IPA/CIPFA 2003 Conference - Regulation, Audit & Inspection Company Law Regulation – Initial Impacts Paul Appleby Director of Corporate Enforcement 16 December 2003

Outline of Presentation Introductory Comments Company Law Compliance Detection/Investigation Work Insolvent Companies Legal Proceedings by the ODCE Concluding Comments

Introduction (1) Genesis of the ODCE Political/Business Scandals in the 1990s Political Recognition that Company Law was not being enforced adequately New Company Law Enforcement Act 2001 ODCE established as an independent agency with accounting, legal, administrative and police staff

Introduction (2) What is the ODCE? Remit is focused on the Companies Acts Multi-disciplinary agency comprising administrative, legal, accounting and Garda staff Budget of €3.8 million in 2003

Introduction (3) The ODCE’s Principal Goals Improving Company Law Compliance Uncovering Suspected Breaches Pursuing Detected Breaches Sanctioning Improper Conduct in Insolvent Companies Providing Quality Services

ODCE Compliance Work (1) Publishing Accessible Information Seven Information Books on Obligations/Duties Scope of Auditor Mandatory Reporting Requirement Liquidation-Related Functions of the ODCE ODCE Strategy Statement and Annual Reports

ODCE Compliance Work (2) Promoting Compliance Programme of Presentations, Articles, etc. Engaging with Business via Consultation Papers Website Development Media Queries Effective Enforcement

ODCE Compliance Work (3) Improving Company Related Provisions Supporting the Company Law Review Group Assisting the planned Irish Auditing and Accounting Supervisory Authority Advising the Department of Enterprise Trade and Employment on Compliance/Enforcement Issues Strengthening Professional Standards

Detection of Non-Compliance (1) Auditor Obligations “ Where, in the course of, and by virtue of, their carrying out an audit of the accounts of the company, information comes into the possession of the auditors of a company that leads them to form the opinion that there are reasonable grounds for believing that the company or an officer or agent of it has committed an indictable offence under the Companies Acts, the auditors shall, forthwith after having formed it, notify that opinion to the Director and provide the Director with details of the grounds on which they have formed that opinion. ” -S.74(e), Company Law Enforcement Act 2001

Detection of Non-Compliance (2) Reports: 400 in 2002; 1,400 so far in 2003 Issues: 79% relate to Filing/Similar Offences 14% are about Directors’ Loans 5% deal with Failing to hold EGMs 2% relate to Inadequate Books <0.01% concern Unqualified Auditors/ AGM Problems/Disclosure Defaults/Fraud Actions:Filing Offences referred to the CRO Most of the rest are under investigation

Detection of Non-Compliance (3) Overall Views Good Awareness by Auditors of Obligations Uniform Interpretation of Obligations not yet achieved Reporting of Few Offence Types is disappointing Filing Defaults should not be reported to ODCE at all Culture Change in Auditor/Client Relations Positive Impact on Auditor Independence Positive Impact in reinforcing Compliance Message

Detection of Non-Compliance (4) Public Complaints Volumes: 200 in 2002; 300 so far in 2003 Offences: 35% disclose no Company Law Issues 21% relate to Civil Matters/Debt Issues 15% are filing defaults 29% cover a range of issues, e.g., AGMs Actions:Many closed, others being assessed

Detection of Non-Compliance (5) Matters of Public Record Tribunal of Inquiry/Inspector Reports Media Disclosures CRO Database Inter-Agency Co-operation Garda Siochana Revenue, Financial Services Regulator, etc.

Insolvent Companies (1) “(1) A liquidator of an insolvent company shall, within 6 months after his or her appointment or the commencement of this section, whichever is the later, and at intervals as required by the Director thereafter, provide to the Director a report in the prescribed form. (2) A liquidator of an insolvent company shall, not earlier than 3 months nor later than 5 months (or such later time as the court may allow and advises the Director) after the date on which he or she has provided to the Director a report under subsection (1), apply to the court for the restriction under section 150 of the Act of 1990 of each of the directors of the company, unless the Director has relieved the liquidator of the obligation to make such an application.” - S.56(1) and (2), Company Law Enforcement Act 2001

Insolvent Companies (2) What gives rise to restriction? Where the High Court is not satisfied that a director has acted honestly and responsibly in conducting the company’s affairs. What is the effect of restriction? A person may not act, directly or indirectly, as a director, etc., unless the company is adequately capitalised. For a private company, the minimum paid-up share capital sum is €63,487. The equivalent figure for a public company is €317,435. Both must be fully paid for in cash. What is the effect of disqualification? Disqualification involves an absolute ban for five years or more.

