Seán Fleming (Laois-Offaly, Fianna Fail)

I welcome the opportunity to speak on Second Stage of the Investment Funds, Companies and Miscellaneous Provisions Bill 2006, which deals with three or four broad issues. It amends the parts of the Companies Acts dealing with audit and dematerialisation. It imposes transparency requirements on the issuers of securities which are admitted to trading on certain markets. The miscellaneous provisions section of the Bill ties up a series of loose ends. That summarises the key issues dealt with in the Bill.

Many of the provisions of Part 3 relate to EU regulations. They have been included on foot of the requirement to transpose various EU directives into national law. I want to make a general comment about EU directives. The EU has to be careful. Ireland, as part of the EU, has to be careful. We are making a relentless effort to ensure there is a level playing field within the EU. As our focus is often on the internal EU market, we sometimes ignores the overall global market. While EU member states are important, they do not constitute the majority player on the world market. We need to bear in mind that there are other major players. We need to resist the efforts being made to bring each member state to the level of the lowest member state. Such efforts are being made by interests which do not have due regard to the outside world.

I would like to strengthen the point I am making by highlighting two cases I have observed over the last year. While there was some logic to the arguments which were made in both instances, the logic behind the final decisions was flawed. Some time ago, Ireland submitted a proposal to the EU to be allowed to provide further grants and forms of support to Intel, one of the biggest employers in the country. The EU rejected that proposal to a large extent on the basis that grants of a similar nature were not available in other member states. It was argued that if Ireland were to be allowed to make such supports available, competition within the Union would be distorted. By closing their minds in that way, those who made the final decision failed to appreciate that Ireland, as an open economy, and Intel, as a world player, were operating in the global marketplace.

The real problem with the decision to refuse Ireland permission to offer grants to Intel, which operates in Ireland, was that it will ultimately work to the advantage of companies outside the EU. The supports in question would have benefitted the Irish economy, Intel and the world economy. The failure to allow Ireland to make the supports available will help companies in places like the Far East, the Middle East and South America to make progress, with the assistance of state support from the governments in such areas. Ultimately, companies which are operating in the EU will be disadvantaged.

I would like to highlight another contentious case, which caused many people to jump up and down some years ago. I refer to Ireland's decision to offer tax concessions to the horse breeding industry. Attempts were made by some people to regularise the system by removing some of the concessions on the basis that such reliefs were not available to a similar extent under the taxation laws of other EU countries. The approach taken by the EU seems to be that if any member state has an advantage over other member states, the first thing that should be done is to eliminate that advantage. If we do that, however, we neglect the overall global picture. Ireland, which is one of the major players in the international horse breeding industry, is competing with the United States and Australia. If the EU puts Ireland at a disadvantage in that sector by forcing it to operate at the lower level of other member states, it disadvantages the entire EU within the global horse breeding market.

If we disadvantage individual countries or companies within the EU, we will ultimately confer benefits on the EU's competitors in other parts of the world. We must be careful of that. We are in a global economy and one can overstate the issue of fortress Europe. We deal not only with Berlin, but with Boston and many other places worldwide. We are in competition with many cities, not only those in the EU. As an open economy, Ireland has more to gain and lose by following the road of rules harmonisation within the EU without taking due cognisance of what is going on outside the EU.

I wish to address the issue of auditing, which is dealt with in section 6. It amends section 32 of the Companies (Amendment) (No. 2) Act 1999 by increasing the audit exemption threshold for turnover and balance sheet totals up to the maximum levels permitted in the EU. This will bring the new thresholds to €7.3 million for turnover and €3.65 million for the balance sheet. I understand this will come into effect in a few months time. The Minister will see if this is possible for financial years commencing on 1 January and will return to the issue on Committee Stage.

The essence of this is that we are exempting companies with a turnover below €7.3 million from the requirement of a statutory audit. The logic is that they are relatively small enterprises, especially in the retail sector where there may be high purchases and sales with a limited profit margin, the effect being low profits despite high turnover.

The issue of exemptions from audit for companies in the voluntary sector is one I would like to see included in this legislation and I believe this can be done if there is political willingness and willingness in the Department. I wish to refer to a letter I received from the office of the Minister for Enterprise, Trade and Employment on 31 December 2004. I wrote to the Minister regarding a small rural development company in Laois called the Sliabh Margy Development Association. I also spoke directly to the Minister in connection with the Mountrath amalgamated social employment scheme, of which I am a sponsoring member.

