New Directors' Compliance Statement - is your company ready?

New Directors' Compliance Statement - are you ready?

Companies Act 2014 imposed a new requirement on directors to include a Directors’ Compliance Statement in the annual directors’ report

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The New Directors’ Compliance Statement – are you ready?

Under Companies Act 2014, directors are required to include a Directors' Compliance Statement (the Statement) in the annual directors' report. It is hoped that this will encourage a culture of compliance in Irish companies that applies from the top down. No new tax or legal obligations are imposed on companies as a result of the introduction of the Statement. Rather, directors will be required to formally acknowledge their responsibilities for ensuring that companies comply with certain tax and company law obligations. This is intended to lead to greater engagement by directors with existing compliance processes.

The introduction of the Statement is aligned with the global focus on corporate governance and risk management generally, and on tax and legal governance in particular. For example, tax authorities are increasingly enquiring into tax governance and the underlying processes and controls within an organisation, rather than focusing solely on the tax returns as the output of these processes. In this international context, the Statement should enhance the reputation of Irish companies for employing high corporate governance standards.

Affected companies

This new requirement applies to all Irish plcs (except Part 24 Investment Companies) and other limited liability companies with a balance sheet total exceeding 12.5 million and an annual turnover exceeding 25 million. The obligations do not apply to unlimited companies or companies formed under foreign law.

It also applies for accounting periods commencing on or after 1 June 2015. Many companies with a December year-end have recently come through their 2015 audit and are now turning their focus to this new requirement, which will apply to the for the first time in respect of the year ending 31 December 2016.

The content

The statement itself is a simple paragraph to be included in the directors report in which the directors:

  • Acknowledge their responsibility for securing the companys compliance with certain relevant obligations; and
  • Confirm that certain assurance measures (actions) have been carried out or if they have not, explain why not.

Relevant obligations

Relevant obligations include all obligations under Irish tax law (all tax heads) and certain obligations under Companies Act 2014, a breach of which could give ride to serious criminal sanctions.

Compliance with Irish tax law is clearly broad in its scope. Companies will need to consider this in the context of their own facts and circumstances, as not all tax obligations will be relevant to every company. In our experience, companies are reviewing their position on a tax head by tax head basis rather than trying to make a list of all relevant obligations. In essence, the focus is on end-to-end tax compliance processes rather than on a check-the-box exercise. The relevant legal obligations are those under Companies Act 2014 that could give rise to serious criminal sanctions. The broad categories include:

  • Requirements in relation to accounting records, audits, and financial statements;
  • Certain offences in relation to the operation of a companys business and transactional issues;
  • Offences when being wound up;
  • Offences involving matters dealing with the Office of the Director of Corporate Enforcement; and
  • Serious market abuse, prospectus and transparency offences.

Directors' actions

In relation to the Irish tax and company law obligations that are within the scope, the directors must confirm that:

  • The company has a compliance policy statement;
  • Arrangements and structures (processes) have been put in place to secure material compliance; and
  • An annual review of the compliance processes had been carried out during the year.

Both the compliance policy and the compliance processes should be, in the opinion of the directors, appropriate to the company. Companies Act 2014 does not absolutely require that these three actions be taken, as it provides that the directors can instead explain why the actions have not been undertaken. That said, failure to confirm that the actions have been undertaken may be difficult to explain in practice.

The consequences of failure to comply

A failure to include the statement of responsibility or a statement that assurance measures have been undertaken (or explained if not) in the directors' report carries a maximum personal fine for each of the directors of 5000 and/or a maximum prison sentence of six months (summary conviction only).

Material compliance

Arrangements and structures will be regarded as being designed to secure material compliance if they provide reasonable assurance of compliance in all material respects. There is no further definition or elaboration of this term in Companies Act 2014.

Clearly, the requirement cannot impose a higher standard of compliance than that already required under relevant tax and company law. Directors must therefore apply their judgement based on the circumstances of their company.

Assurance from employees and services providers

Companies Act 2014 provides that the compliance processes may include reliance on the advice of employees and service providers with the requisite knowledge and experience. However, the assurance that employees and service providers may be willing or able to provide to the board may depend on the depth of their involvement with those processes.

What next for affected companies

Companies will of course have existing corporate governance arrangements in place to secure compliance with applicable laws and regulations, not just those defines as relevant obligations. In many cases, little additional work may be required. In all cases, however directors, should consider the comfort they will need to obtain in order to sign off on the Statement and the extent to which their considerations should be documented.

A suggested approach for directors

Companies should begin by identifying those Irish tax law and company law obligations that are in scope. They should then review their existing compliance processes and procedures in this regard. These may currently be undocumented, and the legislation itself does not impose a requirement that the arrangements and structures be documented.

However, if they are undocumented the company should consider whether documentation should be put in place (by way of flowcharting the processes, for example). This would facilitate the annual review process and may also help to identify improvements and efficiencies that were not previously apparent.

Where satisfactory documented arrangements and structures are already in place, it may be worthwhile to conduct a gap analysis to test for and identify any control weaknesses. This may involve conducting a walk-through test or testing the output of the processes (data analytics or internal audit reviews, for example). The annual review process will also need to be planned and resourced.

The design and content of board reports should also be given some thought, in terms of how to summarise the arrangements and the output of the annual review in an easily digestible format. Best practice would involve periodic reports to the board on the design and effectiveness of the compliance processes. These reports would outline identified gaps, if any, and the planned remedial actions for them. Consideration by the board of these reports and any follow-up requests for further information or actions should be documented.

Conclusion

Many companies are grappling with how to respond to this new requirement which has been imposed on directors. The response required by directors will vary and will depend on factors such as the nature, scale and the complexity of the companys business and the tax and legal framework within which it operates. While the requirements under this new obligation may require some time and attention, particularly for the first accounting period for which it applies, the benefits of having greater board engagement in this area should strengthen tax and legal governance and further improve the culture of compliance in any company.

What to ask...

When reviewing the existing compliance governance and control framework, there are specific questions the board might ask:

  • Is there a documented tax strategy?
  • Is there a documented legal strategy?
  • Is there a tax and legal compliance policy in place?
  • Who is part of the tax and legal team, and what is their experience and qualifications?
  • Is there a documented organisation chart outlining clear roles and responsibilities?
  • Is there a list of the key tax risks for each relevant tax head on a risk register?
  • What tax risk control procedures are there and to what extent are these documented? Are they operating effectively? 
  • How familiar are the directors with the specified company law obligations under Companies Act 2014 and what controls are in place to manage compliance with those obligations? Are those controls operating effectively?
  • How are tax and legal processes and controls monitored throughout the year?

 

Laura Heuston FCA is Director of Taxation at KPMG

John Curry is Director of the Tax Process & Technology Service at KPMG

John OShea is Director of Legal Services at KPMG

This article originally appeared in the August 2016 edition of Accountancy Ireland and is reproduced here with their kind permission.

 

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