IAFA/ACCA Seminar

University College Dublin

22 November 2003

Initial Experiences in Company Law Investigations and EnforcementPaul Appleby Director of Corporate Enforcement

Outline of PresentationBrief Introduction to the ODCEReporting Obligations of Auditors Public Complaints and Other Information SourcesReporting Obligations of LiquidatorsApproaches Taken to InvestigationsQuality of Financial ReportingConcluding Comment

Introduction (1)What is the Office of the Director of Corporate Enforcement?Remit is focused on the Companies Acts 1963-2001Multi-disciplinary agency comprising 35-40 administrative, legal, accounting and Garda staffBudget of 3.8 million in 2003

Introduction (2)The ODCEs GoalsEncourage Compliance with Company LawUncover Suspected BreachesProsecute Detected BreachesSanction Improper Conduct in Insolvent CompaniesDeliver 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)Start Date of Obligation was 28 November 2001Scope covers about 128 indictable offencesODCE Consultation Paper issued in February 2002First Auditor Reports received in March 2002Joint Guidance published in July 2002 by ODCE, CCAB-I and APBCopy available at www.odce.ie/publications

Auditors Reporting Obligations (3)Reports: 400 in 2002; 1,357 in 2003 so farIssues:79% relate to Filing/Directors Residence14% are about Directors Loans5% deal with Failing to hold EGMs2% relate to Inadequate Books

Auditors Reporting Obligations (4)Features of Reporting to dateOnly 9 of 128 possible offences reported to dateMost reports relate to matters disclosable elsewhereFiling Defaults/Directors Residence (on the CROs record) Directors Loans (in Notes to Financial Statements)Failure to hold EGM (Obligation to do so stated in Auditors Report)Failure to keep proper books (in Auditors Report)

Auditors Reporting Obligations (5)Performances/Interpretations by AuditorsReporting improvement after ODCE contactsDifferences in approach on non-filing offences, e.g., wilful knowledge offencesOne firms reports account for >80% of all reports of one offence Quality of information supplied is variable

Auditors Reporting Obligations (6)Overall ViewsGood Awareness by Auditors of ObligationsUniform Interpretation of Obligations not yet achievedReporting of Few Offence Types is disappointingFiling Defaults should not be reported to ODCE at allCulture Change in Auditor/Client RelationsPositive Impact on Auditor IndependencePositive Impact in reinforcing Compliance Message

Public and Other Complaints (1)Public ComplaintsReports: 200 in 2002; 270 so far in 2003Issues: 35% disclose no Company Law Issues 21% relate to Civil Matters/Debt Issues15% are filing defaults29% cover a range of issues (e.g., AGMs)Actions:Many closed, others being assessed

Public and Other Complaints (2)Matters of Public RecordTribunal of Inquiry/Inspector ReportsMedia DisclosuresCRO DatabaseInter-Agency Co-operation Garda SiochanaMOUs planned with Revenue, IFSRA, etc.

Public and Other Complaints (3)Overall ViewsMany Public Complaints are resource-intensiveRelevant Complaints disclose real concernsInformation-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 companys 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 Commencement1 June 2002: insolvent companies to which a liquidator was newly appointed or was appointed on or after 1 July 20011 June 2003: insolvent companies to which a liquidator was appointed on or after 1 January 2000

Liquidators Reporting Obligations (4)Volumes 20022003 so farLiquidator Reports 300 430 Cases Determined 4 533Full Relief 4 285 (53%)Partial Relief - 24 (4.5%)Relief at this time - 31 (5.8%)No Relief - 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 companys survivalFailure to keep proper books of accountExcessive directors loansAbout 50 of these also suggested serious misconduct, e.g:Fraudulent trading/fraudulent preferenceRemoval of property, etc.

Liquidators Reporting Obligations (6)Initial Impact of RegimeSeveral hundred directors are currently facing restriction proceedings by the liquidatorUp to 30% are acquiescing in the restrictionA majority of those who defend the proceedings are convincing the Court that they should not be restricted

Liquidators Reporting Obligations (7)Overall ViewsDifferent Character to Liquidators Reports/Few S.299 ReportsCreditors report success directors investing funds to avoid the restriction processSome evidence also of directors seeking to evade accountability ODCE countering this trend with planned actions against the directors of unliquidated insolvent and struck-off companiesHigh Court decisions laying more emphasis on dishonesty than irresponsibility of directors conduct

Investigation Approaches (1)Approaches to InvestigationCorrespondence/DiscussionsSeeking Original DocumentsTaking of StatementsNon-Legal Outcomes to InvestigationsFile ClosureReferral to Other AuthoritiesWarning Letter

Investigation Approaches (2)Warning Letters re Failure to Hold EGMs700 will issue next week to the directors, auditors and company secretaries of 95 companiesVariable Approach planned on Directors LoansLast main area for concerted attention Some Individual Issues absorb Time/Resources

Investigation Approaches (3)Legal Powers Used20022003 so farSearch Warrants 5 10Bankers Books 7 13 Arrests - 7Detentions - 4

Investigation Approaches (4)Civil Enforcement20022003 so farCompliance Orders -10Disqualifications - 1Property Seizures - 1Seeking Information 2 -Judicial Review 1 1

Investigation Approaches (5)Criminal Enforcement 20022003 so farConvictions: 20 40+ Offences: Failing to Keep Proper BooksFalsification of DocumentsUndischarged BankruptsDirectors LoansUnqualified Auditor

Investigation Approaches (6)Pipeline Cases (by type)Directors LoansInadequate BooksFalsification of DocumentsDisqualified Auditors

Undischarged BankruptsRestricted DirectorsTrading while DissolvedExternal Companies

Quality of Financial Reporting (1)ODCE Role We enforce the obligations in company law Overall legal standard is a true and fair viewWe depend on company auditors to identify breachesWe rely on auditors to help prosecute those breachesWe 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 arentBasis of Opinionthe evidence available to us was limited because the companys 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.OpinionIn 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 Companys 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 wasnt 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 ReportsCases where the failure to ascertain the companys 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 IssueCase 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 ViewsAudit is a valuable discipline and assuranceSatisfied as to the integrity of most accounts/auditsOur work has identified some lapsesMany examples given now subject to investigationHave/Will relay issues to accountancy bodiesAny audit exemption change should be measuredODCE/IAASA co-operation desirable in the future

Concluding Comment (1)Active Compliance Agenda/Enhanced ProfileConcluded about 75% of Reports/ComplaintsAbout 100 ODCE Cases heading for Court New Insolvency Regime successfully launchedPositive Feedback on Customer Services

Concluding Comment (2)Further information on the ODCE and its work is available from www.odce.ie

Thank You