I have met the people involved in these organisations and I feel that this relates directly to the Department of Enterprise, Trade and Employment. I will deal with FÁS schemes first. There is a requirement, laid down by FÁS, that every FÁS scheme conduct an audit of its affairs. Many schemes have a turnover of around €300,000 and 90% of this consists of wages. Previously, this may have been unemployment assistance, disability allowance, lone parents' allowance and so on when those on the FÁS scheme were claiming social welfare. When people join a FÁS scheme they are paid through that scheme. Some 90% of money in most FÁS schemes covers wages and the balance covers insurance, materials and other overheads.

Under FÁS rules, schemes must be audited each year which I understand and accept as it is taxpayers' money. However, the Department of Enterprise, Trade and Employment requires that such schemes be managed by a limited company and the limited company is subject to a separate, independent audit, despite the fact that it is only a shelf company. There are no exemptions to this and the full cost must be borne. This is where complications arise.

It is ridiculous that a company with a turnover of €7.3 million will not require a statutory audit while a local FÁS scheme, with a turnover of €300,000, is required to have two statutory audits with two audit fees. We are trying to eliminate bureaucracy and are doing so for profit making companies, but are ignoring the non-profit sector and the community and voluntary sector.

Department staff suggested to me that this could be remedied if the company and the scheme had the same year-end, creating, effectively, one audit process. There would be a need for two certificates and perhaps a nominal fee. However, this is not realistic. When a new company is formed as part of a FÁS scheme, they may have the same year-end for the first year. The FÁS scheme may not run for a couple of months, however, and it might not resume until the following April. The FÁS scheme will then require an audit from April to March while the company, a separate legal entity, will adhere to the calendar year for the Companies Registration Office. It is neither possible nor practical in many situations for the two entities to have the same year-end. There is a legal requirement for two audits.

I will refer now to the letter I received from the Minister's office on 31 December 2004. I am pleased to have the opportunity to raise it here, even at this late stage. The letter stated:

The law providing for exemptions from the requirement for a company to engage auditors is contained in section 32 of the Companies (Amendment) (No. 2) Act 1999. One of the criteria that must be satisfied in order for a company to qualify for an audit exemption under the section is that a company to which the Companies (Amendment) Act 1986 applies. The Act does not apply to a variety of classes of company, including companies that are not trading for the acquisition of gain.

In other words, the exemption does not apply to non-profit organisations, but does apply to profit seeking organisations. This is daft. I would understand this if it was the other way round. The letter continues: "Audit exemptions are, therefore, never available to non-profit companies, irrespective of their level of turnover." I will come back to this in a moment. The letter further states that the Company Law Review Group is the standing body charged with reviewing these matters. I was invited to make a submission to the group, which I did in 2005, and I have not heard anything since.

The last paragraph of the letter states:

Any possible reforms of the audit exemptions would have to address the requirements of a wide range of non-profit companies that the law covers, such as community title management companies, management companies in housing estates, charities, sporting associations, development associations, etc. They would also have to appropriately balance any possible benefit from a reduction in compliance costs against the importance of ensuring accountability, especially where there are public funds involved.

As I mentioned, I am involved in the Sliabh Margy Development Association. The association sought to draw a £5,000 grant, through Leader, to conduct walks in the rural area. It was obliged, under the rules, to do this through a company. The association set up a company to carry out two transactions — one to cash a cheque and one to pay the people who put up the signs. The company then had to carry out a statutory legal audit. This is farcical — something confirmed by the letter from the Minister's office. We should treat the non-profit and voluntary sector more fairly.

That company, which existed solely to cash one cheque, also ran foul of the Companies Registration Office because, understandably, it was late with its annual return. I contacted the Companies Registration Office and received a small concession, but none was received from the Minister's office relating to the audit.

The Companies Registration Office wrote to me on 24 November 2004. It stated that it is required that the non-profit status of a company must be included in the memorandum and articles of association. It must be confirmed in the articles of association that no dividends will be paid and that, on winding up, all of the assets, which would otherwise be available to members, must be transferred to another company with similar restrictions. The outcome was that the company in question changed its memorandum and articles of association as a result of this suggestion and was allowed a waiver or refund of fees from the Companies Registration Office. I thank the Companies Registration Office for its help.

