Auditors Reporting and Disclosure

Auditors’ reporting obligations

Company directors and other officers should be aware that auditors who, in the course of their audit, form the opinion that there are reasonable grounds for believing that the company, or an officer or agent of the company, has committed an indictable offence under the Companies Acts are required to report that opinion to the Office of the Director of Corporate Enforcement (ODCE).

In the context of the general prohibition as set out in section 31, of the Companies Act, 1990 states that:

• An officer of a company who authorises or permits the company to enter into a transaction or arrangement knowing or having reasonable cause to believe that the company was thereby contravening section 31 shall be guilty of an offence
• A person who procures a company to enter into a transaction or arrangement knowing or having reasonable cause to believe that the company was thereby contravening section 31 shall be guilty of an offence

The final determination as to whether an officer authorising or permitting a transaction or arrangement, or a person procuring a company to enter into a transaction or arrangement knew, or had reasonable cause to believe, that the company was thereby contravening section 31 is a matter upon which only the Courts are competent to adjudicate. However, the auditor must, upon becoming aware that there has been a contravention of the general prohibition, form an opinion as to whether there exists an obligation to report to the ODCE, whether there are reasonable grounds for believing that an indictable offence has been committed by the company, or an officer or an agent of the company.

As a prerequisite to forming that opinion, the auditor must first form an opinion as to whether there are reasonable grounds for believing that the criteria as set out in section 40 have been satisfied i.e. an opinion as to whether the officers of the company who authorised or permitted the company to enter into the transaction or arrangement, or persons who procured the company to enter into the transaction or arrangement knew or had reasonable cause to believe that the company was thereby contravening section 31.

In forming their opinion on this matter, auditors would be expected to discuss the matter with the directors and any other relevant persons, review relevant correspondence and other documents that might pertain to the matter including, for example previous management letters to the client and the client’s replies thereto, previous letters of representation received from the client, and any notes of previous discussions with the client on matters relating to the transaction or arrangement in question or to previous transactions or arrangements of a similar nature assess the directors’ bona fides with regard to the matter, and exercise their professional judgement.

Where, having conducted the enquiries and performed the procedures deemed necessary, the auditor forms the opinion that the officers/persons did authorise, permit or procure the transaction knowing or having reasonable cause to believe that the company was thereby contravening section 31, the matter must be reported to the ODCE immediately. Under such circumstances, failure on the part of the auditor to report immediately is itself an indictable offence.

Where, having conducted the enquiries and performed the procedures deemed necessary, the auditor forms the opinion that the officers/persons did not authorise, permit or procure the transaction knowing or having reasonable cause to believe that the company was thereby contravening section 31, there is no legal requirement to report to the ODCE. However, under such circumstances the auditor should ensure that the basis for forming that opinion is fully documented and capable of being justified should the need arise subsequently e.g. in the context of a professional body monitoring visit or where the ODCE challenges the decision not to report on the basis of other information available to it.

Where the opinion is formed that there is no legal requirement to report the matter to the ODCE, auditors should consider whether the matter is one that ought to be reported to a proper authority in the public interest and, where this is the case, they should discuss the matter with the board of directors.

In circumstances where the auditor is unable to form an opinion as to whether the officers/persons authorised, permitted or procured the transaction or arrangement knowing or having reasonable cause to believe that the company was thereby contravening section 31, the Director of Corporate Enforcement is of the view that auditors should, in the interests of prudence, report the matter to the ODCE.

Irrespective of whether or not the auditor forms the opinion that the officers/persons authorised, permitted or procured the transaction knowing or having reasonable cause to believe that the company would thereby contravene section 31, upon first becoming aware of a suspected breach, certain of the auditor’s obligations under Statement of Auditing Standards (SAS) 120 ‘Consideration of Law and Regulations’ are activated.

Obviously, given the nature of the subject matter i.e. directly involving directors or officers of the company, the appropriate level of management will usually be the board of directors.

• In the context of reporting non-compliance with law or regulations, SAS 120.8 goes on to require that ‘The auditors should, as soon as practicable, either (a) communicate with management, the board or the audit committee, or (b) obtain evidence that they are appropriately informed, regarding any suspected or actual non-compliance with law or regulations that comes to auditors’ attention
• SAS 120.9 further provides that ‘If, in the auditors’ judgement, the suspected or actual noncompliance is material or is believed to be intentional, the auditors should communicate the finding without delay’. Accordingly, in the case of a loan that exceeds 10% of a company’s net assets, given that such a loan might ordinarily be considered material in the context of the financial statements, the matter will require immediate communication to the directors

Clearly, any amounts drawn down by way of loan, or any other contraventions authorised or permitted subsequent to having been notified of the matter by the auditors pursuant to SAS 120 are done so knowingly and therefore there is no question in such circumstances that they are reportable to the ODCE.

Auditors are required to ensure that the provisions of SAS 120 are fully complied with as failure to adhere to auditing standards is a disciplinary matter, potentially having serious consequences.

In circumstances where existing arrangements, which at the time they were entered into were less than 10% of the company’s relevant assets, subsequently come to exceed that limit for any reason, the directors are required to amend the terms of the arrangements to bring them back to within the 10% limit within two months. Failure to do so is not an offence and is therefore not reportable to the ODCE by the auditor. However, as set out elsewhere in this guidance, failure to amend the terms of the arrangements does entitle the company to render the arrangements void.