opinion that there are reasonable grounds for believing that an indictable offence has been committed. However, a number of instances have come to ODCE attention where auditors have delayed - sometimes for significant periods subsequent to the formation of their opinions - in submitting reports. Given the requirement to report immediately upon forming an opinion, any subsequent delays in reporting on the part of auditors are investigated by ODCE and, where warranted, appropriate enforcement action will be taken.

Failure to Report Due to Client Disclosure

ODCE has encountered a number of instances where audit clients have made voluntary disclosures to ODCE but where no indictable offence reports have subsequently been submitted by the auditors in question. While ODCE welcomes voluntary disclosure on the part of companies, such disclosure does not relieve the auditor of his/her obligation to report. Such failure on the part of the auditor to report is itself an indictable offence (under section 194(4) Companies Act, 1990 as amended).

Nature of Reports

While the dominance of ‘annual return’ reports is unsurprising, given that there are 128 indictable offences under the Companies Acts, ODCE is concerned that only 7 categories of offence have been reported thus far. Accordingly, this is an area in which the ODCE expects to see progress in the coming year. Auditors should familiarise themselves with the list of indictable offences under the Acts (a full list of such offences is set out in an appendix to the guidance).

2003 – where will ODCE be focussing its attention?

ODCE is of the view that the maintenance of a good working relationship between auditors and the ODCE is desirable and of mutual benefit. Accordingly, ODCE, through its ongoing contacts with practitioners and their professional bodies, will seek to ensure that such a relationship continues to exist. However, as stated previously, failure on the part of auditors to report to ODCE where there are reasonable grounds for believing that an indictable offence has been committed is itself an indictable offence. Therefore, in the event that the ODCE obtains evidence to suggest that auditors having an obligation to make a report have failed to do so, ODCE will seek to pursue appropriate enforcement action against the auditor(s) in question.

Based on the profile of offences reported by auditors, together with other sources of information e.g. liquidators’ reports, feedback from the accountancy/auditing profession etc., ODCE will continue its initiatives designed to encourage and improve compliance with company law on the part of companies and their officers by, interalia, publishing further appropriate guidance in clear and readily understandable terms. In that context, ODCE has recently published a series of seven Information Books which set out the principal duties and powers of companies, company directors, company secretaries, members and shareholders, auditors, creditors, liquidators, receivers and examiners under the Companies Acts 1963-2001. Copies of these documents are also available from the ODCE free of charge or, alternatively, can be downloaded from the ODCE website (address: Similarly, ODCE’s policy of making representatives available to deliver presentations and information seminars to interested parties will continue into 2003.

In the context of non-audit related issues, ODCE will also be devoting considerable resources to liquidators’ reports in 2003. It is likely that as a result of these reports, a large volume of restriction applications will require to be taken by liquidators in the High Court. In addition, following a review of these reports, it is likely that ODCE will also be pursuing other enforcement avenues e.g. disqualifications and/or criminal prosecutions.

Conclusion

While it is, as yet, too early to judge the value of section 74 of the CLEA, the Director of Corporate Enforcement has given an undertaking to review it in the future with a view to determining to what extent changes in the law or its operation might be necessary. Such a review will, of course, involve wide consultation with all interested parties, including the auditing profession.

Contact Points

Further information on the role, activities and services of the ODCE, together with copies of the documents referred to in this article are available at the following contact points:

Office of the Director of Corporate Enforcement,
16, Parnell Square,

Dublin 1.

01 858 5800

Lo-call 1890 315 015

01 858 5801

@



Ian Drennan FCCA is Corporate Compliance Manager with the ODCE.