1. The Joint Committee has examined the Commission’s proposal for the Eighth Council Directive on company law. The proposal is made pursuant to Article 54 (3) (g) of the EEC Treaty and concerns the approval of persons responsible for carrying out statutory audits of the annual accounts of limited liability companies [R/979/78 (ES 43)].
2. The draft Directive is one of a number of measures proposed or adopted in relation to company law designed to facilitate the exercise of the right of establishment by companies or firms. Some of these other measures contain provisions dealing with the auditing of accounts by suitably qualified persons and the proposed Eighth Directive seeks to provide for the minimum qualifications which persons entitled to carry out audits should possess.
3. The Joint Committee is informed that detailed examination of the proposed Directive at Community level will not begin until sometime in 1979.
Contents of Proposal
4. The draft Eighth Directive is concerned with the qualifications of persons who audit the accounts of limited companies. However, it need not necessarily apply to auditors of all limited companies; under Article 51 of the Fourth Directive (recently adopted), which deals with company accounts, Member States have the option of relieving small companies (as defined in Article 11 of that Directive) from the obligation of havng their accounts audited by persons authorised by national law. Because the Eighth Directive is concerned with limited companies, its requirements need not be applied to unlimited companies, to other forms of body corporate or to unincorporated bodies such as partnerships.
5. The proposed Eighth Directive would require Member States to approve statutory company audits being carried out either by natural persons with specified qualifications or by firms, whether incorporated or not, provided that only qualified persons within the firm carry out the audit. The essential qualification is to be acquired by passing, after a course of advanced training, an examination at graduate or equivalent level, designed to guarantee a good level of theoretical knowledge and the ability to apply it in practice. The level and scope of the examination are specified in detail.
6. There are various other ancillary provisions in the draft Directive. Article 6 gives Member States the option of permitting persons with long practical experience to sit the examination of professional competence without having attained the required level of study. Articles 3 and 11 deal with independence of the auditor. Article 7 seeks to protect the interests of practising auditors who at the time of coming into force of the Directive, do not satisfy the requirements of the Directive. Article 8 enables students who have already begun courses of study when the Directive comes into force, to achieve qualification by examination on the basis of the old syllabus even if it is not in accordance with the Directive. Article 10 deals with the recognition of persons who acquire similar qualifications in other countries and Article 12 requires Member States to publish annually a list of approved auditors.
7. Two general points should be noted. Firstly, the purpose of the Directive is not to provide for the mutual recognition of diplomas or degrees or to facilitate the exercise of the right of establishment or of the freedom to provide services by the auditing professions, although the draft Directive is recognised as laying the groundwork for these developments later. Secondly, the Directive avoids any mention of professional bodies such as accountancy bodies and does not seek to harmonise the qualifications of a particular profession. The reason given in the explanatory memorandum is that in some Member States auditing can be carried out by different professions. For this reason the Directive concentrates on the level and scope of the examination of professional competence.
Irish Statutory Provisions
8. Under section 162 (1) of the Companies Act, 1963 a person shall not be qualified for appointment as an auditor of a company unless he is either (a) a member of a body of accountants recognised by the Minister for Industry, Commerce and Energy or (b) authorised by the Minister for such appointment either by virtue of having obtained similar qualifications other than from such a body or as having obtained adequate knowledge and experience prior to 1st April, 1964 in the course of his employment as a member of one of the recognised bodies of accountants or as having practised in the State as an accountant prior to 1st April, 1964. Where a firm is appointed by its firm name to be the auditors of a company, section 160 (9) of the Act of 1963 provides that the appointment shall be that of “those persons who shall from time to time during the currency of the appointment be the partners in that firm as from time to time constituted and who are qualified to be auditors of that company”. Section 162 (3) (c) prohibits the appointment of a body corporate.
9. The acountancy bodies at present recognised by the Minister for the purpose of section 162 (1) of the Compnies Act, 1963 are the following:—
The Institute of Chartered Accountants in Ireland;
The Institute of Certified Public Accountants in Ireland;
The Association of Certified Accountants;
The Institute of Chartered Accountants in England and Wales;
The Institute of Chartered Accountants of Scotland.
Range of Proposed Directive
10. In some Member States several professions are permitted to undertake statutory audits. Consequently, the proposed Directive is framed to deal with the qualifications of those responsible for auditing company accounts rather than with the qualifications of auditors as such. In Ireland such audits may be carried out only by professional accountants. In the Joint Committee’s view, whatever qualifications are adopted in the Directive should apply in Ireland to auditors in general and not merely to auditors of company accounts. This could be provided for in the national legislation implementing the Directive. More-over, the proposed Directive, when adopted, will presumably serve as a basis for a further Directive on the mutual recognition of qualifications. It seems desirable, therefore, that whatever qualifications are now adopted should be appropriate for all professional auditors and that this factor should be taken into account when considering the proposal at Community level.
11. In Ireland members of recognised accountancy bodies are automatically entitled to audit the accounts of companies. The Joint Committee is advised that the Directive is not intended to interfere with this system. It would, of course, be the responsibility of the competent authority in the State to ensure that the educational standards of recognised accountancy bodies are in accordance with the Directive.
Approval of Companies or Associations as Auditors
12. The Directive would oblige Member States to approve as auditors companies or associations as well as individuals subject to the audits being carried out only by professionally qualified personnel and provided that non-qualified personnel have neither access to relevant documents nor authority to appoint or remove auditors or to issue instructions in relation to audits. Moreover, the non-professionals may not hold a majority of the capital in concerns formed after the Directive is implemented.
13. It has been strongly represented to the Joint Committee that Ireland should resist the provision allowing audits by other than firms of professionally qualified accountants. The Committee is informed, however, that this provision is intended to cover the existing situation in the Federal Republic of Germany. In the Committee’s view, Article 54 (3) (g) of the EEC Treaty requires “equivalent” but not identical safeguards throughout the Community and it believes that Directives made under Article 54 (3) (g) should not interfere with an existing practice in a Member State provided that it embodies adequate safe-guards. However, the Committee would favour an amendment of the Directive so as to give Member States the option whether to approve such concerns as auditors or not. The matter could be looked at again when the Directive regarding the right of establishment comes up for consideration.
14. Constraints on non-qualified persons from dealing with or influencing the audits and the requirements of confidentiality, as provided for in Article 2 (2) (a) of the draft Directive seem to the Joint Committee to have been drafted to provide for the practice referred to in the previous paragraph and then unintentionally too wide. There is a tendency nowadays for accountancy firms to take on partners who are not qualified auditors but who are experts in tax law, for example, or in computers (some accounting is now recorded on computers). The Commission’s explanatory memorandum states that these constraints on non-qualified persons are not intended to apply to persons carrying out duties under an auditor. However, the Committee believes that this is not enough as the Article casts doubts on whether non-auditor experts would have access to the accounts. The Article, if adopted as it stands, might also prohibit the auditor of a holding company in one Member State from having access to the accounts of a subsidiary in another Member State if he were not authorised as an auditor in that other Member State. The Committee suggests, therefore, that an amendment of the provision is required.
Independence and Good Repute
15. The Directive would oblige Member States to grant approval as auditors “only to persons who are of good repute and independent”. It is to be left to Member States to apply their own criteria for determining “good repute” but as regards independence, some criteria are given in Article 11 of the draft. The auditor may not directly or indirectly receive benefits from the company or its members and may not have an interest in the capital. If more than 10 per cent of his turnover is derived from a client, the disciplinary authorities must decide if his independence is being limited.
16. The Consultative Committee of Accountancy Bodies-Ireland is strongly of the opinion that the Directive should legislate for the competency of auditors only and that the question of independence should be regulated only by the ethical code of the profession. The Joint Committee, however, is advised that the criteria specified in the draft Directive are not unknown in Irish practice. For example, the ethical guide for members of the Institute of Chartered Accountants in Ireland advises members to ensure that fees from one client or group of associated clients do not exceed 15 per cent of the gross fees or gross professional income. Members are also advised not to have beneficial interests in shares of client companies and if they have such interests, to dispose of them at the earliest reasonable opportunity. Moreover, the Committee notes that it is open to Member States to ensure the independence of auditors through “professional discipline”. Accordingly, it would be open to Ireland to allow appropriate accountancy bodies to supervise the conduct of auditors to ensure that the standards of independence are maintained.
17. The Joint Committee notes that the draft Directive does not contain the type of criteria specified in section 162 (3) (a) and (b) and (4) of the Companies Act, 1963. That section prohibits a person from acting as auditor of a company if, for example, he is an officer or servant of that company or of that company’s holding company or subsidiary or of a sister subsidiary. The reason for this omission may be because this type of criteria relating to independence of the auditor is already mentioned in Article 53 of the Draft Fifth Directive and in Articles 203 (a) and 203 (b) of the Draft Statute for European Companies. In the Committee’s view it would seem more appropriate, however, that provisions dealing with the independence of auditors should be included in the Eighth Directive rather than be scattered throughout various Community provisions dealing with company law.
Training and Examination
18. The Draft Directive provides for a course of advanced training, entry to which requires the attainment of university entrance level, and for an examination at graduate or an equivalent level in specified subjects with an emphasis on practical as well as theoretical knowledge. The Joint Committee is advised that at present in Ireland educational requirements for entry as an accountancy student are at about university entrance level. It understands, moreover, that while it is not the practice to designate any tests in accountancy examinations as tests of practical knowledge, the written tests in such subjects as Taxation, Auditing and Accounting have a large element of practical day to day, problems. Consequently, the Joint Committee believes that the Irish system of training accountants can accommodate the requirements of the Directive though some modifications in the prescribed subjects may be desirable.
19. It has been represented to the Joint Committee that some difficulty may arise in Ireland by reason of the fact that the Directive specifies that the practical training of students should involve “principally the statutory audit of the annual accounts of companies”. Students serving articles with small firms may be involved mainly in accountancy work generally and possibly in the audit of sole traderships and other firms which are not companies. There is a possibility that this experience would not be sufficient to meet the requirements of the Directive. While it has sympathy with small firms which may experience difficulty in meeting the proposed requirements, the Committee feels that the overriding consideration must be the public interest and it considers that this requires that student training should embrace all aspects of accountancy.
20. The Directive would give Member States the option of permitting persons with considerable practical experience in “finance, law and accountancy” to sit the examination of professional competence even if they have not attained the level of study required by Article 4. The Joint Committee understands that the rules of the Institute of Chartered Accountants in Ireland, while they do not specifically contain a provision of this sort, are sufficiently flexible to permit it. The Institute of Certified Public Accountants in Ireland permits persons who have not attained the level of education necessary for entry as a student to study for the examination of the Institute if they are not less than 25 years old and have not less than 7 years experience in work of an accountancy nature acceptable to the Council.
21. The Joint Committee considers that the provisions protecting those already qualified or at present studying to be accountants are reasonable.
22. For the considerable assistance it received in considering this proposal the Joint Committee wishes to acknowledge its indebtedness and to express its gratitude to the Institute of Certified Public Accountants in Ireland and the Consultative Committee of Accountancy Bodies—Ireland, on which the Institute of Chartered Accountants in Ireland, the Association of Certified Accountants and the Institute of Cost and Management Accountants are represented.
(Signed) MARK CLINTON,
Chairman of the Joint Committee.
6th December, 1978.