IAFA/ACCA Seminar

1. IAFA/ACCA Seminar University College Dublin 22 November 2003

2. Initial Experiences in Company Law Investigations and Enforcement Paul Appleby Director of Corporate Enforcement

3. Outline of Presentation • Brief Introduction to the ODCE • Reporting Obligations of Auditors • Public Complaints and Other Information Sources • Reporting Obligations of Liquidators • Approaches Taken to Investigations • Quality of Financial Reporting • Concluding Comment

4. Introduction (1) What is the Office of the Director of Corporate Enforcement? • Remit is focused on the Companies Acts 1963-2001 • Multi-disciplinary agency comprising 35-40 administrative, legal, accounting and Garda staff • Budget of €3.8 million in 2003

5. Introduction (2) The ODCE’s Goals • Encourage Compliance with Company Law • Uncover Suspected Breaches • Prosecute Detected Breaches • Sanction Improper Conduct in Insolvent Companies • Deliver Quality Customer Services

6. Auditors’ Reporting Obligations (1) “ Where, in the course of, and by virtue of, their carrying out an audit of the accounts of the company, information comes into the possession of the auditors of a company that leads them to form the opinion that there are reasonable grounds for believing that the company or an officer or agent of it has committed an indictable offence under the Companies Acts, the auditors shall, forthwith after having formed it, notify that opinion to the Director and provide the Director with details of the grounds on which they have formed that opinion. ” • S.74(e), Company Law Enforcement Act 2001

7. Auditors’ Reporting Obligations (2) • Start Date of Obligation was 28 November 2001 • Scope covers about 128 indictable offences • ODCE Consultation Paper issued in February 2002 • First Auditor Reports received in March 2002 • Joint Guidance published in July 2002 by ODCE, CCAB-I and APB • Copy available at www.odce.ie/publications

8. Auditors’ Reporting Obligations (3) Reports: 400 in 2002; 1,357 in 2003 so far Issues: 79% relate to Filing/Directors’ Residence 14% are about Directors’ Loans 5% deal with Failing to hold EGMs 2% relate to Inadequate Books <0.01% concern Unqualified Auditors/ AGM Problems/Disclosure Defaults/Fraud Actions: Filing Offences referred to the CRO Most of the rest are under investigation

9. Auditors’ Reporting Obligations (4) Features of Reporting to date • Only 9 of 128 possible offences reported to date • Most reports relate to matters disclosable elsewhere • Filing Defaults/Directors’ Residence (on the CRO’s record) • Directors’ Loans (in Notes to Financial Statements) • Failure to hold EGM (Obligation to do so stated in Auditor’s Report) • Failure to keep proper books (in Auditor’s Report)

10. Auditors’ Reporting Obligations (5) Performances/Interpretations by Auditors • Reporting improvement after ODCE contacts • Differences in approach on non-filing offences, e.g., ‘wilful knowledge’ offences • One firm’s reports account for >80% of all reports of one offence • Quality of information supplied is variable

11. Auditors’ Reporting Obligations (6) Overall Views • Good Awareness by Auditors of Obligations • Uniform Interpretation of Obligations not yet achieved • Reporting of Few Offence Types is disappointing • Filing Defaults should not be reported to ODCE at all • Culture Change in Auditor/Client Relations • Positive Impact on Auditor Independence • Positive Impact in reinforcing Compliance Message

12. Public and Other Complaints (1) Public Complaints Reports: 200 in 2002; 270 so far in 2003 Issues: 35% disclose no Company Law Issues 21% relate to Civil Matters/Debt Issues 15% are filing defaults 29% cover a range of issues (e.g., AGMs) Actions: Many closed, others being assessed

13. Public and Other Complaints (2) Matters of Public Record • Tribunal of Inquiry/Inspector Reports • Media Disclosures • CRO Database Inter-Agency Co-operation • Garda Siochana • MOUs planned with Revenue, IFSRA, etc.

14. Public and Other Complaints (3) Overall Views • Many Public Complaints are resource-intensive • Relevant Complaints disclose real concerns • Information-sharing yet to be fully exploited

15. Liquidators’ Reporting Obligations (1) “(1) A liquidator of an insolvent company shall, within 6 months after his or her appointment or the commencement of this section, whichever is the later, and at intervals as required by the Director thereafter, provide to the Director a report in the prescribed form. (2) A liquidator of an insolvent company shall, not earlier than 3 months nor later than 5 months (or such later time as the court may allow and advises the Director) after the date on which he or she has provided to the Director a report under subsection (1), apply to the court for the restriction under section 150 of the Act of 1990 of each of the directors of the company, unless the Director has relieved the liquidator of the obligation to make such an application.” - S.56(1) and (2), Company Law Enforcement Act 2001

16. Liquidators’ Reporting Obligations (2) What gives rise to restriction? • Where the High Court is not satisfied that a director has acted honestly and responsibly in conducting the company’s affairs. What is the effect of restriction? • A person may not act, directly or indirectly, as a director, etc., unless the company is adequately capitalised. For a private company, the minimum paid-up share capital sum is €63,487. The equivalent figure for a public company is €317,435. Both must be fully paid for in cash. What is the effect of disqualification? • Disqualification involves an absolute ban for five years or more.

