The European Communities (Statutory Audits) (Directive 2006/43/EC) Regulations 2010 were signed into law on 20th May 2010 giving effect to the 8th Company Law Directive on statutory audits of annual accounts and consolidated accounts.
The Regulations impose rules and obligations regarding statutory audits, meaning an audit of individual accounts or group accounts in so far as required by Community law, on statutory auditors and audit firms, the entities being audited and the supervisory authorities (Accounting Institutes & IAASA).
Auditors and audit firms must be approved by a “competent authority” being a recognised accountancy body before carrying out a statutory audit.
The Regulations are applicable to all firms and imposes further obligations on “Public Interest Entities”. Public Interest Entities are defined as
- companies or other bodies corporate governed by the law of a Member State whose transferable securities are admitted to trading on a regulated market of any Member State within the meaning of point 14 of Article 4(1) of Directive 2004/39/EC,
- credit institutions as defined in point 1 of Article 1 of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions, and
- insurance undertakings within the meaning of Article 2(1) of Directive 91/674/EEC;
The main provisions of the Regulations include:-
- Permitting Statutory Auditors to operate as body corporate;
- Incoming Statutory Auditor afforded access to information
- Requirements relating to signing of audit reports
- Transparency report of Public Interest Entities
- Removal of Auditor & Notification Obligations
- Public Register of Auditors
- Independence Provisions for Auditors
- Audit Committees for Public Interest Entities
- Disclosure of Auditors’ Remuneration of audit & non-audit work
- Statutory obligations regarding continuing education, professional ethics, independence and objectivity
I will now address the main provisions in more detail.
Body Corporate permitted to act as Statutory Auditor
Regulation 6(b) of the Regulations deletes Section 187(20 of the Companies Act 1990 which prevented a body corporate acting as an auditor. The legislation now provides that a statutory auditor or audit firm may undertake statutory audit work as a corporate body. This new provision gives audit firms the option of operating as a limited company with all the benefits of limited liability. If a statutory auditor or audit firm acts as auditor of a credit union, friendly society or industrial and provident society, these entities must be audited by a public auditor then the audit firm must act under a partnership or sole practitioner so they may not be able to set up as a body corporate or will have to maintain 2 structures. There are a number of issues to be considered prior to setting up a limited company and these include:-
- Contact your Institute advising that you intend on operating as a body corporate and that the regulations of your Institute provide for this.
- Obtain legal, tax and pensions advice prior to setting up the Company.
- Decide what type of company to be formed (Private Limited or Unlimited)
- What name will the company trade as and will there be a requirement to register a business name. Your Institute may have rules regarding what names can be used.
- Consider who will act as shareholders & directors?
- If there is a Partnership agreement in place should a shareholders’ agreement be prepared
- Apply to your Institute to change your registration details and obtain new registration for the body corporate
- The sole practitioner or partnership will have to resign as auditor of all clients and seek appointment of the company as auditor. The correct process must be followed as the firm will either resign under Section 185 Companies Act, 1990 or be removed by the company at an EGM. New letters of engagement should be issued.
- Other considerations include contacting PII provider, transfer of assets into the company, issuing new employment contracts to employees, notify the Bank, Revenue and all suppliers, new letterhead and disclosures on emails & website.
Incoming Statutory Auditor afforded access to information
Regulation 47 provides that where a statutory auditor is replaced the former auditor shall grant access to all relevant information concerning the audited entity to the incoming statutory auditor.
Requirements relating to signing of audit reports
Regulation 57 amends Section 193 of Companies Act 1990 and now requires that audit reports shall state the individual name of the auditor and be signed and dated;
- By the statutory auditor
- By the statutory auditor designated by the statutory audit firm as being primarily responsible for carrying out the statutory audit on behalf of the audit firm.
The signature on the audit report shall be the individual auditors own name “for and on behalf of” the audit firm. This is applicable for financial years of on or after 20 May 2010.
Transparency Report of Public Interest Entities
Regulation 58 requires a statutory auditor which carries out the audit of a “Public Interest Entity” to prepare and publish a transparency report within 3 months of the financial year end of the auditor.
The report must be formally approved by the statutory auditor and signed by the auditor. The report must be published on a website maintained by or on behalf of the auditor within three months of the financial year end and remain available for 3 years.
- A description of the legal structure and ownership of the subject;
- Where the subject belongs to a network, a description of the network and the legal and structural arrangements of the network;
- A description of the governance structure of the subject;
- A description of the internal quality control system of the subject and a statement by the administrative or managerial body on the effectiveness of its functioning;
- An indication of when the last quality assurance review referred to in Chapter 2 of Part 8 took place;
- A list of public-interest entities for which the subject has carried out statutory audits during the preceding financial year;
- A statement concerning the subject’s independence practices which also confirms that an internal review of independence compliance has been conducted;
- A statement on the policy followed by the subject concerning the continuing education of statutory auditors referred to in Regulation 39;
- financial information showing the significance, from the perspective of the market, of the subject, such as the total turnover divided into fees from the statutory audit of annual and group accounts, and fees charged for other assurance services, tax advisory services and other non-audit services;
- Information concerning the basis for the remuneration of the principals or partners.
