Transcript Document

IAFA/ACCA Seminar
University College Dublin
22 November 2003
Initial Experiences in
Company Law Investigations
and Enforcement
Paul Appleby
Director of Corporate Enforcement
Outline of Presentation
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Brief Introduction to the ODCE
Reporting Obligations of Auditors
Public Complaints and Other Information Sources
Reporting Obligations of Liquidators
Approaches Taken to Investigations
Quality of Financial Reporting
Concluding Comment
Introduction (1)
What is the Office of the Director of Corporate
Enforcement?
• Remit is focused on the Companies Acts 1963-2001
• Multi-disciplinary agency comprising 35-40
administrative, legal, accounting and Garda staff
• Budget of €3.8 million in 2003
Introduction (2)
The ODCE’s Goals
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Encourage Compliance with Company Law
Uncover Suspected Breaches
Prosecute Detected Breaches
Sanction Improper Conduct in Insolvent Companies
Deliver Quality Customer Services
Auditors’ Reporting Obligations (1)
“ Where, in the course of, and by virtue of, their carrying out an
audit of the accounts of the company, information comes into
the possession of the auditors of a company that leads them to
form the opinion that there are reasonable grounds for
believing that the company or an officer or agent of it has
committed an indictable offence under the Companies Acts,
the auditors shall, forthwith after having formed it, notify that
opinion to the Director and provide the Director with details
of the grounds on which they have formed that opinion. ”
- S.74(e), Company Law Enforcement Act 2001
Auditors’ Reporting Obligations (2)
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Start Date of Obligation was 28 November 2001
Scope covers about 128 indictable offences
ODCE Consultation Paper issued in February 2002
First Auditor Reports received in March 2002
Joint Guidance published in July 2002 by ODCE,
CCAB-I and APB
• Copy available at www.odce.ie/publications
Auditors’ Reporting Obligations (3)
Reports:
Issues:
Actions:
400 in 2002; 1,357 in 2003 so far
79% relate to Filing/Directors’ Residence
14% are about Directors’ Loans
5% deal with Failing to hold EGMs
2% relate to Inadequate Books
<0.01% concern Unqualified Auditors/
AGM Problems/Disclosure Defaults/Fraud
Filing Offences referred to the CRO
Most of the rest are under investigation
Auditors’ Reporting Obligations (4)
Features of Reporting to date
• Only 9 of 128 possible offences reported to date
• Most reports relate to matters disclosable elsewhere
– Filing Defaults/Directors’ Residence (on the CRO’s record)
– Directors’ Loans (in Notes to Financial Statements)
– Failure to hold EGM (Obligation to do so stated in
Auditor’s Report)
– Failure to keep proper books (in Auditor’s Report)
Auditors’ Reporting Obligations (5)
Performances/Interpretations by Auditors
• Reporting improvement after ODCE contacts
• Differences in approach on non-filing
offences, e.g., ‘wilful knowledge’ offences
• One firm’s reports account for >80% of all
reports of one offence
• Quality of information supplied is variable
Auditors’ Reporting Obligations (6)
Overall Views
• Good Awareness by Auditors of Obligations
• Uniform Interpretation of Obligations not yet achieved
• Reporting of Few Offence Types is disappointing
• Filing Defaults should not be reported to ODCE at all
• Culture Change in Auditor/Client Relations
• Positive Impact on Auditor Independence
• Positive Impact in reinforcing Compliance Message
Public and Other Complaints (1)
Public Complaints
Reports:
200 in 2002; 270 so far in 2003
Issues:
35% disclose no Company Law Issues
21% relate to Civil Matters/Debt Issues
15% are filing defaults
29% cover a range of issues (e.g., AGMs)
Actions:
Many closed, others being assessed
Public and Other Complaints (2)
Matters of Public Record
• Tribunal of Inquiry/Inspector Reports
• Media Disclosures
• CRO Database
Inter-Agency Co-operation
• Garda Siochana
• MOUs planned with Revenue, IFSRA, etc.
Public and Other Complaints (3)
Overall Views
• Many Public Complaints are resource-intensive
• Relevant Complaints disclose real concerns
• Information-sharing yet to be fully exploited
Liquidators’ Reporting Obligations (1)
“(1) A liquidator of an insolvent company shall, within 6 months after his
or her appointment or the commencement of this section, whichever is
the later, and at intervals as required by the Director thereafter, provide
to the Director a report in the prescribed form.
(2) A liquidator of an insolvent company shall, not earlier than 3 months
nor later than 5 months (or such later time as the court may allow and
advises the Director) after the date on which he or she has provided to
the Director a report under subsection (1), apply to the court for the
restriction under section 150 of the Act of 1990 of each of the directors
of the company, unless the Director has relieved the liquidator of the
obligation to make such an application.”
- S.56(1) and (2), Company Law Enforcement Act 2001
Liquidators’ Reporting Obligations (2)
What gives rise to restriction?
• Where the High Court is not satisfied that a director has acted honestly
and responsibly in conducting the company’s affairs.
What is the effect of restriction?
• A person may not act, directly or indirectly, as a director, etc., unless
the company is adequately capitalised. For a private company, the
minimum paid-up share capital sum is €63,487. The equivalent figure
for a public company is €317,435. Both must be fully paid for in cash.
What is the effect of disqualification?
• Disqualification involves an absolute ban for five years or more.
