Question
One of our clients – a large construction company – has not formed an Audit committee for many years and the same is highlighted to them in the management letter. In the directors Report, their contention is that the Audit committee is under consideration but that has been the case for quite a few years with no conclusive result.
Our query as auditors of the company is
– What are the implications on the Audit report if there is no audit committee in place?
– Are there any repercussions which we must make the client aware of in absence of Audit committee?
– What would be the situations in which it would be permissible to not establish an audit committee, and if there are any disclosure requirements?
Answer
Section 167 requires that once the limits of turnover (€50m) and balance sheet total (€25m) have been breached, either
– an audit committee is set up that meets the requirements of section 167, or
– such a committee is not established, with the reasons disclosed in the directors report
In this situation such a committee has not been set up so the company is in the position that it must state the reasons for this in the directors report. In response to your questions;
– What are the implications on the Audit report if there is no audit committee in place.
The company is not in breach of company law. However it must state the reasons as to why they have not set up such a committee in its directors report. In addressing this, the directors should consider how the company meets the requirements set out in S.167 of an audit committee. The purpose of a committee is the following
(a) the monitoring of the financial reporting process;
(b) the monitoring of the effectiveness of the relevant company’s systems of internal control, internal audit and risk management;
(c) the monitoring of the statutory audit of the relevant company’s statutory financial statements; and
(d) the review and monitoring of the independence of the statutory auditors and in particular the provision of additional services to the relevant company.
So if the directors believe that this is achieved in the absence of an audit committee then the directors report should state this (including how this is achieved).
As regards the impact on the audit report, the first issue to consider is whether the directors report is accurately stated. If it is incorrectly stated then you will need to consider this in line with ISA 720.
Secondly, if there is no audit committee in place this may increase the level of risk compared to the situation were a committee is in place.
– Are there any repercussions which we must make the client aware of in absence of Audit committee.
In the absence of a committee, the directors should ensure that they comply with paras (a) to (d) above.
– What would be the situations in which it would be permissible to not establish an audit committee, and if there are any disclosure requirements.
There are a few situations where this would be permissable which would include;
– Audit committee has been established at a higher level in the group
– There is no formal audit committee, however the directors ensure that the requirements of S.167(7) are achieved by other means such as Internal audit or board of management meetings.
I have included an example disclosure below of a company who has not yet established a committee which might help;
“The company, while meeting the requirements, has not established an audit committee under Section 167 Companies Act 2014. The reasons for this decision not to establish an audit committee are based on the fact that the company are either directly involved or are appropriately informed by other shareholders who are involved in the governance of the group through their directorships, executive positions and their participation and control which extends to all elements of the group’s activities. It is the opinion of the board of directors that they fulfil the responsibilities of the audit committee which include:
– the monitoring of the financial reporting process;
– the monitoring of the effectiveness of the group’s systems of internal control and risk management;
– the monitoring of the statutory audit of the group’s statutory financial statements; and
– the review of monitoring of the Independence of the statutory auditor and in particular the provision of additional services to the group.”