CONSULTATION PAPERS C/2002/1 AND C/2002/2
The Association of Chartered Certified Accountants (ACCA) is pleased to have the opportunity to comment on the two consultation papers, C/2002/1 and C/2002/2, issued by the Office of Director of Corporate Enforcement. Our comments on the two papers are set out below.
C/2002/1: COMPANY LAW GUIDANCE NOTES
We have reviewed the guidance notes issued by the Office of the Director of Corporate Enforcement (ODCE) with consultation paper c/2002/1, in accordance with the specific consultation questions.Do the guidance notes contain the main duties and powers in the relevant area?
Yes.
Is the material readily accessible by a non-professional reader?
Generally, we believe that they are. All the guidance notes appear to have been drafted in accordance with a common format which helps in presenting the material and which also should be of help to those persons who will read more than one of the final versions of the guidance notes. We consider though that in several instances - listed in the detailed comments below - legal and technical terms are introduced without explanation. In view of the purpose of the notes, we suggest that 'difficult' terminology should be explained at an early stage, and if possible in accessible, non-technical terms.
In respect of some of the notes there could be a greater effort to present the material in a co-ordinated plain English style. The note on 'Directors', in particular, seems to list a succession of statutory provisions in a dry technical manner with the result that it risks losing the interest of the reader. While the material cannot avoid the inclusion of technical information it should be presented in a way that engages the reader as far as is practicable. Other draft notes, in particular that on 'Shareholders and Members', in our view strike a better balance between technical information and narrative.
Are there any other topics which could be covered in further such material from the ODCE?
While the powers of the ODCE are covered in several of the drafts, it would be useful for there to be a separate guidance note setting out the powers of the ODCE to intervene in company affairs.
DETAILED COMMENTS
COMPANY1. Since 'distinct legal personality' is an abstract, technical concept which lay readers of the guidance notes may not have come across before, it would be useful to expand on this term where it is first used. At the end of the first sentence, there could be additional wording along the lines of '…, which means that, in the eyes of the law, the company exists separately from the individuals who own and manage it, and also that the company can take legal action and be subjected to legal action in its own name'.
2. In the third paragraph, the second sentence says that a privet company must have a share capital. This is incorrect and should be deleted. In the last sentence of the same paragraph, the draft suggests that public companies are 'generally' limited companies: all public companies are, of course limited companies. We suggest that, as an illustration of the distinctive character of public companies, the text refers to the minimum share capital requirement for such companies, which is €38,100.
3. At the top of page 2, under sub-paragraph (d), there is a reference to 'true and fair view'. This is, again, a term with which most readers will be unfamiliar. There should be a suitable cross-reference to where in the text this term is explained further.
4. Under the heading 'annual audit', it would be helpful for the text to carry, after the first sentence in the passage, a brief explanation of the term 'audit'. We suggest 'audit is the procedure whereby a company's accounts are reviewed by an independent expert, in accordance with legal and professional criteria, and which results in the auditor giving an opinion on whether the accounts comply with the law and are 'true and fair'' '.
5. Again, under the heading 'Annual Return' on page 3, it would be helpful to describe briefly the nature of the 'Return'.
6. In Appendix A, we suggest that the third heading might be better presented as 'Information which must be filed with the Registrar of Companies'. The reference to the annual return should be expanded to include the company's annual accounts.
7. In Appendix B, some expansion on the term 'turnover' would be helpful in the circumstances. We suggest 'The term 'turnover' refers to the company's income from its main operations, i.e. not including bank interest, dividends received or other non-operational income'.
DIRECTORS
1. The first paragraph is liable to confuse readers, since it starts off by saying that the articles usually delegate powers to 'a board of directors'. We suggest that the passage starts by making clear that companies are obliged by law to appoint at least two directors. Thereafter, the text can go on to deal with the manner in which those directors are empowered to act on behalf of the company.
2. We suggest that, given the relatively obscure nature of the concept of 'shadow director', the second paragraph should be expanded upon, along the following lines: 'New directors are appointed either by the company's shareholders directly or, where the company's articles of association allow, by the company's other directors. Where any person (not being a director) exerts such an influence over the company's directors that those directors are accustomed to act in accordance with his or her instructions, the other person is regarded by the law as being a 'shadow director'. Many of the legal responsibilities which apply to directors apply equally to shadow directors'.
3. Under Duties, the third sentence of the first paragraph should read '… and not to its individual shareholders'. This is to make clear that directors' primary duty is to shareholders as a group.
4. In the last paragraph on page 8, it should be made clear that, where a director is also involved in a competitor business, he or she should not allow that other interest to interfere with his or her duty to act in the best interests of the company.
5. We suggest the second sentence should be deleted.
6. Under 'Powers', we suggest that the first sentence could be improved along the following lines: 'A company's directors act on behalf of their company. They only have powers to do what the company itself is legally entitled to do, and the powers that they have are those which are delegated to them by the company, usually via the company's articles of association'.
