Revised Guidance

on the Directors’

Compliance Statements

to be prepared under the

Companies Acts

December 2004

TABLE OF CONTENTS

Page
1.0  Background and Summary / 4
2.0  Affected Companies / 7
3.0  A Company's ‘Relevant Obligations’ / 10
4.0  Internal Financial and Other Procedures for Securing Compliance with ‘Relevant Obligations’ / 15
5.0  Reviewing the Effectiveness of Control Procedures / 18
6.0  Reporting by Directors / 23
7.0  Role of Audit Committees / 28
8.0  Auditors’ Role in Reviewing the Statements / 30
9.0 Penalties for Non-Compliance / 31
Appendix 1 - Section 45 of the Companies (Auditing and Accounting) Act 2003
Appendix 2 – Extract from the Appendix to ‘Internal Control – Guidance for Directors on the Combined Code’ (the ‘Turnbull Report’)
Appendix 3 – Framework for the Directors’ Compliance Policy Statement
Appendix 4 – Framework for the Directors’ Annual Compliance Statement
Appendix 5 – Bibliography
Appendix 6 – Acknowledgements / 32
36
38
39
40
41

1.0  Background and Summary

1.1 Introduction

Section 45 of the Companies (Audit and Accounting) Act 2003 ("2003 Act") introduces a requirement for the directors of certain companies to prepare and publish two Statements (hereinafter called the “Compliance Statements” or "Statements") on the company's compliance with certain legal obligations. The requirement has its origins in the July 2000 Report of the Review Group on Auditing which was established on the recommendation of the Dáil Committee of Public Accounts arising from the Committee’s work into deposit interest retention tax.

The terms of Section 45, which inserts two new Sections 205E and 205F into the Companies Act 1990 (“1990 Act”), are included as Appendix 1. This Guidance, which has been drafted by the Office of the Director of Corporate Enforcement (“ODCE”) in conjunction with the Consultative Committee of Accountancy Bodies - Ireland, the Institute of Directors in Ireland, the Irish Business and Employers' Confederation, the Irish Financial Services Regulatory Authority and the Revenue Commissioners, seeks to assist the directors of affected companies in fulfilling their obligations with regard to the Statements.

1.2 Scope of Provision

The companies affected by this new requirement with effect from (insert date) are:

·  all public limited companies (whether listed or unlisted) and

·  all private companies limited by shares whose turnover exceeds €15,236,856 or whose balance sheet total exceeds €7,618,428 in the year in question.

(To be amended in the light of any Ministerial decisions on commencement and exemptions.)

1.3 Directors’ Compliance Policy Statement

The directors’ Compliance Policy Statement (which is termed the ‘compliance statement’ in Section 205E) deals principally with company policy and related matters in respect of compliance with certain legal obligations and comprises details of:

·  The company’s policies regarding its compliance with its relevant obligations;
·  The internal financial and other procedures that have been implemented for the purposes of securing compliance with the company’s relevant obligations; and
·  The arrangements in place for reviewing the effectiveness of the company’s policies and procedures.

1.4 Directors’ Annual Compliance Statement

The directors’ Annual Compliance Statement (which is termed the ‘related statement’ in Section 205E) deals with certain confirmations regarding the company's compliance with its obligations and comprises:

·  An acknowledgement by the directors that they are responsible for securing the company’s compliance with its relevant obligations;
·  Confirmation that the company has internal financial and other procedures in place that are designed to secure compliance with its relevant obligations, or if this is not the case, details of the reasons why not;
·  Confirmation that the directors have reviewed the effectiveness of the company’s procedures in place during the year in question for the purposes of securing compliance with relevant obligations, or if this is not the case, details of the reasons why not; and
·  The directors’ opinion, based on:
o  the procedures in place; and
o  their review of the effectiveness of those procedures,
as to whether they have used all reasonable endeavours to secure the company’s compliance with its relevant obligations in the financial year in question, and if they are not of the opinion that they have used all reasonable endeavours, the reasons for that opinion.

