Thursday, 22nd January, 2009: In its 2007 Annual Report, which has been published today, the Company Law Review Group (CLRG) has endorsed the Authority’s proposals for certain amendments to the Companies Acts.
Authority proposals for legislative amendments
Specifically, the Authority had advocated:
- the amendment of section 23 of the Companies (Auditing and Accounting) Act, 2003, thereby permitting the Authority to recoup costs associated with the conduct of investigations into whether prescribed accountancy bodies have failed to comply with their approved investigation and disciplinary procedures;
- the amendment of section 27(4) of the Companies (Auditing and Accounting) Act, 2003, thereby providing expressly that Authority staff may be delegated to conduct preliminary enquiries under sections 23 to 26 of that Act;
- the amendment of section 31 of the Companies (Auditing and Accounting) Act, 2003, thereby empowering the Authority to share otherwise confidential information in certain circumstances with specified classes of persons/entities rather than with individually named persons/entities as is currently the case;
- the amendment of section 33 of the Companies (Auditing and Accounting) Act, 2003, thereby enabling the Authority to indemnify its agents; and
- the amendment of section 110A of the Company Law Enforcement Act, 2001, for the purpose of permitting Authority officers to provide evidence in certain legal proceedings by way of certificate evidence as opposed to by way of oral evidence.
Authority recommendations regarding legal recognition of the term ‘Accountant’
The CLRG also examined the Authority’s recommendations regarding statutory recognition of the term ‘accountant’ – which were tabled to the Minister for Trade & Commerce during 2007. Having considered that matter, a majority of the CLRG’s membership has:
- accepted the consumer protection issue identified by the Authority; and
- endorsed the Authority’s analysis in favour of affording the term ‘accountant’ statutory recognition.
Auditors’ liability
Having considered the issue of auditors’ liability, the CLRG has recommended that:
- the current ban on audit firms being permitted to incorporate should be removed; and
- a statutory cap on auditors’ liability should be introduced, with the quantum of such a cap to be determined by the Minister for Trade & Commerce following consultation with relevant stakeholders, including a cross section of audit firms, their clients and insurers.
The Authority’s views on this matter are set out in full in the CLRG’s Report. In summary, the Authority is of the view that the current arrangements, i.e., whereby audit firms are jointly and severally liable for losses incurred in circumstances where they are less than fully culpable, are inherently unjust and inequitable. In that context, the Authority is of the view that reform of auditors’ liability is merited. With reference to the proposal that a predetermined cap on liability be introduced, the Authority is of the view that the level at which such a cap might be set would have to be carefully considered having regard, inter alia, to:
- an objective assessment of the risk of a claim (or claims) being filed against an Irish audit firm that is (are) of sufficient magnitude to threaten the existence of the firm;
- what level such a claim (or claims) would have to be at to threaten the existence of the firm concerned;
- the structures of the firms that the measures are seeking to protect – for example, before setting a cap level, information would, in the Authority’s view, be required as to the extent to which an Irish firm could be liable for meeting a claim filed against another member firm of the network – this goes to the heart of assessing the risk of a ‘catastrophic’ claim that could directly threaten the existence of an Irish audit firm;
- the level of any cap should, while seeking to prevent a failure that would be injurious to the public interest, not seek to remove to an inappropriate degree the risks associated with statutory audit, which is a profitable business;
- the possible adverse effects on audit quality of setting cap levels too low;
- whether it is appropriate to set differing levels of cap depending on, for example, whether the client company is listed or unlisted or on the size of the client;
- other interested parties’ views (including investor and shareholders’ groupings and representatives).
In its contribution to the CLRG’s Report, the Authority also:
- advocated that any cap on liability introduced should not extend to protect against instances of fraud or intentional/wilful misconduct;
- drew attention to the fact that, while liability reform will be of some assistance in rendering it easier for, so called, ‘mid-tier’ audit firms to compete for the audits of the largest companies, there are other barriers to such firms’ entry to that subset of the market and, therefore, liability reform alone will not address the current levels of concentration in the upper end of the audit market; and
- advocated that any proposals for liability reform should also have regard to the recently published EU Commission Recommendation on Quality Assurance which, along with the recently published Commission Recommendation on Auditors’ Liability, forms an integral part of the Commission’s overall package of audit related measures. (Commissioner McCreevy’s speech of 19 December, 2007 to the European Parliament regarding his proposals for an audit package can be accessed here.
As alluded to above, the EU Commission has recently issued a Recommendation to Members States on the issue of limitation of statutory auditors’ liability. In that document, the Commission has recommended that, before adopting measures designed to limit auditors’ liability, Member States should take into account the impact any such limitation of liability on financial markets and investors and on conditions for access to the market of statutory audit for listed companies, as well as the impact on audit quality, insurability of risks and the companies to be audited.