Sec 42 of Companies (Auditing & Accounting) Act 2003 & Article 41 of 8th EU Directive sets out the requirements for certain company types to establish an audit committee. These provisions have not yet been signed into law, however the Department of Enterprise Trade & Employment have indicated that draft regulations adopting the provisions of both the 2003 Act and 8th Directive, with some amendments, will be published by the end of July 2009 and signed into law before the end of 2009.
What companies are required to establish an Audit Committee?
The requirement to establish an audit committee applies to all public limited companies, qualifying large private companies, relevant undertakings and public interest entities.
Section 42 requires that all public limited companies whether listed or not, establish and adequately resource an Audit Committee with certain responsibilities as defined in the Act unless it is a wholly owned subsidiary undertaking of another public limited company.
In addition, qualifying large private limited companies and relevant undertakings must either establish an Audit Committee with all or some of the defined responsibilities, or decide not to do so.
A “qualifying large private company” is defined as either:
- A private company limited by shares whose balance sheet total exceeds €25 million and whose amount of turnover exceeds €50 million in both the most recent financial year and the immediately preceding financial year,
- A private company limited by shares if the company and all of its subsidiary undertakings together meet the above balance sheet and turnover criteria.
A “qualifying relevant undertaking” is defined as either:
- An unlimited company or partnership whose balance sheet total exceeds €25 million and whose amount of turnover exceeds €50 million in both the most recent financial year and the immediately preceding financial year, where all the members who do not have a limit on their liability are:
- Companies limited by shares or by guarantee, or equivalent bodies not governed by Irish Law or a combination of both there categories of body or
- Bodies of a type referred to in subparagraph (i) that are governed by the laws of an EU Member State or are equivalent bodies with a comparable legal form that are governed by the laws of a Member State or
- A combination of the categories of body mentioned in the preceding subparagraphs (i) and (ii)
- an unlimited company or partnership of the type described in paragraph (c ) if the company or partnership and all of its subsidiary undertakings together meet the above balance sheet and turnover criteria.
Article 2.13 of the Directive defines ‘public interest entities’ as including:
- Entities which have issued transferable securities admitted to trading on a regulated market governed by a Member State (4),
- Credit institutions (5) (i.e. banks and building societies) and
- Insurance undertakings (6).
What companies are not required to have an Audit Committee?
Every private company limited by shares whose balance sheet and turnover totals are below the aforementioned limits
Every unlimited company or partnership of the type described above whose balance sheet and turnover totals are less than the aforementioned limits.
All other forms of corporate body not included i.e. companies limited by guarantee and non-EU Member State and branches.
Audit Committee Requirements
The Audit Committee must consist of at least 2 members.
The 8th Directive requires that at least one member of the Audit Committee must be independent and must be qualified in accounting or auditing.
A Director qualifies for appointment to the committee if he or she:
- Is or has not been an employee of the company or subsidiary in the last 3 years
- Is not the chairperson of the Board of Directors.
The Audit Committee requires appropriate term of reference that
- Have been prepared and approved by the Board of Directors
- Are submitted to the shareholders at the AGM
- Are reviewed annually by the board
- Specify how the committee will discharge its duties & responsibilities
- Provide for the a programme of meetings with the management, auditor and internal auditor
Functions & Responsibilities of the Audit Committee
The main functions of an Audit Committee include:
- Overseeing financial reporting
- Overseeing the process related to the company’s financial risks and internal control & audit
- Overseeing the internal and external audit processes.
- Review and monitor the independence of the auditor & audit firm