Presentation to Attendees at the Audit Committee Institute Ireland Dinner Merrion Hotel, Dublin 7 th October, 2004 Ian

2. Presentation to Attendees at the Audit Committee Institute Ireland Dinner Merrion Hotel, Dublin 7th October, 2004 Ian Drennan Chief Executive (Designate)

3. Overview • History • The 2003 Act • The Authority • Review of Financial Statements • The Authority’s current agenda

4. A Brief History • Tribunal of Inquiry (Dunnes Payments) ‘McCracken’ (1997) • Tribunal of Inquiry (Messrs Haughey and Lowry) ‘Moriarty’; • Appointment of Authorised Officers and Inspectors to a number of companies; • Investigations into certain parties’ professional conduct. • PAC – DIRT Report (1999) • Adverse findings against, and criticisms of, financial institutions, State agencies and elements of the institutions’ external audit function. • Recommended the establishment of a Review Group on Auditing.

5. A Brief History • RGA (2000) - Terms of reference included an examination of, inter alia: • whether self regulation of the accountancy profession was working effectively and consistently; • auditor independence; and • role of the auditor in ensuring companies’ compliance with law and regulations • RGA recommended, inter alia, • establishment of an Oversight body; • FRRP function; and • requirement for Directors’ Compliance Statements.

6. The 2003 Act • Recommendations of the RGA accepted by Government in December 2000. • RGA’s recommendations given the force of law by the Companies (Auditing and Accounting) Act, 2003. • The 2003 Act deals principally with: • the establishment of IAASA; and • ‘Other Measures to Strengthen the Regulation of Auditors’, including: • statutory backing for accounting standards; • audit committees; • disclosure of accounting policies; • disclosure of auditors’ remuneration (analysed by audit, audit related and non-audit); and • Directors’ Compliance Statements.

7. The Authority • Company limited by guarantee. • Objects: • ‘To supervise how the prescribed accountancy bodies regulate and monitor their members; • To promote adherence to high professional standards in the auditing and accountancy profession; • To monitor whether the financial statements of certain companies and other undertakings comply with the Companies Acts; and • To act as a specialist source of advice to the Minister on auditing and accounting matters.’

8. The Authority • Board will comprise 15 directors, nominated thus: • 2 (including the Chairprson) nominated by the Minister; • 3 nominated jointly by the prescribed accountancy bodies; • 9 nominated by the following bodies (1 each): • IBEC ICTU • IAIM ISE • Pensions Board IFSRA • Revenue DCE • Law Society • Chief Executive Officer (appointed by the other directors). • A maximum of 5 of the 15 directors may be members of prescribed accountancy bodies.

9. The Authority • The Authority’s principal functions will include: • Promoting adherence to the highest standards in the profession; • Reviewing the financial statements of certain companies and other undertakings; • Considering applications for recognition for audit purposes; • Supervising the manner in which the accountancy bodies monitor (including work quality) and regulate (including investigation and disciplinary functions) their members; • Where deemed appropriate, conducting investgations into bodies and/or members. • Co-operating in the development of auditing and ethical standards.

10. Review of Financial Statements • Review constituency comprises: • All plcs, whether listed or not; • Subsidiary undertakings of plcs; • Private companies limited by shares who, in the current and preceding year, satisfy the following criteria: • B/S total exceeds €25m; and • T/O exceeds €50m. • Private companies which, when aggregated with their subsidiary undertakings, exceed the aforementioned thresholds; • Subsidiaries of the preceding class of companies; and • ‘Other undertakings’ satisfying the aforementioned criteria – e.g. unlimited companies and partnerships whose members having unlimited liability are themselves limited companies.

11. Review of Financial Statements • ‘Compliance with the Companies Acts’ – considerations include: • Prescribed formats (as set out in the 1986 Act); • Statutory disclosure requirements (e.g. details of subsidiaries, directors’ remuneration, transactions with directors etc.); • Requirement for financial statements to give a ‘true and fair view’ • While the term ‘true and fair view’ is not defined in the Companies Acts, it is generally accepted that, in most circumstances, in order for a set of financial statements to give a true and fair view, they should be prepared in compliance with accounting standards as well as with statutory requirements. • Accordingly, in circumstances where directors are of the view that a departure from an accounting standard is required in order to present a true and fair view, the reasons for, and effect of, any such departure are required to be disclosed in the financial statements.

