CIMA Breakfast Briefing Shelbourne Hotel, Dublin 2 3 November 2004

Company Directors’ Responsibilities Paul Appleby Director of Corporate Enforcement

Introduction Common Law Duties Companies Acts Duties Other Statutory Duties of Directors ODCE Role/Issues/Focus/Impact New Obligations on Compliance Statements Issues for the Directors’ Guidance Some Concluding Comments

Common Law Duties (1) Act in good faith and in company’s interest –Must honestly believe in their decisions –Interest must be the company’s and members’ interest, not the interest of particular member(s) –No abuse of powers

Common Law Duties (2) Be open and transparent –May not make an undisclosed profit from acting as a director. Must account for any secret profit derived –Minimise potential conflicts. Executive directors in particular should not be involved with a competitor

Common Law Duties (3) Act with due care, skill and diligence –Related to individual director’s knowledge and experience –Director is liable for loss resulting from negligence

Main Companies Acts Duties (1) General duty to comply personally and to ensure that the company complies with the law: –A defaulting director is one who ‘authorises’ or ‘permits’ the default –Where a company defaults, the director is presumed to have permitted the default, unless s/he can establish they took ‘all reasonable steps’ to prevent it or were unable to do so because circumstances beyond control

Main Companies Acts Duties (2) Duty to maintain proper books of account –Correctly record/explain the transactions –Enable the financial position to be determined with reasonable accuracy at any time –Enable the balance sheet and profit and loss account to comply with company law –Enable the accounts to be readily/properly audited

Main Companies Acts Duties (3) Duty to prepare annual financial statements –Must give a ‘true and fair’ view –Compliance with law and accounting standards –Directors’ Report must address The state of the company’s affairs Likely future developments Any dividend recommendation, etc.

Main Companies Acts Duties (4) Duty to have annual Audit performed. Company can be exempted if it meets conditions including: –Turnover no greater than €1.5 million and –Balance sheet no greater than €1.905 million and –Average employees no greater than 50 and –Its current and previous annual returns were on time

Main Companies Acts Duties (5) Duty to convene Company General Meetings –Present financial statements to the AGM –Present directors’ report to the AGM –Convene EGM where net assets are 50% or less of the company’s called-up share capital

Main Companies Acts Duties (6) Duty to file documents with the CRO: –Annual Return and associated documents –Change of registered office –Change of director/secretary or their particulars –Notice of director/secretary ceasing to act –Creation of a mortgage or charge/Satisfaction –Ordinary/Special Resolutions, etc.

Main Companies Acts Duties (7) Duty to maintain certain registers –Register of members –Register of directors and secretaries –Register of directors’ and secretaries’ interests –Register of debenture holders –Minute books –Directors’ service contracts, etc.

Main Companies Acts Duties (8) Duty of Disclosure –Personal details for the register of directors –Interests in shares for the register of interests –Payments in connection with share transfers –Directors’ service contracts –Interests in company contracts or proposals, etc.

Main Companies Acts Duties (9) Curbs on use by Director of Company Assets –General prohibition applies (with exceptions) –An area of significant non-compliance –ODCE Guidance available in ‘Transactions Involving Directors’ Book

Main Companies Acts Duties (10) Duty to act responsibly in insolvent situations –Cease trading in a timely manner –Preserve company assets –Make an accurate statement of company affairs –Cooperate with any appointed liquidator

Other Legal Duties Compliance with respect to the law relating to: –Employees, e.g., PRSI, pensions –Persons in general, e.g., health and safety, equality –Customers, e.g., consumer rights –The market, e.g., competition law –The public interest, e.g., tax law, environmental law –Regulated services, e.g., financial services, transport

ODCE’s Company Law Role Encouraging Improved Compliance Uncovering Suspected Breaches Prosecuting Detected Offences Sanctioning Improper Conduct in Insolvent Situations Quality Customer Services

Issues on the ODCE’s Agenda Incidence of Excessive Directors’ Loans Companies Failing to keep Proper Accounts Insolvent Company Problems Undesirable Persons acting as Directors, etc. Resource-Intensive Cases Directors’ Compliance Statements

ODCE Focus Encourage Voluntary Compliance Secure Rectification of Defaults (if feasible) Warn of Future Sanctions to deter re-offence Sanction Non-Compliance (where appropriate) Pursue Mix of ‘Big’ and ‘Small’ Cases Extend Enforcement Activity into New Areas

Initial ODCE Impact Quality Compliance Information Published Over 2,500 Offence Reports from Auditors Over 600 Public Complaints Over 1,000 Reports from Liquidators More than 60% of issues determined

Initial ODCE Impact Over 100 Convictions of Directors/Accountants 14 High Court Orders against Liquidators Two Disqualifications 11 Offence Types Prosecuted to date Over 200 Directors Restricted via Liquidators

Compliance Duties in 2003 Act Involves the making by the directors of certain companies in their annual report of: –a Compliance Policy Statement and –an Annual Compliance Statement Also involves the relevant auditors expressing: –an opinion as to whether each of these Statements is ‘fair and reasonable’

Compliance - by Whom? The directors and auditors of: –all public limited companies (whether listed or not) and –all private companies limited by shares- whose turnover exceeds €15.2 million or whose balance sheet total exceeds €7.6 million in the year in question

Compliance - with What? The company’s ‘relevant obligations’ are: –the Companies Acts –tax law and –any other enactments: that provide a legal framework within which the company operates and that may materially affect the company’s financial statements

Compliance – from When? Date/form of commencement not yet known Mr Michael Ahern, T.D., the Minister for Trade and Commerce will decide

Compliance Policy Statement - Content the company’s policies respecting compliance with its ‘relevant obligations’ its internal financial and other procedures for securing compliance with its relevant obligations its arrangements for implementing and reviewing the effectiveness of the above policies and procedures

Annual Compliance Statement - Content Directors’ acknowledgement that they are responsible for securing company compliance Confirmation that the company has internal financial and other procedures in place to secure compliance and if not, specifying the reasons Confirmation that the directors have reviewed the effectiveness of the company’s procedures during the year and if not, specifying the reasons and

Annual Compliance Statement – Content (continued) Statement whether, based on the procedures in place and their review of them, the directors are of the opinion that they have used all reasonable endeavours to secure compliance during the year and if not, specifying the reasons

Role of any Audit Committee Must review the Annual Compliance Statement before its approval by the board Must state whether, in its opinion, the Statement –complies with the legal requirements and –is fair and reasonable and is based on due and careful enquiry

Compliance and CBFSAI Act 2004 IFSRA may require Compliance Statement from a financial service provider and an auditors’ report Statement is broader than 2003 Act and includes: –All applicable and designated legislation –All codes, guidelines and notices and –All other legislation with which it must comply Where a company is involved, IFSRA may rely on Compliance Statements made under the 2003 Act

Development of ODCE Guidance Initial ODCE work started early in 2004 IBEC, Institute of Directors, CCAB-I and Revenue participated in developing Guidance ODCE Consultation Paper and Draft Guidance for Directors published in late July 36 submissions now under examination

ODCE Guidance Recommendations Imperatives for Positive Confirmation include –‘relevant obligations’ have been identified –financial/other procedures have been put in place –procedures address the risk of non-compliance –procedures have operated effectively We rely on the Turnbull Report in relevant areas

ODCE Guidance Recommendations Documentary Support is critical for: –Identification of company’s ‘relevant obligations’ –Design of appropriate control processes –Outputs of the control process –Review by directors of compliance environment –Review by Auditors and Audit Committee (if any)

Issues for the ODCE Guidance Commencement Date –Most suggested dates in 2005 or from 1/1/2006 –Some proposed a phased commencement –Assessment now underway in consultation with others –I will shortly provide the Minister with the relevant submissions and my assessment to assist his decision –I have recently stated that I won’t be recommending that it be commenced earlier than 1 July 2005

Issues for the ODCE Guidance ‘Relevant Obligations’ includes: –Irish company/tax law –Other Irish enactments material to financial statements It excludes other State law and non-statutory rules Requests for schedules of legislative obligations I’m prepared to develop a list of company law offences, even if it’s not comprehensive - some company law breaches may not be offences

Issues for the ODCE Guidance Affected Companies –Some uncertainty as to qualifying criteria –Issue of exemptions (also a Ministerial decision) –Clarity on effect of the obligation on groups –Clarity on application to newly qualifying companies –We will try to meet this need for greater clarity

Issues for the ODCE Guidance Forms of Compliance Statement –Some sought templates with the Guidance –Again, I’m prepared to try to develop a meaningful Statement framework for directors. However, the final signed Statements will have to be specific to the individual company and its business area

Issues for the ODCE Guidance Detection/Rectification of Non-Compliance –Implications for Directors’ Reporting –Again, we’ll examine the various scenarios and try to develop appropriate guidance for each situation

Issues for the ODCE Guidance Need for Consultation with IFSRA –Process of preparing the Guidance started before the 2004 Act was enacted –IFSRA are now participating in our working group developing the final Guidance

Issues for the ODCE Guidance Terminology –More guidance needed on terms in the 2003 Act like ‘all reasonable endeavours’ and ‘a reasonable assurance in all material respects’ –We’ll do our best to elaborate further –However, directors will have to make their own judgements after professional advice

Availability of ODCE Guidance Copies of the ODCE Consultation Paper and Draft Guidance remain available from www. odce. ie Final Guidance will be published in a few weeks Related Draft Bulletin on Auditor Compliance Reporting is also available from the Auditing Practices Board at www. frc. org. uk/apb This will also be finalised as soon as possible

Concluding Comments ‘Culture of non-compliance’ which was said to prevail is being turned around and hopefully eradicated: –State had failed to regulate effectively –Professional Conduct was not encouraged –Little Prospect of Sanction for Misconduct –Flawed Accountability Framework in Practice

Concluding Comments New Situation –Directors, etc. now more accountable –Auditor’s independent role reinforced –Errant and unscrupulous Directors face Inquiry/Court action by ODCE, IFSRA, Revenue, etc. –Creditors’ Situation has improved –Better Information Disclosures to Market –Reinforcing Good Practice in other areas

Concluding Comments Effective and Balanced Regulation protects: –The public from fraud –Employees, traders and suppliers from irresponsible conduct –State revenue and the taxpayer’s interest –Investors and credit institutions from bad debts –Legitimate business from fraud-based competition –Personal and Corporate Reputation

Concluding Comments Compliance may be regarded a business cost, but it has a valuable market role and public interest purpose as well Quality Regulatory Environment is the aim –Progress has been achieved –Conditions for enterprise development are positive –Risks of unscrupulous conduct being minimised –Continuing support of all parties is necessary –Outlook is favourable for further improvements

Concluding Comments ODCE website (www. odce. ie) contains information materials for directors on: –General duties under Irish law –Best international corporate governance practice –Guidance in specific areas, e.g., directors’ loans –New compliance statement obligations –General ODCE developments, e.g., convictions

End of Presentation Thank You