What is the Companies (Statutory Audits) Act 2018?
The Companies (Statutory Audits) Act 2018 (the Act), which was signed into law on 25 July 2018, amends and consolidates existing Irish legislation on statutory audits. These changes have been made to give further effect to, and bring Ireland more in line with, the EU Audit Reform regime, consisting of Directive 2006/43/EC as amended by Directive 2014/56/EU, and Regulation 537/2014. The EU legislative reforms were enacted in the wake of the international financial crisis, to strengthen auditor independence and audit supervision in Europe.
What is the statutory audit legislative framework in Ireland now?
The statutory audits regime in Ireland is now comprised of two tiers of legislation: the Companies Act 2014, as amended by the Act, and Regulation 537/2014 which is directly effective.
The Act introduces a new Part 27 to the Companies Act 2014, on "Statutory Audits". Many of the 124 new sections in Part 27 were originally contained in the 2016 Statutory Audits Regulations (S.I. 312/2016). These regulations (the 2016 Regulations) are now included in the Act, and so the 2016 Regulations will be revoked by the Act when commenced (subject to some transitional provisions relating to the conduct of audits, and the duties and powers of statutory auditors, for financial years prior to the date of commencement of the relevant provisions of the Act).
What are the key reforms in the Act?
Many of the new provisions covered by the 2018 Act are very technical, and relate to the obligations on auditors and the workings of the Irish Auditing and Accounting Supervisory Authority (IAASA). The reforms that are likely to be of more general interest include the following:
Enhanced Powers given to IAASA
One of the key reforms is that the supervisory powers of IAASA have been enhanced, to ensure effective monitoring and enforcement of statutory audit provisions, by introducing new sanctions which may be imposed by the IAASA on current (and former) statutory auditors for breach of certain provisions. These new sanctions which IAASA can impose include the power to:
- give a direction to cease certain conduct or remedy conduct that gave rise to the breach
- give a reprimand or severe reprimand to a specified person in relation to that conduct
- give a direction to pay to IAASA an amount calculated, in the case of a statutory audit firm, by reference to the number of statutory auditors in the firm, and
- prohibit a statutory auditor or key audit partner, for a specified period or indefinite period, from carrying out statutory audits or signing the audit report.
IAASA has also been given the power to prescribe additional requirements in relation to the statutory auditor's report, where necessary, to give effect to legal requirements relating to the scope of statutory audits, or to add to the credibility and quality of the audit report.
New exemptions from audit committee requirements
While the Act provides that the directors of public-interest entities (PIEs)[1] will continue to be obliged to establish audit committees, there are exemptions from this requirement for certain types of entity. These include PIEs that are small or medium-sized enterprises (as defined by the 2003 EU Prospectus Directive, as amended), and companies listed on an EU regulated market that have had an average market capitalisation of less than €100 million for the previous three years, provided that the functions assigned to an audit committee are performed by the board of directors.
Also entitled to an exemption from the audit committee requirements are PIEs that are captive insurers or reinsurers, where the PIE has a body or bodies which perform equivalent functions to an audit committee in accordance with the provisions in place in the State in which the PIE to be audited is registered. To qualify for this exemption, a captive insurance undertaking or captive reinsurance undertaking must not be owned by a credit institution, or have securities admitted to trading on a regulated market.
Annual Returns and Audit Exemption
The Act also contains a number of provisions which relate to the filing period for annual returns and financial statements, and the loss of the audit exemption. The main reforms are as follows:
Loss of Audit Exemption
The Act provides that where a company's audit exemption is lost due to late filing, the two financial years following the financial year in which the company failed to file on time (and not, as is currently the case, the financial year to which the annual return applies and the following financial year) will need to be audited. This will be a welcome reform, as it will remove the need for a company, which is late in filing its Annual Return, from having to look back and instruct its statutory auditors to commence an audit on a financial year that has already ended, which can be an expensive and lengthy exercise for companies.
A single filing period for Annual Returns and Financial Statements?
The Act proposes to introduce a "single step" approach for companies when filing their annual return and financial statements, and the Department of Business, Enterprise and Innovation (DBEI) have indicated that this is to be a 56 day period. However, the DBEI have indicated that the sections of the Act, which appear to be intended to implement this change, will not be commenced, when the other sections of the Act are commenced, which is likely to be next month (more on this below), so for now, the current position remains that a company will have 28 days from the company's Annual Return Date (ARD) to file its annual return electronically plus a further 28 days to file its financial statements.
When applying to extend a company's ARD, the Act also provides that a company will have 56 days (and not 28 days as is currently the case) from the ARD to file the annual return and the application to extend. However, the DBEI have indicated that this section will also not come into operation when the Act is commenced next month.
Note: It remains possible to apply to the District Court rather than, as was initially proposed in the Bill, the High Court only, for a time extension to file the annual return. Also, contrary to what was proposed in the Bill as initiated, it will not be possible to apply to the District Court to waive a late filing fee.
Has the Act been commenced yet?
[1] "Public interest entities" are defined by the EU Audit Directive, and include banks, insurers and companies listed on an EU regulated market, as well as other designated undertakings, which have significant public interest due to the nature of their business, their size, or the number of employees.
