On 20 May 2010, The European Communities (Statutory Audits) (Directive 2006/43/EC) Regulations 2010 (the “Regulations”) became law. The EU Directive which gave rise to the Regulations, and 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, including the Central Bank of Ireland’s recent consultation paper on corporate governance, the provisions within the Regulations which require the establishment of audit committees are of particular interest. The Regulations require, on a statutory basis, the establishment of an audit committee for “public interest entities”, including insurance and reinsurance companies. Public interest entities are required to establish an audit committee by 20 November 2010.
The Regulations provide that an 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 must not have had either a material business relationship with, or a position of employment in, the public interest entity during the three years prior to his appointment to the audit committee.
Under the Regulations, the responsibilities of the audit committee include:
- the monitoring of the financial reporting process and the effectiveness of internal controls, internal audit and risk management;
- the statutory audit of the annual and consolidated accounts; and
- the review and monitoring of the independence of the statutory auditor or audit firm.
The Regulations also impose a two year suspension on statutory auditors taking up key management positions in public interest entities that they have audited or been a key audit partner. This should be borne in mind by insurance and reinsurance companies when recruiting key management personnel. This two year period starts to run the day following their resignation as auditor of the public interest entity.
There are exemptions from the requirement to have an audit committee, such as where a subsidiaries parent complies with the Regulations. The Regulations also include provisions regarding the approval of statutory auditors, the keeping of a public register of auditors, educational standards of auditors and the independence of auditors. In addition, they set out sanctions for acting as an auditor without the necessary qualifications.
For further information, please contact John Larkin.