The wording of audit reports do not change often and when they do, the change in wording is usually a matter the reader of financial statements would be well advised to note. For 2010 calendar year end annual reports for certain listed companies, there has been an addition to the audit report wording that ought to be noted. In this regard, the Auditing Practices Board (APB) of the FRC issued Bulletin 2011/1 “Developments in Corporate Governance Affecting the Responsibilities of Auditors of Companies Incorporated in Ireland” on 10 May 2011. The text was prepared by a Committee of Chartered Accountants’ Ireland, and approved by the full board of the APB.
To put some context on these organisations, the Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment. The APB which is a subsidiary of the FRC is committed to leading the development of auditing practice in the United Kingdom and the Republic of Ireland so as to:
- establish high standards of auditing;
- meet the developing needs of users of financial information; and
- ensure public confidence in the auditing process.
By virtue of Audit Regulations, auditors are obliged to comply with APB standards. While bulletins are not standards auditors have due regard to them as they give guidance on how best to deal with a particular topic.
Directive 2006/46/EC requires companies whose securities are admitted to trading on an EU regulated market to include a “corporate governance statement” each year in their annual report. This directive was transposed into Irish company law by Statutory Instrument no. 450 of 2009 (as amended by SI no. 83 of 2010). As a result, directors of companies with a listing on an EU regulated stock market are required to prepare a corporate governance statement each year. For the most part directors include the statement either directly in, or by cross reference as part of, the directors’ report. The requirement took effect for accounting periods commencing on or after 18 November 2009. In addition, the changes in law require the auditor to report on the consistency of certain aspects of a company’s Corporate Governance Statement with the company’s audited financial statements.
The bulletin has a very handy appendix summarising the requirements and is commended as useful reading to anyone considering the disclosures mandated by law (as opposed to Code or listing rules) in a corporate governance statement.
In order to provide auditors with guidance on their new statutory duties, APB Bulletin 2011/1 “Developments in Corporate Governance Affecting the Responsibilities of Auditors of Companies Incorporated in Ireland”:
- describes the Irish legislative requirements in respect of the Corporate Governance Statement required to be made by certain companies whose securities are admitted to trading on an EU regulated market; and
- illustrates how the APB’s illustrative auditor’s reports set out in Bulletin 2006/1 are required to be amended when a Corporate Governance Statement is required to be issued
A copy of the Bulletin may be downloaded from the publications section of the APB’s website.
Other matters covered by SI no.450 of 2009 (as amended) include mandating the disclosure of off balance sheet items and related party disclosures but these are not matters within scope of the bulletin.
As well as the directors’ report, law provides for the required annual corporate governance disclosures to be made elsewhere within the annual report or separate to the annual report on a company’s website. Irish law requires the auditor to positively report on certain aspects of the corporate governance statement relating to a group regardless of where the corporate governance statement is located. In contrast to the group situation, the audit opinion on the annual corporate governance statement for a company is only required where the information has not been included in the director’s report. There are three illustrative audit opinions based on examples in Bulletin 2006/1 (the compendium of example audit reports previously published by the APB). These examples address:
- a Corporate Governance Statement issued by a group which is included in the directors’ report;
- a Corporate Governance Statement issued by a group which is outside of the directors’ report; and
- a Corporate Governance Statement issued by a company outside the directors’ report.
The bulletin suggests that auditors include language as follows in the audit report where a corporate governance statement is produced separately from the directors’ report:
“In our opinion the description of the main features of the internal control and risk management systems in relation to the financial reporting process and the information required by section 158 (6D) (d) of the Companies Act, 1963 given in the separate annual corporate governance statement [on pages] [in describe document] [at include web address] is consistent with the financial statements”.
The company law reference is less than ideal as such references are not particularly transparent to non-experts. However, in this case as the legal provision is a pot pourri of requirements which do not lend themselves to a short summation. The authors of the bulletin where left with no option but, with great reluctance, to resort to using a legal reference. Section 158(6D)(d) refers to the disclosures required by paragraph 2(c), (d), (f), (h) and (i) of Regulation 21 of the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006 (S.I. No. 255 of 2006). These requirements are not new, having been in force since 2006 but are now required to be located in the Corporate Governance Statement for relevant companies. The pot pourri consists of disclosures concerning the following matters:
(i) to the extent not already required to be disclosed pursuant to section 67 or 91 of the Companies Act 1990, in the case of each person with a significant direct or indirect holding of securities in the company, such details as are known to the company of -
- the identity of the person,
- the size of the holding, and
- the nature of the holding
(ii) in the case of each person who holds securities carrying special rights with regard to control of the company -
- the identity of the person, and
- the nature of the rights
(iii) rights, including in particular -
- limitations on voting rights of holders of a given percentage or number of votes,
- deadlines for exercising voting rights, and
- arrangements by which, with the company’s cooperation, financial rights carried by securities are held by a person other than the holder of the securities
(iv) any rules which the company has in force concerning –
- appointment and replacement of directors of the company, or
- amendment of the company’s articles of association,
(v) the powers of the company’s directors, including in particular any powers in relation to the issuing or buying back by the company of its shares
Readers will note that the corporate governance statement required by the EU Directive (and hence Irish law) is not intended to replace the statements that are made by listed companies as required by the UK and Irish Listing Rules. Indeed, these rules continue to develop and the Irish Stock Exchange listing rules provide that Irish listed companies are to comply or explain against the provisions of both the UK Corporate Governance Code (for years commencing after 30 September 2010) and the Irish Corporate Governance Annex (for years commencing on/after 18th December 2010). In addition, the annex extends the auditors review of the corporate governance statements in relation to the following two provisions of the Irish Annex:
- Companies should include a meaningful description of the work carried out by the audit committee during the financial year. Issuers should not simply recycle the committee’s terms of reference, which are required to be made available to investors in accordance with provision C.3.3 of the UK Code.
- The description should, in particular, explain the work done by the Committee relating to the oversight of risk management on behalf of the board. If the board has assigned work on risk management to a specific risk committee, a meaningful description of the work carried out by that committee should also be included.
No doubt further guidance will issue in due course in relation to these matters – auditors and directors alike will welcome such guidance particularly in areas such as “meaningful description” – what might be “meaningful” to one person could well be obscure or bland or uninformative to another – so it will be useful to see criteria documented in this regard.
Oliver Holt, FCA, is Director Finanical Reporting at Deloitte.