Liquidators’ Reporting Obligations (3)
Phased Commencement
• 1 June 2002: insolvent companies to which
a liquidator was newly appointed or was
appointed on or after 1 July 2001
• 1 June 2003: insolvent companies to which
a liquidator was appointed on or after 1
January 2000
Liquidators’ Reporting Obligations (4)
Volumes
Liquidator Reports
Cases Determined
Full Relief
Partial Relief
Relief at this time
No Relief
2002
300
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2003 so far
430
533
285 (53%)
24 (4.5%)
31 (5.8%)
187 (35%)
Liquidators’ Reporting Obligations (5)
Character of Liquidator Reports (Sample of 300)
130-150 recommended restriction. Examples:
• Continued trading, where there was no reasonable prospect
of the company’s survival
• Failure to keep proper books of account
• Excessive directors’ loans
About 50 of these also suggested serious misconduct, e.g:
• Fraudulent trading/fraudulent preference
• Removal of property, etc.
Liquidators’ Reporting Obligations (6)
Initial Impact of Regime
• Several hundred directors are currently facing
restriction proceedings by the liquidator
• Up to 30% are acquiescing in the restriction
• A majority of those who defend the proceedings
are convincing the Court that they should not be
restricted
Liquidators’ Reporting Obligations (7)
Overall Views
• Different Character to Liquidators Reports/Few S.299 Reports
• Creditors report success – directors investing funds to avoid the
restriction process
• Some evidence also of directors seeking to evade accountability
• ODCE countering this trend with planned actions against the
directors of unliquidated insolvent and ‘struck-off’ companies
• High Court decisions laying more emphasis on dishonesty than
irresponsibility of directors’ conduct
Investigation Approaches (1)
Approaches to Investigation
• Correspondence/Discussions
• Seeking Original Documents
• Taking of Statements
Non-Legal Outcomes to Investigations
• File Closure
• Referral to Other Authorities
• Warning Letter
Investigation Approaches (2)
Warning Letters re Failure to Hold EGMs
• 700 will issue next week to the directors, auditors
and company secretaries of 95 companies
Variable Approach planned on Directors’ Loans
• Last main area for concerted attention
Some Individual Issues absorb Time/Resources
Investigation Approaches (3)
Legal Powers Used 2002
Search Warrants
5
Bankers’ Books
7
Arrests
Detentions
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2003 so far
10
13
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Investigation Approaches (4)
Civil Enforcement 2002
Compliance Orders
Disqualifications
Property Seizures
Seeking Information 2
Judicial Review
1
2003 so far
10
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Investigation Approaches (5)
Criminal Enforcement
2002
2003 so far
Convictions:
20
40+
Offences: Failing to Keep Proper Books
Falsification of Documents
Undischarged Bankrupts
Directors’ Loans
Unqualified Auditor
Investigation Approaches (6)
Pipeline Cases (by type)
• Directors’ Loans
• Undischarged
Bankrupts
• Inadequate Books
• Restricted Directors
• Falsification of
Documents
• Trading while
Dissolved
• Disqualified Auditors
• External Companies
Quality of Financial Reporting (1)
ODCE Role
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We enforce the obligations in company law
Overall legal standard is a ‘true and fair view’
We depend on company auditors to identify breaches
We rely on auditors to help prosecute those breaches
We do not police compliance with accounting/auditing
standards, but we have met occasional problems
Quality of Financial Reporting (2)
Accounts that should be qualified and aren’t
“Basis of Opinion
…the evidence available to us was limited because the company’s
turnover comprises cash sales over which there was no system of
control on which we could rely for the purposes of our audit. There
were no other satisfactory audit procedures that we could adopt to
confirm cash sales were properly recorded.
Opinion
…In our opinion proper books of account have been kept by the
company…”
Quality of Financial Reporting (3)
Non-Standard Opinion
“ In our opinion the financial statements give as true and fair view of the state
of the Company’s affairs as at 31st March 2002 as was possible with the
books that we received… (There followed a statement of the problem issues
and the representations made by the directors.)
Subject to the above being accurate, we have obtained all the information
and explanations that we consider necessary for the purposes of our audit.
In our opinion, there wasn’t proper books of account kept by the Company.
However, the financial statements are in agreement with the books of
account at present within reason, there are items such as creditors and cash
that cannot be pinpointed down, as well as stock…”
Quality of Financial Reporting (4)
Inadequate Audit Reports
• Cases where the failure to ascertain the company’s title to
substantial investments attracted a qualified audit opinion
one year and no qualification the next
• Case of insolvent company with no opinion expressed on
its “going concern” prospects, notwithstanding a
substantial continuing deficit
Quality of Financial Reporting (5)
Fundamental Uncertainty/Going Concern Issue
Case where a company made a trading loss in 1999 and 2000, had
cumulative losses and where its current liabilities exceeded its current
assets in each year by over £800K and £1 million. Two months before
the company went into liquidation, the auditor reported as follows:
“…The financial statements have been prepared on a going concern basis,
the validity of which depends upon future funding being available.
The financial statements do not include any adjustments that would
result from a failure to obtain funding. Our opinion is not qualified in
this respect.”
Quality of Financial Reporting (6)
Overall Views
• Audit is a valuable discipline and assurance
• Satisfied as to the integrity of most accounts/audits
• Our work has identified some lapses
• Many examples given now subject to investigation
• Have/Will relay issues to accountancy bodies
• Any audit exemption change should be measured
• ODCE/IAASA co-operation desirable in the future
Concluding Comment (1)
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Active Compliance Agenda/Enhanced Profile
Concluded about 75% of Reports/Complaints
About 100 ODCE Cases heading for Court
New Insolvency Regime successfully launched
Positive Feedback on Customer Services
Concluding Comment (2)
Further information on the ODCE and its
work is available from www.odce.ie
Thank You