A standard planning condition now applied by many local authorities for new estates or apartment developments is that the open area be managed by a management company. I will give a practical example. Imagine a new estate consisting of 100 houses where the planning requirement is that the management company cut the grass and manage the open area. If the company charged each house €100 per annum for cutting the grass, there would be a turnover of €10,000 per annum. I envisage that more money will have to be spent on the audit fee than on cutting the grass. This is the thrust of the provision and it is a case of excessive bureaucracy.

I want to highlight this matter in the House and I have done so previously in correspondence. Section 6, in essence, is a pragmatic measure to help the profitable trading and business sector but in making this measure we are placing the non-profit and voluntary sector at a further disadvantage. The latter sector can include sports clubs, including GAA clubs, and also charities and many other associations. I want to see the flexibility afforded to the profit-making sector extended to the non-profit-making sector.

Will the Minister make available the information he received from the Company Law Review Group, which information he mentioned to me almost two years ago? How many companies are involved? I suspect many organisations are being caught by the auditing provision and at every annual general meeting attendees mutter and grumble that they must pay €1,500 for auditing. My local FÁS scheme must pay for it twice to satisfy the requirements. It has a turnover of €300,000, 90% of which is expended on wages. A few bob is spent on materials and the greatest remaining expense is the double audit fee. I ask that common sense prevail sooner rather than later.

On the increase in exemptions concerning the audit fees, will it be standard practice for the Revenue Commissioners to accept non-audited accounts from now on? Sometimes a company with a turnover of €7.3 million can have a very small gross margin whereas a company in the production sector can have a very high gross margin of a couple of million euro. Will the Minister of State confirm the rights of minority shareholders who might feel disadvantaged if they do not get audited accounts through the major shareholder?

Section 7 deals with mandatory dematerialisation, which effectively means that share certificates will be stored electronically rather than on paper. This is a fact of life in this day and age and it will facilitate and make easier trading by investors. It will enhance Ireland's international competitiveness in securities trading and will reduce the current costs associated with the cumbersome process of managing paper-based transactions. Dematerialisation has already taken place in countries such as France, Denmark, Sweden, Italy, India, Australia and New Zealand and I understand it is being considered in the United Kingdom, Belgium, the Netherlands, Spain and the United States. Section 7 is therefore very worthwhile.

Section 12 deals with the Financial Regulator. It states the Financial Regulator is the appropriate body in this area and that it may be free to introduce supplementary rules to enable it to fulfil its role. The Minister of State said in his speech that €80 billion of asset-backed securities investments are managed by Dublin-based investors. Will he tell us how much of this money is regulated by the Irish regulator? Companies must be registered in Ireland before they can be regulated here.

The question of the Central Bank arises under section 13. Consider the confidentiality provisions concerning information available to the Central Bank and Financial Regulator. The element of secrecy has been sacrosanct and intrinsic to the types of industries concerned worldwide but there are issues to be addressed in this regard, although not in this legislation. If the Central Bank identifies criminal fraud on foot of its knowledge of a company, it cannot notify the Garda Síochána, Revenue Commissioners or Director of Corporate Enforcement. I believe, however, that it can force the company in question to publish a relevant statement in its annual directors' report – this is one of the few requirements. It can notify the Financial Regulator that an issue has arisen but it cannot provide any details thereon.

The Garda, Director of Corporate Enforcement, Financial Regulator and Revenue Commissioners may all be investigating a major company, and may sometimes have representatives carrying out an investigation in the same company office, yet they are legally prevented from sharing information they have obtained on matters of public interest. There should be some mechanism whereby information relevant to another State organisation can be made available to that organisation while respecting the principle of confidentiality. It is not good enough that there is a provision for total secrecy in such circumstances.

Section 18 allows for the appointment of a person to perform the functions of the Director of Consumer Affairs. This is only a temporary measure but it is essential that it be included in the legislation to enable a person to continue to carry out that role until such time as the National Consumer Agency is placed on a statutory footing and in a position to make such an appointment.

I ask for a reassessment of the legislation in the Department to allow flexibility for the voluntary and community sectors, which are forced to carry out audits. Commercial organisations, which operate on a much bigger scale, will be exempt from the requirement to produce such audits.

See this speech in context