Audit committees have been a feature of many companies in Ireland for some time, but their role and responsibilities have never before been enshrined in Irish company law. Section 42 of the Companies (Auditing and Accounting) Act 2003, which inserted a new section 205B into the Companies Act 1990, introduces provisions relating to audit committees into Irish company law for the first time. The new provisions will apply to all Irish-registered public limited companies, whether listed or not, and also to qualifying large private companies and relevant undertakings (that is, unlimited companies and partnerships of the requisite balance sheet and turnover sizes). Although the Director of Corporate Enforcement recently published a Guidance on Audit Committees to assist in the implementation of these provisions, as Update went to press, no decision had yet been made as to when these provisions will come into operation.

When the new provisions come into operation, Irish-registered public limited companies will be required to establish and adequately resource an audit committee with certain responsibilities, including:

• reviewing the individual or group accounts, determining if they give a true and fair view of the company's affairs and its profit and loss, and recommending to the board whether or not to approve the accounts,
  
  
• advising the board on the appointment of the company's auditor,
  
  
• monitoring the performance and quality of the auditor's work and his/her independence from the company,
  
  
• satisfying itself that the arrangements made and the resources available for internal audits are suitable, and
  
  
• performing any other functions relating to the audit and financial management of the company as may be delegated to it by the board of directors.

Irish-registered private companies limited by shares and relevant undertakings (unlimited companies and partnerships) whose balance sheet total exceeds €25 million and whose turnover exceeds €50 million in both the most recent financial year and that immediately preceding are required to either establish an audit committee with some or all of the defined responsibilities under section 205B, unless they elect not to do so. If they elect not to establish an audit committee, they must disclose reasons for doing so in the annual directors' report. In addition, where the board establishes an audit committee with all or only some of the defined responsibilities as set out in section 205B, the reason for that decision must also be disclosed.

Generally an audit committee is a committee of directors which is required by law to regularly assess the validity of the company's financial statements and financial reporting and to oversee its internal and external audit processes, with a view to enhancing the quality of the financial reporting. The committee independently scrutinises the financial and other information made available to the board and it monitors the ongoing value of the external audit and regularly reviews the performance of any internal audit function within the company. The board is obliged to prepare written terms of reference for the audit committee setting out the committee's role in the audit and financial management of the company.

The independence of the committee members in carrying out their role is crucial and the lack of such independence in the case of the Enron audit committee was considered a significant factor which ultimately lead to the collapse of the company. Best practice now recommends that the audit committee should be composed entirely of non-executive directors and the legislation provides that audit committee members should not be employees of the company. It is important to note, however, that ultimate responsibility for ensuring that the company complies with its legal obligations remains with the full board and the establishment of an audit committee does not affect the directors' duties generally.

For further information please contact Richard Curran or Gerry Halpenny.


Winter 2006.