12. Review of Financial Statements • Where a company’s financial statements have been: • disseminated to members in advance of the AGM; or • laid before the AGM; or • delivered to the Registrar: and there is, or may be, a question of non-compliance, the Authority may give notice to the directors. • The aforementioned notice must specify: • the matters in respect of which it appears to the Authority that a question of non-compliance arises; and • a period of not less than 30 days in which the directors are required to furnish the Authority with an explanation of the financial statements or prepare revised financial statements.

13. Review of Financial Statements • In the event that, at the end of the specified period, the directors have neither, in the Authority’s opinion, given a satisfactory explanation nor revised the financial statements, the Authority may apply to the High Court for a declaration of non-compliance and an associated Order. • If satisfied that an instance of non-compliance exists, the High Court may make a declaration to that effect and may, inter alia; order the following: • the revision of the financial statements and/or the directors’ report; • the re-audit of the financial statements; • the payment by the directors of the Authority’s costs*. * Every person who was a director at the time the financial statements were approved is considered to have been a party to that approval unless s/he can show that they took all reasonable steps to prevent approval.

14. Review of Financial Statements • In the event of an application being made to the High Court, the Authority is required to furnish the Registrar with: • notice of the application; and • a general statement of the matters at issue. • Similarly, on the conclusion of the proceedings, the Authority is required to furnish the Registrar with: • a copy of the Court Order; or • notice that the application has failed or has been withdrawn.

15. Review of Financial Statements • The Act provides that the Authority may levy the companies and other undertakings coming within its review remit. • Criteria for apportioning the levy will be developed by the Authority. • Act provides for differing levels of levies for different classes of undertakings. • In circumstances where a parent and one or more subsidiaries would satisfy the criteria, only the parent will be levied. • Authority’s proposals in this regard require Ministerial approval in advance of being put into effect.

16. Review of Financial Statements • Drafting of operating procedures governing the review function is a requirement of the Act and will be a priority upon formal establishment. • Stakeholders’ views will be sought in advance of finalisation. • The Board’s preference is likely to be to seek to resolve any issues arising through dialogue and correspondence. • Matters arising will be dealt with on a confidential basis unless notification to the Registrar is required or financial statements are amended.

17. Audit Committees and IFRS • While significant benefits are likely to accrue from the transition to IFRS, first time adoption is likely to result in an increased risk of error and/or misstatement. • ‘Irish business has some way to go to be ready for the implementation of IFRS’ (Source: ICAI/DCU survey of ICAI members/students - published in current edition of Accountancy Ireland). • Some 39% of respondents employed by companies obliged to adopt IFRS were unable to indicate that their companies were either very well prepared (17%) or fairly well prepared (44%). • Audit Committees, therefore, have a crucial role to play in overseeing the management of these risks.

18. Audit Committees and IFRS • Guidance recently issued by the ICAEW* suggests that Audit Committees should be identifying the matters anticipated to affect their consideration of financial statements prepared on the basis of IFRS, including, for example: • management’s IFRS implementation plan; • selection and adoption of IFRS compliant accounting policies; • the impact of IFRS on areas of accounting involving significant levels of judgement; • the clarity and compliance of disclosures and explanations relating to the implementation of IFRS; • the risk of transition being being used as an opportunity to deliberately misstate financial reports/statements. * Source: Institute of Chartered Accountants in England & Wales (ICAEW) – Technical Release ‘Audit 03/04: Auditing Implications of IFRS Transition’.

19. Authority’s Current Agenda • Drafting first work programme (3 year period) • Quantifying likely financial and human resource requirements over that period. • Consulting with accountancy bodies (who are required by the Act to fund 60% of the Authority’s annual budget). • Preparing for submission of the work programme for Ministerial approval. • Addressing accommodation and related support requirements.

20. End of presentation. Thank you.