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Directors’ Compliance Statements:Issues Addressed in the ODCE’s
Revised Guidance
Paul ApplebyDirector of Corporate Enforcement
Introduction – The Consultations
• Consultation Paper/Draft Guidance published last July • 36 Submissions received by the ODCE of which:
– 16 emanated from professional firms/bodies
– 7 sourced from financial service interests
– 13 originated from businesses and other backgrounds
• Many expressed appreciation of the Guidance• Many also identified issues that required clarification
Introduction – The Issues
• Affected Companies• Relevant Obligations• Compliance
Procedures• Reviewing
Effectiveness
• Directors’ Reporting• Audit Committee Role• Offences/Sanctions• Different Duties under
the CBFSAI Act 2004• Commencement
Introduction – The Outputs
• ODCE wrote to Minister Ahern in November on date of commencement and possible company exemptions
• Revised Guidance developed in conjunction with CCAB-I, IBEC, IFSRA, the Institute of Directors and Revenue
• Revised Guidance published on 16 December last
Issues – Companies Affected
• Irish-registered public limited companies (whether listed or not) and
• Certain Irish-registered companies limited by shares related to defined turnover (‘t/o’) and balance sheet total (‘bst’) thresholds
• Some confusion evident on this latter point
Issues – Companies Affected
• Act: A private company limited by shares is exempted if its ‘t/o’ does not exceed €15.237 m. AND if its ‘bst’ does not exceed €7.618 m. (white)
t/o > €15.237 m. +
bst > €7.618 m.
t/o > €15.237 m. +
bst < €7.618 m.
t/o < €15.237 m. + bst > €7.618 m.
t/o < €15.237 m. + bst < €7.618 m.
Issues – Companies Affected
• Guidance: A private company limited by shares is covered if its ‘t/o’ exceeds €15.237 m. OR if its ‘bst’ exceeds €7.618 m. (blue area)
t/o > €15.237 m. +
bst > €7.618 m.
t/o > €15.237 m. +
bst < €7.618 m.
t/o < €15.237 m. + bst > €7.618 m.
t/o < €15.237 m. + bst < €7.618 m.
Issues – Companies Affected
• Groups: Compliance Statement obligation only applies to every qualifying company in the group
• Consolidated Financial Statements: Only applies to the holding company if it qualifies itself
• Newly Qualifying Companies: Applies in the first year. (See the Revised Guidance for a discussion of certain scenarios.)
Issues – Companies Exempted
• Irish unlimited companies • Irish private companies limited by guarantee• Irish private companies limited by shares falling
below the ‘t/o’ or ‘bst’ threshold • Foreign-registered companies, including those
having a branch/other activity in the State• Any classes exempted by Ministerial regulation
Issues – ‘Relevant Obligations’
• Companies Acts – Primary and Secondary Legislation• Tax Law – Primary and Secondary Legislation• ‘any other enactments…’
– includes relevant Irish primary and secondary legislation
– includes relevant and directly applicable EU legislation
– excludes foreign law and non-statutory rules
• ‘…that provide a legal framework (for) the company…’– examples include employment, equality and competition law
Issues – ‘Relevant Obligations’• ‘…may materially affect the…financial statements’
– quantitative materiality: example of >5% effect on profit before tax. But impact on other metrics also needs consideration
– qualitative materiality: example includes a discontinuance of operations (e.g., due to failure to meet licence conditions)
• schedules of legislative obligations – list of company law offences is on the ODCE website, but this is
not comprehensive (e.g., common law and non-offence duties)– other sources indicated (e.g., Revenue, AG’s Office, IBEC)
Issues – Compliance Procedures
• Indicated internal financial/other procedures adapted from the Turnbull Report
• Controls include staff supervision, training, computer processing, management reviews, compliance calendars
• Must properly address a risk of material non-compliance• Directors may need professional support in this task
Issues – Reviewing Effectiveness• Material again adapted from the Turnbull Report• Elements of Effective Review
– Continuous Monitoring of Control System– Independent Review of the Operation of Controls– Reporting of Results to the Board– Assessment of Control Framework/Operation
• Monitoring v Inquiry v Examination v Testing – size/complexity of the business;– importance of the control for securing compliance;– comfort derived from less intensive examination/monitoring
Issues – Reviewing Effectiveness
• Board’s annual review of effectiveness to include-– response to changes in ‘relevant obligations’– changes in risk profile of the business environment– scope/quality of effectiveness of controls in place– identified non-compliance and corrective steps taken– quality of communications to the board
Issues – Directors’ Reporting
• Content of Compliance Statements – skeletal statements but no templates in the Guidance– policies, procedures and arrangements will be unique– they will relate to the company’s ‘relevant obligations’,
its business environment and directors’ choices and judgements on the steps needed to secure compliance
Issues – Directors’ Reporting
• ‘All reasonable endeavours’ to secure compliance– the Guidance identifies various tasks for directors
• Compliance procedures are effective if they provide ‘a reasonable assurance of compliance in all material respects’ – the Guidance discusses the distinctions between total,
material and non-material compliance
Issues – Directors’ Reporting• Implications of detection/rectification of material non-
compliance– a selection of scenarios are discussed in the Guidance
#1 Procedures Annual Review
Detection Default(s) Statement
Found to be defective
Done Internal
Sources
Remedied
Promptly
Positive
Possible
Issues – Directors’ Reporting
#2 Procedures Annual Review
Detection Default(s) Statement
Found to be defective
Done External
Source
Remedied
Promptly
Positive or qualified
#3 Procedures Annual Review
Detection Default(s) Statement
Found to be defective
Not done
External
Source
Remedied
Promptly
Qualified
inevitable
Issues – Directors’ Reporting
• Approach of the Directors to their Statements-– are factually accurate– contain no omissions or misleading material – present content in a balanced/objective manner– are sufficiently detailed to be understandable to users – contain opinions/conclusions/judgements that are
properly supported by the available information
Issues – Audit Committee Role
• Opinion as to whether the Annual Compliance Statement complies with the requirements, is ‘fair and reasonable and is based on due and careful enquiry’
• Guidance indicates the tasks and judgements which would be reasonably expected to apply in arriving at this opinion
Issues – Offences and Sanctions
• Greater clarity in the Revised Guidance• ODCE role is limited to ensuring that
– Statements are prepared and published and– Statements are accurate
• Clearly, we will enforce these provisions • Failure to discharge discrete obligations (e.g., the
annual review) are not offences in themselves
Issues – Financial Services Impact
• IFSRA helped to develop the Revised Guidance
• CBFSAI Act 2004 compliance provision outlined
• IFSRA are preparing for its implementation now
• Form and content of IFSRA Guidance to be determined
Issues – Commencement Date• Most suggested dates in 2005 or from 1/1/2006• Some proposed a phased commencement• ODCE Submission made to Minister Ahern in November• Three main options for commencement (in my view):
– financial year starting on or after 1 July 2005– financial year starting on or after 1 January 2006– phased approach over two year period from July 2005
Concluding Thoughts
• Imperatives for Positive Confirmation include– ‘relevant obligations’ have been identified – compliance policy has been decided– financial/other procedures have been put in place– procedures address the risk of non-compliance– procedures have operated effectively
Concluding Thoughts
• Documentary Support is critical for: – identification of company’s ‘relevant obligations’– design of appropriate control processes– outputs of the control process– review by directors of compliance environment– judgements underlying directors’ conclusions
Concluding Thoughts
• APB Guidance on the Auditor’s Reporting Duties vis-à-vis Compliance Statements being finalised
• Should be available from the APB website (address: www.frc.org.uk/apb/) shortly