The path to prosecution

The obligation to report has changed under Companies Act 2014, with the result that the path to prosecution may be more direct.

Statutory auditors are required to make a report to the Director of Corporate Enforcement where, in the course of carrying out an audit of the financial statements of a company, the auditors are of the opinion that there are reasonable grounds for believing that a category one or category two offence under Companies Act 2014 has been committed. Where auditors fail to make a notification when required to do so, the auditors themselves are guilty of a category three offence.

This obligation to notify is not a new requirement introduced by Companies Act 2014; however, the Act did seek to resolve a difficulty that had arisen under prior Companies Acts relating to similar reporting requirements imposed on auditors under that legislation.

Under the prior Companies Acts, the obligation was to report suspected “indictable” offences. However, the determination as to what actually constituted an “indictable” offence was unclear given that offences could be tried either summarily or upon indictment at the election of the prosecuting authorities.

Increase in the number of offences to be reported?

This change from indictable offences to category one or two offences should result in significantly greater certainty.

It is worth noting that the number of category one and two offences under the Act is significantly less than the number of indictable offences under the previous Companies Acts. However, despite this reduction in number, can we expect that, arising out of the greater certainty as to what comprises an offence that requires a report to be made, the number of reports made will actually increase?

Wider range of offences to be reported?

What is also clearly evident from the statistics relating to reported offences published by the Office of the Director of Corporate Enforcement (ODCE) is that the reports made by auditors under the old regime related to two key areas – offences relating to loans to directors and the offence for failure to keep proper accounting records.

Might this also mean that, with the greater clarity brought by Companies Act 2014, a wider range of offences will now be reported? The range of offences that can now be reported under Companies Act 2014 also includes a new reportable offence. This offence occurs where a director or directors of a company are party to the approval of statutory financial statements that do not give a true and fair view, knowing that the financial statements do not give such a view, or being reckless as to whether this is the case.

In this regard, where auditors give an opinion other than a clean opinion, and the directors – knowing that the auditors have taken such a view – approve the financial statements, there will naturally be a question as to whether this would cause the auditors to form the opinion that there are reasonable grounds for believing that the director or directors have committed an offence, such that the auditors have a reporting obligation.

The implications for directors

The duty of directors to ensure that the company of which they are an officer keeps adequate accounting records and that (among other things) the company prepares statutory financial statements in accordance with the requirements of Companies Act 2014 that give a true and fair view of the assets, liabilities, financial position and profit and loss for the financial year are fundamental principles of company law. This has not changed. It is never enough to simply assume that this is being done as where it is not, a director and the company for which it has responsibility could face an ODCE investigation and possible criminal prosecution.

The directors of a company must know or be capable of finding out at any time, the company’s financial position. The directors must be in a position to understand the company’s transactions and must take responsibility for the correct presentation to the required standard of the company’s financial affairs for a given period in its statutory financial statements. There were always implications for not doing so; the certainty that Companies Act 2014 now brings in terms of the circumstances where a failure to comply with the accounting requirements of the Act requires statutory auditors to report those possible offences to the ODCE could make the path to prosecution more direct.

Claire Lorde is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran.