Mr. Pat Houlihan:

Yes, but of a pleasant nature. At the last meeting much of what we said was the genesis of the proposals, a depiction of the broad outline, the Council negotiations, the current state of play generally in terms of the Council and the European Parliament and providing a flavour of where they were and where they may be going, an idea of where Ireland stood in general on them but we did not get into the details of specific aspects as time did not allow. Many of the contributions made at the last meeting reflected real and genuine concern at the financial crisis, the aftermath and the extent to which audit may have been a contributory factor in that financial crisis.

In a discussion paper of 2011 the UK Financial Reporting Council, FRC, has interesting observations to make on the crisis. One of its comments is that many argued that the crisis demonstrates the need for reform, others point out that companies in the non-financial sectors came through the global recession better than expected, given its speed and depth. That introduces another perspective on the issue. One of the key questions that arose on the last occasion and probably will arise today - IAASA may have a have a useful contribution to make on it - is the expectation gap which the average person would expect an audit to do. One of our colleagues from the other side of the table provided useful and helpful clarity on the role and function of an auditor. Mr. John Moynihan, an accountant, who unfortunately cannot be present, contributed on the legal obligations of an auditor. The expectation gap is one that surfaces periodically. It is not something that happened now. It is a cyclical thing and arises in the wake of an economic crisis where people are trying to understand what happened and at the same time trying to find a scapegoat.

The recessions in the UK in the 1980s and 1990s and the dot.com bubble all ended up in surfacing the idea of what is the audit doing and why did not the auditor warn people. There were recriminations and so on. The manifestation of the expectation gap is cyclical because when things settle down and there is normality people do not wonder about what auditors do but they do when a crisis occurs. The result of these crisis points had been that the auditors have been put on the back foot from time to time and have been obliged to point out that an audit is neither a guarantee against fraud or a future business success. It is neither one thing nor the other. The recent crisis has certainly put it back centre stage and certainly the committee is interested in it and, I hope, we will have time to go into it in greater detail later. In May 2009, the UK Treasury Select Committee inquiry into the banking crisis questioned whether the audit function examines the right issues. It stated:.

The fact that some banks failed soon after receiving unqualified audits does not necessarily mean that these audits were deficient. But the fact that the audit process failed to highlight developing problems in the banking sector does cause us to question exactly how useful audit currently is. We are perturbed that the process results in 'tunnel vision', where the big picture that shareholders want to see is lost in a sea of detail and regulatory disclosures.

The nuance there is that there is much information but it must be asked if much of it crucial and germane.

The FRC document to which I referred earlier goes on to state that while we found that audit work could have been more effective if auditors had shown more scepticism. We have established no circumstances where financial statements were materially misstated, rather corporate and financial reporting was overtaken by exceptional market conditions. During the financial crisis the analyses that were considered reasonable at the time of the report and accounts were finalised became rapidly obsolete as markets deteriorated and the requirements of the listing regime that were intended to ensure that markets were kept properly informed of which development proved inadequate to address the exceptional developments that arose. Audit, by itself, according to this contention, could not have prevented the collapse of the credit markets. That could only have been achieved if action had been taken by those responsible for macro-economic affairs and prudential regulation.

Therefore, the theme pervading those observations is that audit is not the exclusive theatre of blame for the financial crisis and if repetitions are to be so guarded against, or avoided, that other elements in the overall mosaic need to be considered and thought seriously about. This is part of our of our cogitations today.

Other issues raised at the session on 16 October included the need to strengthen the audit function, the need for independence of the auditor or audit firm from the entity being audited, competition issues, whether the EU audit proposals provide for sanctions and whether it is more appropriate to address issues by means of domestic or EU legislation. These are issues we can provide answers to as we proceed. In my view the audit proposals address the issues I have listed.

To give a brief general update on the progress of the EU audit negotiations in Brussels, the debate is continuing in the European Parliament. Various political groups and committees of the European Parliament are attempting to finalise their positions and the various elements of the audit package. It is difficult to see how the Parliament can arrive at a common view on all of these matters before February, or more than likely, March.

Ireland, in its capacity as Presidency of the European Council, which is also looking at these issues in parallel has provided for a significant number of meetings to try to progress matters, the first of which will take place in the second week in January. We are serious about trying to move that agenda forward and trying to get it to some kind of completion. We are scheduled to have a general approach, which is a title for a Council agreement on this issue, at the competitiveness Council in May. We hope to reach that target and, perhaps, exceed it. Recently the European Parliament was in contact with the people from our representation and were hoping we might make such spectacular progress that we could finish our work in the Council in the first couple of months of the year and move on to the next stage of proceedings which are so-called trialogs with the Council and the European Parliament. If we got an advantageous wind behind us we must just do it but as it is an important dossier we will be striving to bring it to fruition or as far as we can possibly bring it in our six months.

A specific matter was raised by the Chairman at the last meeting. I can suspend my reading of it, if you wish, but I would be happy to read the clarification into the record that you sought at the previous meeting. It is in regard to companies which operate as charities, such as sporting organisations and so on, and the cost of having to carry out an annual audit. The Chairman requested clarification on the petition going forward in regard to charities vis-à-vis this exact audit obligation and the following is the situation.

I will read from a note prepared on it which states:

The Company Law Review Group ... 2009 Report examined this issue of extending audit exemption to companies limited by guarantee [CLGs]. It made the following recommendations:

(i) Subject in each case to consultation with the Minister for Community, Rural and Gaeltacht Affairs and the charities regulator, the audit exemption regime contained in Part III of the 1999 (No. 2) Act be extended to such class or classes of CLG which are charitable organisations (within the meaning of the Charities Act 2009) so as to bring them into alignment with charitable organisations that are not companies, provided by 10% of the members with voting rights should be able to require an audit. [That the safety mechanism built in].

(ii) The audit exemption regime contained in Part III of the 1999 (No. 2) Act be extended to all CLGs which are not charitable organisations, subject to a veto right, by any one member of the company, and further subject to the requirement that audit exemption in respect of the following year, shall be an item on the agenda of the annual general meeting.

Consideration is being given as to how these issues will be addressed in the context of the companies Bill which is in the process of publication and hopefully it will appear before the end of the year.

I would like to clarify one issue arising from what the chairperson of IAASA said which may have caused some minor confusion. To paraphrase her opening remark, she said that IAASA does not directly regulate auditors. In case an impression may have been created in some quarters that this means that IAASA is at a remove from the process of regulation, it is not. It is not directly hands on involved, but it is not at a remove from the process. The 2003 Companies (Auditing and Accounting) Act requires IAASA to supervise how the PABS, the six audit bodies and the three non-audit bodies, regulate their members. That is a key obligation IAASA has under the legislation.

Moving downwards from IAASA to the next layer, the bodies of which it supervises the regulation, those bodies supervise their members by means of by-laws, rules and regulations and under the 2003 Act all of those are required to be approved by IAASA. In a sense IAASA has, in a slightly indirect fashion, a reach down to the individual auditors being regulated by their bodies because the rules and regulations the bodies apply must be approved by IAASA. Therefore, reaching down to the individual auditors the obligation flows downwards, in a cascade effect, to them to obey those rules, regulations and requirements the bodies have and if they do not the bodies can take them to task and IAASA has powers under the Act to intervene. In case discussions may have got off on a slightly wrong footing, I thought it might be sensible to clarify the position.