Financial Reporting Supervision Function of IAASA Michael Kavanagh

2. Financial Reporting Supervision Function of IAASA Michael Kavanagh Head of Financial Reporting Supervision

3. Presentation Overview • Brief history and overview of the 2003 Act • Background to IAASA - Objects and functions • Financial Reporting Supervision function

4. Irish Auditing and Accounting Supervisory Authority (IAASA) Financial Reporting Supervision Function is part of IAASA so who are IAASA and what are its functions ………………………?

5. A Brief History • Review Group on Auditing (2000) - Terms of reference included an examination of • 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 recommendations included • establishment of an Oversight body; • Financial reporting review function; and • requirement for Directors’ Compliance Statements.

6. The 2003 Act • 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. IAASA Board • Company ltd. by guarantee - Board comprises 15 directors, nominated thus: • 2 (including the Chairperson) 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 • A maximum of 5 of the 15 directors may be members of prescribed accountancy bodies.

8. IAASA- key staff • Chief Executive – Ian Drennan • Head of Financial Reporting Supervision – Michael Kavanagh • Head of Regulatory & Monitoring Supervision – Helen Hall • Secretary & Head of Legal Services – Jane Meehan • Finance & Administration manager – Fergal Ó Briain • Project manager – Bridget Ryan

9. Statutory Remit (S8) • To supervise how the prescribed accountancy bodies regulate and monitor their members; • To promote adherence to high professional standards in the auditing & accountancy profession; • To monitor whether the accounts of certain classes of companies and other undertakings comply with the Companies Acts and, where applicable, Article 4 of the IAS Regulation [reference to IFRS inserted by S.I. No. 116 of 2005]; and • To act as a specialist source of advice to the Minister on auditing and accounting matters. - All commenced at this stage except no.3

10. Functions • The Authority’s principal functions include: • Promoting adherence to the highest standards in the profession; • Reviewing the financial statements of certain companies and other undertakings; • Co-operating in the development of accounting standards and practice notes; • 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.

11. Brief outline of IAASA function re: Supervision of Accountancy Bodies

12. Prescribed Bodies • Bodies recognised under the 1990 Act for audit purposes (i.e. ACCA, ICAEW, ICAI, ICAS, ICPAI, IIPA); and • Bodies prescribed by the Minister (AIA, CIMA and CIPFA). • The effect of Prescription is to: • bring prescriptees within the Authority’s supervisory remit; and • require prescriptees to contribute towards the Authority’s funding

13. Supervision of Accountancy Bodies • The Authority’s statutory remit, in relation to the prescribed bodies, can be divided into the following categories: • Approval; • Supervision; and • Investigation/enforcement. [more information on the Authority’s function re: Supervision of Accountancy Bodies at www.iaasa.ie]

14. Financial Reporting Supervision Function

15. Principal functions of Financial Reporting Review Unit • To monitor whether the accounts of certain classes of companies and other undertakings comply with the Companies Acts and IAS Regulation • Assisting the Board to discharge its functions as an advisor to the Minister on accounting related matters • Co-operating in the development of accounting standards and practice notes • Liaising with other countries’ financial reporting monitoring bodies • Developing policy regarding the imposition of levies on the Authority’s financial statement supervision constituency • Identifying, and maintaining under review, the composition of the Authority’s financial statement review constituency

16. Compliance with the Companies Acts and the IAS Regulation Compliance with Companies Acts includes - • prescribed formats; • statutory disclosure requirements; • adherence to ‘applicable accounting standards’ –primarily IASB and ASB standards

17. Authority’s Review Constituency • all plcs (whether listed or not) • all subsidiary undertakings of plcs • all private companies limited by shares that, in both in the relevant financial year and the immediately preceding financial year, satisfy the following criteria: • balance sheet total exceeds €25m; and • turnover exceeds €50m. • all private companies limited by shares which, when aggregated with their subsidiary undertakings, exceed the aforementioned thresholds; • all subsidiary undertakings of the preceding class of private companies; and • certain other undertakings, and where applicable their subsidiary undertakings, that satisfy the aforementioned criteria, including unlimited companies and partnerships whose members having unlimited liability are themselves limited companies.