1.5 Recommended Main Steps that Directors Should Take to Ensure Their Compliance with the 2003 Act

The Compliance Policy Statement and the Annual Compliance Statement are closely linked and, as a consequence, directors will find that the key steps necessary to discharge their duties in the preparation of the Statements are interlinked. A summary of the key steps is as follows:

Identify legal framework

Identify relevant obligations


Establish compliance policy

Document
compliance
procedures / Risk-based assessment
of existing
procedures
/ Devise/
implement new procedures
Communication & information

Review of effectiveness

Reporting

Identify Legal Framework

At the outset, directors should establish the legal framework governing the company’s operations, including those provisions of the Companies Acts and tax law applicable to their company.

Identify ‘Relevant Obligations’

The relevant provisions of the Companies Acts and tax law applicable to their company constitute part of the company’s ‘relevant obligations’. In respect of other elements of the company’s legal framework, directors should then identify which of these enactments may materially affect the company’s financial statements. These identified enactments will constitute the remainder of the company’s ‘relevant obligations’.

Establish Compliance Policy

Directors should then set out clearly the company’s policy with respect to its compliance with those relevant obligations. The directors should regularly review and update this policy to take account of changes in the company’s operations, its relevant obligations and best practice. The policy should be set out in the Compliance Policy Statement.

Develop Compliance Procedures and Arrangements

Directors should ensure that the key procedures for securing compliance with the company’s relevant obligations are properly designed, are in place and are adequately documented.

Review of Existing Procedures

An initial review should be made of the likelihood of the procedures, if operating correctly, securing compliance with the company’s relevant obligations. Section 205E(7) states that the procedures are considered to be effective if they provide reasonable assurance of compliance in all material respects with those obligations. Moreover, this assessment should also have regard to the likelihood of a breach of a particular relevant obligation occurring. Such a risk-based assessment will ensure that control procedures and the underlying resources are focused on the areas of greatest need and impact. The results of this assessment may identify obligations that are not addressed, or are not sufficiently addressed, by current compliance procedures.

Devise and Implement New or Amended Procedures

Where the assessment identifies shortcomings in the scope of the identified relevant obligations or in the effectiveness of the current procedures for securing compliance, directors may need to strengthen existing procedures and/or add new procedures, in order to satisfy themselves that they provide a reasonable assurance of compliance in all material respects with those obligations.

Communication and Information

Directors should ensure that the Compliance Policy is communicated to management and employees. Directors should also ensure that actual and suspected instances of non-compliance with relevant obligations are communicated to the appropriate level within the company as and when they occur and are remedied as far as possible without delay.

Review of Effectiveness

Following implementation, the directors should formally consider on an annual basis if the company’s compliance control procedures operated in the manner intended during the year. In larger companies, this may involve consideration of the work of internal audit or a compliance unit. This may be based on the results of the testing of compliance procedures, confirmation of the operation of procedures from those responsible for their operation, the results of ongoing monitoring (including instances of non-compliance), results of reviews by third party agencies and comments from external advisers such as auditors or legal advisers.

Reporting

Having considered the results of the above steps, the directors should, on an annual basis, prepare the Statements for inclusion in the Directors’ Report. While some directors may elect to obtain support to assist them with these compliance duties (e.g., from Internal Audit or third party specialist advisers), it should be noted that, at all times, the directors retain ultimate responsibility.


2.0 Affected Companies

2.1 Companies Affected/Not Affected

Under Section 205E(2) and (9), the new requirements to prepare Compliance Statements apply to:

·  every Irish-registered public limited company (whether listed or not); and

·  every Irish-registered private company limited by shares whose turnover exceeds €15,236,856 or whose balance sheet total (fixed and current assets) exceeds €7,618,428 in the year in question. A company’s relevant turnover and balance sheet totals for this purpose are those appearing in the company’s annual financial statements.

Equally therefore, the requirement does not apply to:

·  every Irish-registered unlimited company;

·  every Irish-registered private company limited by guarantee, including those having a share capital;

·  every Irish-registered private company limited by shares whose turnover does not exceed €15,236,856 and whose balance sheet total (fixed and current assets) does not exceed €7,618,428 in the year in question;

·  every company registered outside the State having a branch or other activity in the State.

