The Companies Act 2014 (CA 2014) has been in gestation for almost 15 years. While there are many innovations and welcome developments in the legislation one of the most eagerly anticipated elements of the new act, from the perspective of the accountancy profession, is Chapter 15 of Part 6, which deals with Audit Exemption.
The Key Sections of the Legislation
Sections 358 to Section 364 in Chapter 15 of Part 6 primarily deal with the key elements of audit exemption. S.365 as set out Chapter 16 specifically deals with the audit exemption for Dormant Companies. Key sections of relevance to the audit exemption within CA 2014 include:
- S.334 – Right of Members to Require an Audit
- S.335 – Statement to be included in Balance Sheet if Audit Exemption availed of & ODCE right to access books and documents to ensure they complied with the conditions
- S.343 – Court Application extending annual return date
- S.358 – Standalone Audit Exemption Criteria • S.359 – Group Audit Exemption Criteria
- S.360 – What the Exemption Means and once the exemption is availed of that exemption is ongoing
- S.361 – Members right to block the audit exemption
- S.362 - Entities not entitled to avail of the exemption
- S.363 & S.364 - Late Filing preventing the company availing of the audit exemption
- S.365 – Dormant Company audit exemption
- S.399 – Removal of statutory auditors where exemption being availed of
- S.1218 – For companies limited by guarantee any member can block the audit exemption
Who is Eligible to Avail of the New Audit Exemption?
- New Model Private LTD Companies
- Designated Activity Companies
- Companies Limited by Guarantee
- Unlimited Companies
- Small Groups
Under the new legislation, based on the latest statistics available from the CRO, in excess of 96% of registered companies are entity types to which the audit exemption can be applied.
What Are the Criteria for Availing of the Audit Exemption?
S.358 sets out the main conditions for audit exemption in a non-group situation while S.359 sets out the main conditions for audit exemption in a group situation.
The Criteria for Non Group Companies in terms of size criteria are the same as set out in S.350:
The company only needs to meet 2 out of the 3 criteria in the current and preceding year
Under the Companies Acts 1963 to 2013 and S.I. 308 of 2012, companies must meet 3 out of the 3 size criteria. The new legislation, now opens up the audit exemption to a considerably broader range of larger companies in line with EU norms.
Based on a study done by the European Commission in 2007 on the annual accounts of certain types of companies the combined estimated percentages of Micro and Small entities in the EC amounted to 96% of all companies. Based on this size criteria the vast majority of Irish SMEs will now be able to avail of the new exemption.
The Criteria for Group Companies as set out in S.359 is based on the consolidated accounts of all entities within the group meeting the size criteria set out below.
The company only needs to meet 2 out of the 3 criteria in the current and preceding year
What Year Ends Can Avail of the Audit Exemption?
Based on our latest interaction with the CRO, they have adopted the interpretation that all financial statements approved after the commencement of CA 2014 on the 1st of June can avail of the audit exemption. At one stage it was anticipated that the commencement order would include something to prevent the retrospective availing of the exemption. In the past while audit exemption may have been available immediately it was always for periods ending on or after a certain date, which at a minimum was the commencement order itself. Based on the S.I. 169 of 2015, which commences the legislation, any reliefs relating to financial statements can be availed of immediately once financial statements are approved after 1st of June 2015.
Irrespective of the commencement order and the entitlement to retrospectively avail of the exemption, company directors do need to consider whether they are infringing the rights of members, by retrospectively availing of the exemption for companies that are newly entitled to avail of the exemption. Prior to the commencement order being issued on the 1st of May there was no legislative framework for members to block the audit exemption under S.334 or S.361. For example members of Companies Limited by Guarantee, Unlimited Companies or Small Groups were not required previously to block the audit exemption, and thus, if the members had no framework to block the audit exemption in this initial transition period it could be argued that the directors availing of the exemption may not be acting in the best interest of the company and the members. This is particularily relevant to Companies Limited by Guarantee and any company where the members and the directors are not the same people.
New Companies and the Audit Exemption
Based on S.358 when a company is newly incorporated there is no defined process to avail of the exemption similar to that set out in the Companies Amendment Act 1999. On this basis newly incorporated companies do not have to go through a process to avail of the exemption. They either meet the criteria or do not in the same way as companies either meet the size criteria or do not.
What does the Audit Exemption Mean?
Under S.361 if a company avails of the audit exemption, S.333, dealing with the requirement to have statutory financial statements audited, does not apply. This goes on to impact on a number of other sections and requirements as set out in the legislation.
