Audit Committee Institute Ireland

1. Audit Committee Institute Ireland Berkeley Court Hotel, Ballsbridge, Dublin 4 9 February 2005

2. Directors’ Compliance Statements: Issues Addressed in the ODCE’s Revised Guidance Paul Appleby Director of Corporate Enforcement

3. Introduction – The Consultations • Consultation Paper/Draft Guidance published last July • 36 Submissions received by the ODCE of which: • 16 emanated from professional firms/bodies • 7 sourced from financial service interests •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

4. 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 Issues

5. 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

6. 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

7. 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)

8. 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)

9. 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.)

10. 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

11. 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

12. 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)

13. 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

14. 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

15. 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

16. 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

17. 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

18. Issues – Directors’ Reporting • Implications of detection/rectification of material non-compliance • a selection of scenarios are discussed in the Guidance

19. Issues – Directors’ Reporting

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. Thank You for Your AttentionQuestions? The ODCE’s Revised Guidance is available from www. odce.ie