Insolvent Companies (3) Phased Commencement 1 June 2002: insolvent companies to which a liquidator was newly appointed or was appointed on or after 1 July June 2003: insolvent companies to which a liquidator was appointed on or after 1 January 2000

Insolvent Companies (4) Volumes 2002Jan/mid-Nov 2003 Liquidator Reports Cases Determined Full Relief (53%) Partial Relief - 24 (4.5%) Relief at this time - 31 (5.8%) No Relief (35%)

Insolvent Companies (5) Initial Impact of Regime Several hundred directors are currently facing restriction proceedings by the liquidator Up to 30% are acquiescing in the restriction A majority of those who defend the proceedings are convincing the Court that they should not be restricted

Insolvent Companies (6) Character of Liquidator Reports (Sample of 300) recommended restriction. Examples: Continued trading, where there was no reasonable prospect of the company’s survival Failure to keep proper books of account Excessive directors’ loans About 50 of these also suggested serious misconduct, e.g: Fraudulent trading/fraudulent preference Removal of property, etc.

Insolvent Companies (7) Some Section 56 Reports under criminal investigation Unliquidated Insolvent Companies Restricted/Disqualified Directors Supervision of Liquidators (Demands for 20+ Companies in Liquidation)

Insolvent Companies (8) Overall Views Different Character to Liquidators Reports Creditors report success – directors investing funds to avoid the restriction process Some evidence also of directors seeking to evade accountability ODCE countering this trend with planned actions against the directors of unliquidated insolvent and ‘struck-off’ companies High Court decisions laying more emphasis on dishonesty than irresponsibility of directors’ conduct

ODCE Investigations (1) Approaches to Investigation Correspondence/Discussions Seeking Original Documents Taking of Statements Non-Legal Outcomes to Investigations File Closure Referral to Other Authorities Warning Letter

ODCE Investigations (2) Legal Powers Used so far Search Warrants 5 10 Bankers’ Books 7 13 Arrests - 6 Detentions - 3

Legal Proceedings (1) Civil Enforcement so far Compliance Order -7 Disqualifications -1 Property Seizure -1 Seeking Information 2- Judicial Review 1-

Legal Proceedings (2) Criminal Enforcement so far Convictions: Offences: Failing to Keep Proper Books Falsification of Documents Undischarged Bankrupts Directors’ Loans Unqualified Auditor

Legal Proceedings (3) Pipeline Cases (by type) Directors’ Loans Inadequate Books Falsified Documents Disqualified Auditors Fraudulent Trading Undischarged Bankrupts Restricted Directors Trading while Dissolved External Companies

Concluding Comments (1) Current Areas for ODCE Attention Compliance Work is in continuing demand More Information on Misconduct needed Completion of Investigations a priority Liquidated/Dissolved/Abandoned Company Work Initiating and Completing Court Proceedings

Concluding Comments (2) Overall Views on Accounts/Audit Satisfied as to the integrity of most accounts/audits Audit is a valuable discipline and assurance Our work has identified some lapses Many now subject to investigation Have/Will relay issues to accountancy bodies

Concluding Comments (3) Approach of the ODCE Arguable Case that Companies Acts and other laws need to be streamlined and modernised A Lax Enforcement Environment up to recently Regulators, etc. are having to change the Culture ODCE adopting a reasonable approach to its role

Concluding Comments (4) The IAASA Bill 2003 Irish Auditing and Accounting Supervisory Authority (IAASA) being formed to - –recognise/supervise bodies of accountants –help develop accounting/auditing standards –review the validity of certain company accounts Directors’ Compliance Statement Increase in Audit Exemption Threshold

Concluding Comments (5) Companies Acts Compliance Benefits Enhancing Consumer Information/Welfare Improving Integrity of Accounts Reducing Tax Evasion Lowering Risks for Creditors Improving Business Reputation and Competitiveness

Concluding Comments (6) Further Information can be obtained from