On 20 May 2010, Regulations implementing the Statutory Audit Directive were signed into law. The Directive, which was due to be transposed into Irish law by June 2008, aims to harmonise the regulation of statutory auditing in the EU. Given current regulatory and political focus on internal controls within financial institutions, the provisions within the Regulations which require the establishment of audit committees are of particular interest.
Under the Regulations, “public interest entities” are required to establish an audit committee by no later than 20 November 2010. Public interest entities are identified as:
- companies whose transferable securities (which includes shares and bonds) are admitted to trading on a regulated market of any EU Member State (in Ireland this is the Main Securities Market of the Irish Stock Exchange);
- credit institutions; and
- insurance undertakings.
The Combined Code on Corporate Governance includes provisions for companies quoted on the Main Securities Market to have an audit committee. However, since the Combined Code operates on a “comply or explain” basis, the Regulations break new ground by requiring, on a statutory basis, the establishment of an audit committee.
The Regulations provide that the audit committee must include at least two independent non-executive directors (one of whom must be competent in accounting or auditing). In order for a director to be independent he/she must not have had during the three years before his/her appointment to the audit committee:
- a material business relationship with the public interest entity; or
- a position of employment in the public interest entity.
Under the Regulations, the responsibilities of the audit committee include:
- the monitoring of:
- the financial reporting process;
- the effectiveness of internal controls; and
- the statutory audit of the annual and consolidated accounts; and
- the review and monitoring of the independence of the statutory auditor of audit firm.
The Regulations also include provisions regarding the approval of statutory auditors, educational standards of auditors and the independence of auditors and set out sanctions for acting as an auditor without the necessary qualifications.
