[Fulltext] New guidance on auditors' obligations to report non-compliance with company law was published in July. We take a look at what's in the guidance and how Section 74 may impact client relationships.
The accountancy profession through the Consultative Committee of Accountancy Bodies - Ireland (CCAB-I) and the Auditing Practices Board (APB) has been working with the Director of Corporate Enforcement, Paul Appleby, to develop practical guidance for auditors on their reporting obligations under Section 74 of the Company Law Enforcement Act, 2001.
Since November last year, auditors have been obliged to report to the Director of Corporate Enforcement where they have reasonable grounds for believing that a company, or an officer or agent of the company, has committed an indictable offence under the Companies Acts.
Guidance for auditors has now been published in an APB Bulletin which has been issued as Q30 to practising members of the Institute of Chartered Accountants in Ireland and can also be downloaded from the APB at accountancyfoundation.com. A version is also available as Decision Notice D/2002/2 on www.odce.ie
The main areas covered by the guidance are:
The role of persons within auditing firms who provide non-audit services to clients.
The nature of the reportable information and reportable persons
The standard of certainty required before an auditor makes a report.
The information which auditors should provide when making a report.
The legal protection against liability that the Act affords to auditors making reports.
The reporting of suspected offences in the public interest.
Indictable Offences
The guidance provides a comprehensive listing of all 128 indictable offences under the Companies Acts. Examples of indictable offences under the Companies Acts include:
Failure to maintain proper books of account
Falsification of records or documents
Fraudulent trading
Illegal transactions involving directors
Making false statements to an auditor
Failure to file an Annual Return
Acting while disqualified
Penalties
In general, the maximum penalty is �¢?�¬12,700 and / or five years imprisonment. The penalties for some offences, are higher - fraudulent trading is �¢?�¬63,000 and / or seven years' imprisonment and insider dealing is �¢?�¬250,000 and / or ten years' imprisonment. Conviction may also result in disqualification.
Sean Murray, FCA, is the Irish representative on the Auditing Practices Board. Welcoming the guidance, he explained it draws on a number of existing Statements of Auditing Standards:
Consideration of Law and Regulations
200 Planning
210 Knowledge of the Business
620 The Auditor's Right and Duty to Report to Regulators in the Financial Sector
Client Relationship
Research consistently shows accountants at the top of the table of trusted business advisers for SMEs. In the wake of the publication of this guidance some commentators reflected on the impact that Section 74 may have on auditor / client relationships. It is of concern to some accountancy firms that the legal profession has competitive advantage in certain practice areas, such as tax advice, by virtue of its enjoyment of client privilege protection.
Accountancy Ireland asked Jack Crowley, Chairman of the General Practices Committee of the Institute of Chartered Accountants in Ireland what he thought practitioners would make of the guidance.
"While the Institute of Chartered Accountants in Ireland, under its Ethical Guide, has always imposed certain reporting requirements on auditors, the Section does create additional obligations so practitioners will welcome the guidance. This is the law of the land and it is in everyone's interests to see the law enforced. We will have to watch to see whether Section 74 adversely affects our client relationships. Firms that provide business advice to clients are at a competitive disadvantage in certain areas of their work to law firms who have the protection of client privilege", Mr. Crowley said.
Heather Briers, Director of Quality Assurance at the ICAI, was also concerned about the impact on client relationships: "The guidance reflects the need to help members meet their responsibilities, but it is too early to judge what effect the Section will have on client relationships. We have to recognise that this extra responsibility has been placed on auditors and there is a danger that relationships will be damaged, especially for smaller firms. We also need to see some coherence brought to the issue of auditor responsibilities. We have Section 74, we have a new provision in the Fraud Act and we have a potential new provision in the IAASA Bill, all imposing new and related obligations. We could do with some joined up Government," Ms Briers said.
Reports by auditors of improper books of account have increased from less than ten to more than fifty per year according to the ODCE. It will be interesting to see what impact the Section has on those numbers.
Accountancy Ireland Vol 34 No 5 October 2002.