Some of these sections include:
- S.121 – Auditors report on Financial Statements
- S.306 – Statement of Non compliance
- S.322 – Disclosure of audit and non audit remuneration
- S.330 – Statement on relevant audit information
- S.336 – Form of audit report
- S.337 – Auditors signature
- S.338 – Circulation of Financial Statements
- S.339 – Members right to demand copy Financial Statements
- S.340 – Publication of Financial Statements
- S.341 – Financial Statements to be laid before AGM
- S.347 – Documents to be annexed to Annual return
- S.356 – Special report on abridged financial statements
- S.380,382 & 385 – Appointment of Auditors
- S.390 & 393 – Obligations of Auditors
One key change to audit exemption under the 2014 Companies Act is that S.360.1.b provides that once a company avails of the audit exemption it does not have to do anything unless and until the company is no longer entitled to avail of the exemption. Under the current regime there was no such option implied or created within the legislation. Once a company avails of the audit exemption it does not have to do anything on an annual basis unless it no longer meets the criteria or the members or directors decide otherwise and take the appropriate steps.
Has the link between Late Filing and the Audit Exemption eventually been broken?
S.363 and S.364 means that companies in non-group or group situations can only avail of the audit exemption if their annual returns are filed on time in the current and preceding year. This is a huge imposition on the accountancy profession.
We have long held the view that if there are to be penalties imposed for late filing; the penalties should be imposed on the directors and not the unfortunate auditor who ends up being stuck performing an audit on a small company. When an auditor is forced to do an audit on a small company the first challenge they face is applying the auditing standards, which are designed to cope with large entities on a small entity where it is virtually impossible to transpose the requirements in an efficient manner. The second challenge “late filing” auditors face is that if the client has filed late they are unlikely to be prepared to pay the appropriate fee to have their company audited. There is a substantial step up from being compiling accountants under ISRS 4410, to being an auditor under the auditing standards. The accountant who has unwillingly become an auditor usually carries this cost.
S.343 in the new act does provide an option however where annual returns are filed late. Under this section which deals with the requirements in relation to filing annual returns a new provision that we previously did not have has been created whereby the directors can have the annual return date extended based on an application to the court.
What about Companies Who Currently Have An Auditor?
S.399 deals with the removal of statutory auditors where the audit exemption is being availed of. This section refers to companies availing of the audit exemption making a decision that the appointment of persons as statutory auditors should not be continued during whole or part of the financial year for which the exemption is being availed of. Previously the legislation was very explicit in terms of this decision being recorded in the minutes of the meeting and the fact that the decision must be made during the financial year for which the exemption is being availed of. While the legislation is not as explicit for multi director companies we feel that this decision like any decision the directors make should be minuted appropriately. Based on current guidance on the CRO website, despite the fact that S.399 refers to terminating appointments of auditor during whole or part of the financial year, it appears as if the interpretation is that audit exemption can be retrospectively availed of.
The one thing that there is no doubt about however is that the process in terms of availing of the audit exemption needs to be complied with in terms of the auditors requirement to issue a notice to the company that there are or there are not circumstances which need to be brought to the attention of the members or creditors. S.399.1.6.(ii) specifically states that unless and until the auditors serve notice that any purported termination of their appointment shall not take effect.
It is critical that entities that were previously audited get the process right in terms of availing of the audit exemption and go through the process and submit the necessary paperwork. This is now compounded as under S.335 of the Act the Director of Corporate Enforcement can request and be given access to the books and documents of the company to ensure that the company complied with the audit exemption provisions.
What to watch out for?
- The most important thing in relation to audit exemption for small companies is filing on time. The accountancy profession, need to continue to monitor and drive on time filing.
- Irrespective of the commencement order and interpretation being applied in relation to retrospectively availing of the audit exemption take a common sense approach to retrospectively availing of the audit exemption.
- For charitable organisations, who are registered with the Charities Regulatory Authority (CRA) just because you can avail of the audit exemption under company law doesn’t necessarily mean that entity is not still obliged to have an audit.
- Ensure that you follow the process in relation to correctly availing of the exemption.
For more information on the Companies Act 2014 and discussion and debate on the implementation process check out our Linkedin Discussion Group.
This article has been written for information and educational purposes only and does not constitute a subsitute for taking legal advice. When making decisions or advising thrid parties legal advice should be obtained in all cases. This is an interpretation of the legislation of which many aspects have not been practically applied. This interpretation may differ from the interpretation of others. OmniPro and the author shall therefore not be liable for any damage or economic loss occasioned to any person acting on, or refraining from any action, as a result of or based on the material contained in this article.