Company Law Review Group: Recent Developments
Author:
Aidan Lambe
The latest offering from the Company Law Review Group (CLRG) addresses some significant issues of particular relevance to the accounting and auditing professions.
As well as making specific recommendations on certain auditing and financial reporting issues, the CLRG has also been considering certain matters that relate to partnership law. While not yet making specific recommendations in this regard, CLRG has committed to examining these issues further as part of its next work programme.
AUDITOR LIABILITY
A recommendation supporting reform of Ireland’s current auditor liability regime is perhaps the most significant to emerge from the CLRG report. Indeed, this is a timely proposal and is entirely consistent with the recent formal communication from the European Commission which recommended that the liability of auditors should be limited and that each Member State should therefore choose the method of limitation that is most appropriate for its civil liability system. At present, Ireland is virtually alone in the EU in preventing auditors from incorporating as limited entities. A statutory cap, as recommended by the CLRG provides a sensible mechanism of protecting auditors from catastrophic claims.
REGULATION
With the establishment of the Irish Auditing and Accounting Authority (IAASA) under the Companies (Auditing and Accounting) Act, 2003, accountants and auditors now arguably belong to the most regulated profession in the State. However, this regulatory regime applies only to those accountants and auditors who belong to those accountancy bodies that have been formerly recognized by IAASA. There is no regulatory process (for example professional indemnity insurance, continuing education requirements, and, more importantly, no disciplinary or complaints process, attaching to those who hold themselves out to the public as ‘accountants’. The CLRG report has endorsed a previously expressed position of IAASA that affording a form of legal recognition to the use of the term ‘accountant’ is in the public interest.
PARTNERSHIP LAW
In the area of partnership law, the CLRG has been considering whether there is a need to raise the current 20 partner limit that partnership law imposes on partnerships. This restriction has, for some time, caused administrative headaches for larger professional services firms that are constituted as partnerships who have had to devise complex and costly legal arrangements to ensure their structures comply with the law. While it is disappointing that CLRG has not been able to come forward with a recommendation in this regard, it is at lease heartening that this issue will be carried forward to its next work programme.
LIMITED LIABILITY PARTNERSHIP
A form of partnership structure that is common in many other countries, including Northern Ireland and Great Britain, is the Limited Liability Partnership (LLP) and has become the vehicle of choice for the constitution of professional services firms. As demonstrated by the paragraph above, there is no doubt that the traditional form of partnership, governed by the Partnership Act, 1890, has been under considerable strain. The LLP structure provides the benefits of limited liability but also allows its members the benefits of organizing internal structures and the same tax status as a traditional partnership. The CLRG has been unable to come to a specific conclusion on this issue but has identified the need to conduct further analysis by undertaking a consultation exercise.
COMPANIES
Companies, too, can take heart from some of the CLRG recommendations. The report recommends that the size thresholds for defining ‘small’ and ‘medium’ companies be increased at least in line with inflation. This move is long overdue since the existing thresholds were last raised in the early 1990s. A separate consultation exercise on these thresholds has recently been carried out by the Department of Enterprise, Trade and Employment.
AUDIT EXEMPTION
In addition, the Group has recommended an extension of the existing audit exemption regime to ‘small groups’ as well as proposing that the current thresholds be raised in line with the maximum levels permitted by the EU. In this area, there is perhaps some unfinished business. For example the ineligibility for audit exemption for small companies limited by guarantee has been raised frequently by ICAI members as imposing a particularly costly and burdensome requirement on these entities.
The CLRG’s proposals in respect of smaller entities is timely given recent proposals from Commissioner McCreevy aimed at easing accounting and audit requirements for so-called ‘micro-entities’.
LISTED COMPANIES
Certain requirements as affecting listed and large private companies have also come under scrutiny. The CLRG has recommended that existing Companies Act provisions as regards audit committees be amended to reflect those contained in EU legislation and that large private companies should only come within the scope of these requirements if similar requirements exist throughout other EU Member States.
CONCLUSION
In summary, the CLRG report has presented a report that addresses a number of matters of critical importance to corporate Ireland. The challenge now is for Government to act on these as soon as possible. While we look forward to the publication of the Consolidated Companies Bill resulting in a significant modernization of Irish company law, its passage through the legislature is likely to take some time. Many of the important recommendations in the latest CLRG report do not need to wait for this process and would lend themselves quite neatly to a smaller piece of amending legislation. Let’s get these done now!
Aidan Lambe, FCA, is Director of Representation & Technical Policy at the Institute of Chartered Accountants in Ireland. Email: aidan.lambe@icai.ie