This is applies to financial years of the auditor on or after 30 August 2010.
Removal of Auditor & Notification Obligations
Regulation 62 inserts Section 161A of Companies Act 1963 which provides if an auditor ceases to hold office during the period between the conclusion of the last annual general meeting and the conclusion of the next agm by virtue of Section 160 of Companies Act, 1963 (removal of an auditor) or Section 185 Companies Act, 1990 (resignation of an auditor), the auditor must notify IAASA within 1 month of the cessation. The notification shall include:-
- Where the auditor has resigned a copy of the resignation notice served under Section 185 Companies Act 1990; or
- Where the auditor has been removed at a general meeting pursuant to section 160(5) Companies Act 1963, a copy of any representations that have been sent to the members.
The Regulations also restricts a company removing an auditor where there is a divergence of opinion on accounting treatments. The removal of an auditor has to be in the best interests of the company which does not include any illegal or improper motive with regard to avoiding disclosures or detection by the company to comply with the Companies Acts.
Public Register of Auditors
The Companies Registration Office will maintain a register of statutory auditors and audit firms. The accounting institutes are required to notify the CRO of any changes of statutory auditors. Statutory auditors are required to notify within one month of any change in the information contained in the public register.
Independence Provisions for Auditors
Regulations 70-78 set out independence requirements for statutory auditors. Statutory auditors cannot carry out a statutory audit if there is a relationship between the statutory auditor or audit firm and the audit entity. The statutory auditor or audit firm will be considered to have a relationship with an audited entity where there is any direct or indirect financial, business, employment or other relationship from which an objective, reasonable and informed third party will conclude that the statutory auditors or audit firms independence is compromised.
The statutory auditor or audit firm shall apply safeguards in order to mitigate threats (self review, self interest, advocacy, familiarity or trust or intimidation) to their independence.
The regulations set out additional reporting and other requirement in case of public interest entities. These include (a) the statutory auditor or audit firm should document in the audit working papers all significant threats to his/her its independence as well as the safeguards applied to mitigate those threats; (b)confirming annually in writing to the audit committee of the entity his or her independence from the public interest entity; (c) disclose annually to such audit committee any additional services provided to the public interest entity; (d) discuss with such audit committee the threats to the independence of the auditor or firm and the safeguards applied to mitigate those threats as documented by him/her it; (e) The key audit partner(s) not engage in the audit for two years after a period of seven years’ involvement and; (f) that a key audit partner not take up a key management position with the entity for two years after resigning from the audit.
Audit Committees for Public Interest Entities
Regulation 91 sets out a requirement for Public Interest Entities to establish an audit committee. This requirement commences on 20 November 2010.
The members of the audit committee shall include not less than 2 independent directors, one of whom must have competence in accounting or auditing. “Independent” means the directors must have been appointed in a non-executive capacity and at no time during the 3 years preceding his or her appointment to the committee did have (a) a material business relationship with the public interest entity, either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the entity or (b) a position of employment in the public interest entity. This may require additional directors to be appointed to public interest entities to satisfy these criteria.
The responsibilities of the audit committee shall include:-
- the monitoring of the financial reporting process;
- the monitoring of the effectiveness of the entity’s systems of internal control, internal audit and risk management;
- the monitoring of the statutory audit of the annual and consolidated accounts; and
- the review and monitoring of the independence of the statutory auditor or audit firm, and in particular the provision of additional services to the audited entity.
Any proposal of the board of directors of a public-interest entity with respect to the appointment of a statutory auditor or audit firm to the entity shall be based on a recommendation made to the board by the audit committee.
The statutory auditor or audit firm shall report to the audit committee of the public-interest entity on key matters arising from the statutory audit of the entity, and, in particular, on material weaknesses in internal control in relation to the financial reporting process.
The Articles of Association should be reviewed to in regards to the rules on setting up committees and may have to be amended to reflect the new provisions.
Audit Committees were originally proposed in Section 42 of Companies (Auditing & Accounting) Act 2003, however this section was never enacted and it appears will not be enacted.
The Listing Rules of the Irish Stock Exchange provides fo the establishment of an audit committee with similar requirements as these regulations. However the Listing Rules operate on a “comply or explain” basis. These Regulations will make the establishment of an audit committee mandatory.
The Financial Regulator has recently issued a new Corporate Governance Code which comes into force on 1st January 2011. The Code is for Credit Institutions and Insurance firms. The Code contains similar provisions to those in the Regulations but include additional requirements including that all members of the Audit Committee should be non-executive directors and the majority of them independent.
Disclosure of Auditors’ Remuneration of audit & non-audit work
Regulation 120 requires that large companies, groups and certain partnerships are required to make more detailed disclosures regarding auditors’ remuneration in the notes to its financial statements.
- The audit of individual accounts
- Other assurance services
- Tax advisory services
- Other non-audit services
The regulations exempt small, medium-sized companies and subsidiary companies regardless of size, from the disclosure requirement. IAASA may request medium sized companies to provide the information to them. Failure to make the required disclose is an offence
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