18. Relevant Exemptions • Act provides potential exemptions for: • certain entities already subject to, what in the Minister’s opinion, is an appropriate level of supervision/regulation - might, for example, include Part XIII companies and UCITS • S110 TCA ’97 entities (securitisation vehicles).

19. Proposed Approach toFinancial Statement Supervision • Act suggests a proactive rather than reactive approach to monitoring • Risk analysis methodology has been developed • Criteria for selection will include • Risk of material misstatement in the financial statements • Potential impact on users of financial statements • Supplemented with random selection of FS for review • Complaint from public may also trigger a review • Emphasis will be on instances of material non-compliance.

20. Enforcement • In circumstances where there is, or may be, an issue regarding a set of financial statements’ compliance with the Companies Acts or the IAS Regulation, and those financial statements have been: • disseminated to members in advance of the AGM; or • laid before the AGM; or • delivered to the Registrar the Authority may give notice to the directors of the entity concerned.

21. Enforcement • 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.

22. Enforcement • 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 associated orders.

23. Enforcement • If, having considered the matter, the High Court is satisfied that an instance of non-compliance exists, the Court may make a declaration to that effect and may order the following: • the revision of the financial statements and/or directors’ report; • the re-audit of the financial statements; • that the directors take specified steps to bring the Court order to the notice of persons likely to rely on the financial statements; • that the Authority’s, and reporting entity’s, costs be awarded against the directors (in that context, 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 (section 26(9)).

24. Enforcement • In the event of an application being made to the High Court, the Authority is required to furnish the CRO with: • notice of the application; and • a general statement of the matters at issue. • On the conclusion of proceedings, the Authority is required to furnish the CRO with: • a copy of the Court Order; or • notice that the application has failed or has been withdrawn.

25. Advisor to the Minister on accounting related matters Has so far included a number of policy issues regarding accounting standards……

26. Liaising with other Financial Reporting Monitoring Bodies • Active participant in EECS (European Enforcement Co-ordination Sessions) – sub committee of CESR • EECS – Forum for discussing and co-ordinating “enforcement” decisions in EU/EEA • A database of IFRS enforcement decisions in the EU/EEA has been established – authoritative precedents • CESR/EECS liasing with IASB and SEC on various matters of mutual interest

27. Levy of financial reporting supervision constituency Two Aspects to funding – • Day to day operation of IAASA - 40% Exchequer - 60% Prescribed accountancy bodies • Reserve Fund - 20% Exchequer - 30% Prescribed accountancy bodies - 50% Review constituency

28. Exchequer & Prescribed Bodies contribution - 2006 • Total budget – 2006: €2.297m, provided thus: • Exchequer 919,000 • ICAI 757,000 • ACCA 233,000 • ICPAI 170,000 • CIMA 96,000 • IIPA 54,000 • ICAEW 21,000 • AIA 18,000 • CIPFA 15,000 • ICAS 14,000

29. The ‘Reserve Fund’ • Section 15 of the Act requires the Authority to establish and maintain a Reserve Fund. • The purposes of the Fund is twofold, namely to discharge the costs associated with: • enforcement in instances of non-compliance of financial statements with the Companies Acts and, where applicable, Article 4 of the IAS Regulation; and • investigations into possible breaches of an accountancy body’s standards etc. by a member.

30. Relevant Exemptions / S15 Levy • Authority developing policy options on S15 levy. • Considerations include: • risk; • impact; • cost/benefit considerations; and • legal advice received by the Authority. • Complexities in identifying review constituency include: • private companies’ turnover and total assets figures not captured by CRO. Therefore, a large scale manual exercise is required; • S17 guarantees; • filers of ultimate group financial statements; • identity of S110 companies. • Research commissioned to establish the scale of the constituency.

31. Other current activities of the Financial Reporting Supervision Unit As well as aforementioned – • Public consultation on levy proposed • Member of EECS working party on enforcement methodologies • Representation at ASB meetings

32. Further Information • Further information on the Authority and its activities may be obtained from: IAASA 2nd Floor, Willow House Millennium Park Naas Co. Kildare Tel: +353 (0)45 983600 Fax: +353 (0)45 983601 Email: info@iaasa.ie Web: www.iaasa.ie www.iaasa.eu