In addition, the requirement to prepare Compliance Statements is not in practice applicable to any company which is in liquidation, in examinership or under administration, because control of the company has effectively passed from the directors.

However, the directors of a qualifying company in receivership legally retain their powers. Where a receiver is appointed by debenture holders holding a floating charge over the whole or a substantial part of the company’s assets, directors will not have access to the company’s books and documents. In those circumstances, they may have to explain in the Compliance Statements their inability to report on the matters required by Section 205E.

(Text to be reviewed in the light of any exemption decisions to be made by Minister Ahern.)

2.2 Groups

According to Section 205E, the Compliance Statements relate to the relevant obligations of an individual company. Where a group structure exists, the Compliance Statements are only required for each company in the group that satisfies the indicated criteria. There is therefore no requirement to prepare the Statements in respect of any ineligible company in the group.

2.3 Consolidated Financial Statements

Similarly, where a holding company prepares consolidated financial statements and it is subject to the obligation in Section 205E, the Compliance Statements prepared by the directors need only relate to the holding company itself.

2.4 Transitional Issues

Section 205E(3) requires that directors prepare a Compliance Policy Statement “as soon as possible after…this section becomes applicable to the company…”.

In the first year of application to a company, directors will therefore need to take prompt action to meet their obligations and put in place a Compliance Policy Statement. The extent to which it is feasible to complete all steps envisaged in both the Compliance Policy and Annual Compliance Statements may vary depending upon the specific circumstances of the company. The action taken should be reflected in particular in the first Annual Compliance Statement in a sufficiently discursive manner to provide a balanced and complete report.

For example in discussing the situation of newly affected companies, let us consider two scenarios:

·  scenario 1 relates to a situation where a company’s turnover or balance sheet total is, or is likely to be, relatively close to the thresholds set out in Section 2.1 above. In this case, the directors should monitor the situation (for example, by reference to the management accounts and other historical or predictive data available to them), in order that their obligation to prepare a Compliance Policy Statement can be identified in a timely manner. Once it becomes clear that it is probable that the company will come within the scope of Section 205E, the directors should take the necessary steps to ensure that they will be in a position to make the Compliance Policy Statement;

·  scenario 2 deals with a situation where it may not always be possible for directors to anticipate a company coming within the scope of Section 205E until some way through the year. In this case, the directors should make the necessary arrangements to put in place appropriate procedures to ensure compliance with its requirements as soon as they become aware of the company’s qualification.

In the case of scenarios 1 and 2, an initial Compliance Policy Statement should be included in the directors’ report relating to the first year of qualification. In the case of scenario 2 however, it may not be possible for directors to complete all of the steps which they would wish to undertake to outline on a comprehensive basis in the Policy Statement the policies, procedures and arrangements for securing compliance with the company’s ‘relevant obligations’, particularly where the date on which the company first falls within the scope of Section 205E is close to the company’s year end. Where the directors consider that further steps are necessary, they should identify what policies, procedures and arrangements are in place at the end of the reporting period, indicate that further action is required and identify the timescale in which they expect to complete this work.

In the case of scenarios 1 and 2, an Annual Compliance Statement should also be included in the directors’ report. However in the case of scenario 2 in particular, it may not be possible to include in the Annual Compliance Statement all of the details envisaged in Section 205E(5) and (6). Where this is the case, the Annual Statement should provide sufficient commentary to indicate the extent to which the requirements have been met and the grounds for the directors’ opinion as to whether or not they have used all reasonable endeavours to secure compliance.

The following Illustration sets out an example of such reporting. It is of course a matter for the directors to prepare Statements appropriate to the particular circumstances of the company.

Where a company ceases to qualify by reference to the turnover and balance sheet thresholds in the company’s annual financial statements, the obligation to prepare Compliance Statements lapses unless and until the company re-qualifies in a subsequent year.