7. At the top of page 12, the text should state that a company's articles will usually (rather than generally) accept the validity of informal decisions: this is to make clear that there should be an enabling provision in the articles for such decisions to be valid.
8. In the last paragraph on page 12, there should be a further explanation of the term 'ostensible authority' along the lines of 'This is where another party is led to believe that a director has authority to commit then company in a certain way and no attempt by anyone in the company is made to correct the impression given'.
9. In the last sentence of Appendix B, the text should refer to persons who have been directors (within 12 months of the winding up).
COMPANY SECRETARY
1. Under (a)-(f) under the first paragraph on page 20, the text lists statutory functions which are to be carried out by the secretary. The draft needs to be clear as to whether the functions concerned must by law be carried out by the secretary or whether they may be carried out by the secretary as an alternative to a director or directors.
MEMBERS AND SHAREHOLDERS
1. The second sentence in the first paragraph on page 22 should read 'Any other person … will become a member'.
2. Under 'Right to Information' on page 27, points (d) and (e) should probably refer to the right to receive (rather than obtain) the information concerned.
3. In the Appendix, we suggest that the reference to the rights of ordinary shareholders make clear that they have no special rights other than those already discussed in the body of the text.
AUDITORS
1. Under 'Qualifications of an auditor', we suggest that the first sentence start 'In order to act as an auditor under the law, a person must comply …'
2. In the first sentence under 'Duties', the text states that the auditor will report on the accounts and on the balance sheet and profit and loss account. The latter two statements in fact are 'the accounts'.
3. The section headed 'duties' might make the point that, in carrying out the audit, the auditor owes a duty of care to the company meaning the body of shareholders (and not to the directors or to individual shareholders).
CREDITORS
1. Under 'What is a creditor?', the text might state, in addition to the creditor's rights to wind up a company, that a creditor has certain rights to recover amounts due to him or her through the courts.
2. With regard to the references to 'secured creditor', some explanation of this term would be in order.
3. As a general point, since this section deals exclusively with the rights of creditors in the case of the insolvency of a company, perhaps this fact should be reflected in the title of the section.
CONSULTATION PAPER C/2002/2: REPORTING OF INDICTABLE OFFENCES
While we do not intend to re-open a debate on the text of the s194(5), the new reporting duty imposed on auditors by the new s194(5) is a potentially onerous one and which will have time and cost implications, which will have to be passed onto clients. We agree that guidance on the new section is essential and welcome the ODCE's decision to consult on it in advance of its publication.The draft guidance covers all the essential components of the new duty and contains much material with which we are content. We support the ODCE's view that the auditor should be alert to information which his firm might possess by virtue of non-audit work and which might reasonably be expected to be relevant to the audit. The draft guidance is also generally consistent with the auditor's traditional role as 'watchdog' rather than 'bloodhound'.
We have however two major concerns. Firstly, we query whether the advice set out in the last paragraph on page 4 is consistent with the revised s194(5). The latter section requires disclosure where, inter alia, information comes into the possession of an auditor in the course of and by virtue of their carrying out of the audit. The draft guidance on page 4 suggests that where a person has come across potentially reportable information, but in a non-audit capacity, the duty to report will be triggered once that same person accepts appointment as auditor (and forms the opinion that a report should be made). We believe that this is a technically incorrect interpretation of the new sub-section and quite possibly impractical to implement in practice. For example, where an auditor has previously been acting in respect of a non-audit appointment, the information which he or she had previously come across might simply have been forgotten: it would be unreasonable, in our view, to hold an auditor responsible for making a report in this sort of situation.
Secondly, the guidance should cover the degree of certainty which an auditor should arrive at in order to 'form an opinion' as to whether an indictable offence has been committed. Clearly, in order to be bound to report, an auditor will need to have more than a suspicion that an offence has been committed but, at the same time, he need not be certain that any such offence has been committed. An auditor is often confronted with assertions from disgruntled parties to the effect that wrong-doing has occurred but will have great difficulty in establishing facts to any conclusive level. Given the very wide range of offences that are covered by the new duty - even encompassing offences which have nothing to do with the affairs of the auditee company and covering matters in respect of which the auditor is not trained to deal with - it would be helpful if the guidance addressed this crucial matter. It seems clear that the auditor will not be able to rely absolutely on legal advice, so it is all the more necessary for auditors to be given a clear idea of the standard of certainty that will constitute forming an opinion.
It is conceivable that an auditor might seek to defend any non-reporting on information under s194(5) on the ground that he or she was not aware of the offence being indictable, and therefore reportable. We suggest that the guidance address this possible loop-hole by stressing that the new reporting duty is subject to the requirement in s193(6) of the 1990 Act6 and that, accordingly, an auditor is expected to be aware of offences which come within the scope of s194(5).
One final point we would make on C/2002/2 is that those companies which are exempt from the audit would be entirely free from attention under the new provisions. This is, arguably, a good reason to ensure that all companies continue to have an audit. It should also encourage the ODCE to consider how parallel procedures could be introduced in respect of unaudited companies.