17. Liquidators’ Reporting Obligations (3) Phased Commencement • 1 June 2002: insolvent companies to which a liquidator was newly appointed or was appointed on or after 1 July 2001 • 1 June 2003: insolvent companies to which a liquidator was appointed on or after 1 January 2000

18. Liquidators’ Reporting Obligations (4) Volumes 2002 2003 so far Liquidator Reports 300 430 Cases Determined 4 533 Full Relief 4 285 (53%) Partial Relief - 24 (4.5%) Relief at this time - 31 (5.8%) No Relief - 187 (35%)

19. Liquidators’ Reporting Obligations (5) Character of Liquidator Reports (Sample of 300) 130-150 recommended restriction. Examples: • Continued trading, where there was no reasonable prospect of the company’s survival • Failure to keep proper books of account • Excessive directors’ loans About 50 of these also suggested serious misconduct, e.g: • Fraudulent trading/fraudulent preference • Removal of property, etc.

20. Liquidators’ Reporting Obligations (6) Initial Impact of Regime • Several hundred directors are currently facing restriction proceedings by the liquidator • Up to 30% are acquiescing in the restriction • A majority of those who defend the proceedings are convincing the Court that they should not be restricted

21. Liquidators’ Reporting Obligations (7) Overall Views • Different Character to Liquidators Reports/Few S.299 Reports • Creditors report success – directors investing funds to avoid the restriction process • Some evidence also of directors seeking to evade accountability • ODCE countering this trend with planned actions against the directors of unliquidated insolvent and ‘struck-off’ companies • High Court decisions laying more emphasis on dishonesty than irresponsibility of directors’ conduct

22. Investigation Approaches (1) Approaches to Investigation • Correspondence/Discussions • Seeking Original Documents • Taking of Statements Non-Legal Outcomes to Investigations • File Closure • Referral to Other Authorities • Warning Letter

23. Investigation Approaches (2) Warning Letters re Failure to Hold EGMs • 700 will issue next week to the directors, auditors and company secretaries of 95 companies Variable Approach planned on Directors’ Loans • Last main area for concerted attention Some Individual Issues absorb Time/Resources

24. Investigation Approaches (3) Legal Powers Used 2002 2003 so far Search Warrants 5 10 Bankers’ Books 7 13 Arrests - 7 Detentions - 4

25. Investigation Approaches (4) Civil Enforcement 2002 2003 so far Compliance Orders - 10 Disqualifications - 1 Property Seizures - 1 Seeking Information 2 - Judicial Review 1 1

26. Investigation Approaches (5) Criminal Enforcement 2002 2003 so far Convictions: 20 40+ Offences: Failing to Keep Proper Books Falsification of Documents Undischarged Bankrupts Directors’ Loans Unqualified Auditor

27. Pipeline Cases (by type) Directors’ Loans Inadequate Books Falsification of Documents Disqualified Auditors Undischarged Bankrupts Restricted Directors Trading while Dissolved External Companies Investigation Approaches (6)

28. Quality of Financial Reporting (1) ODCE Role • We enforce the obligations in company law • Overall legal standard is a ‘true and fair view’ • We depend on company auditors to identify breaches • We rely on auditors to help prosecute those breaches • We do not police compliance with accounting/auditing standards, but we have met occasional problems

29. Quality of Financial Reporting (2) Accounts that should be qualified and aren’t “Basis of Opinion …the evidence available to us was limited because the company’s turnover comprises cash sales over which there was no system of control on which we could rely for the purposes of our audit. There were no other satisfactory audit procedures that we could adopt to confirm cash sales were properly recorded. Opinion …In our opinion proper books of account have been kept by the company…”

30. Quality of Financial Reporting (3) Non-Standard Opinion “ In our opinion the financial statements give as true and fair view of the state of the Company’s affairs as at 31st March 2002 as was possible with the books that we received… (There followed a statement of the problem issues and the representations made by the directors.) Subject to the above being accurate, we have obtained all the information and explanations that we consider necessary for the purposes of our audit. In our opinion, there wasn’t proper books of account kept by the Company. However, the financial statements are in agreement with the books of account at present within reason, there are items such as creditors and cash that cannot be pinpointed down, as well as stock…”

31. Quality of Financial Reporting (4) Inadequate Audit Reports • Cases where the failure to ascertain the company’s title to substantial investments attracted a qualified audit opinion one year and no qualification the next • Case of insolvent company with no opinion expressed on its “going concern” prospects, notwithstanding a substantial continuing deficit

32. Quality of Financial Reporting (5) Fundamental Uncertainty/Going Concern Issue Case where a company made a trading loss in 1999 and 2000, had cumulative losses and where its current liabilities exceeded its current assets in each year by over £800K and £1 million. Two months before the company went into liquidation, the auditor reported as follows: “…The financial statements have been prepared on a going concern basis, the validity of which depends upon future funding being available. The financial statements do not include any adjustments that would result from a failure to obtain funding. Our opinion is not qualified in this respect.”

33. Quality of Financial Reporting (6) Overall Views • Audit is a valuable discipline and assurance • Satisfied as to the integrity of most accounts/audits • Our work has identified some lapses • Many examples given now subject to investigation • Have/Will relay issues to accountancy bodies • Any audit exemption change should be measured • ODCE/IAASA co-operation desirable in the future

34. Concluding Comment (1) • Active Compliance Agenda/Enhanced Profile • Concluded about 75% of Reports/Complaints • About 100 ODCE Cases heading for Court • New Insolvency Regime successfully launched • Positive Feedback on Customer Services

35. Concluding Comment (2) Further information on the ODCE and its work is available from www.odce.ie Thank You