Business Opinion: The Republic is now in the unique position of having a law on its statute books whereby members of the much admired profession of auditor are required to commit hari kiri (in the business sense) whenever they encounter possible wrong-doing on the part of their paymasters.
Whenever auditors discover suspected failings by their client companies which could entail an indictable offence under company law, they are obliged to inform Paul Appleby, the Director of Corporate Enforcement, so he, then, can investigate. Its not the kind of development you would expect would improve the relationship between an auditor, or an audit firm, and his or its client. It could, you could even imagine, lead to a less than amicable parting of the ways.
A consultative process involving the profession and Mr Appleby's office has now ended and has produced what his office calls a Decision Notice on the legislation, parsing its various clauses in an exercise which, on a good day, might give a Jesuit a headache. The law seems clear but the difficult part is when exactly it kicks in.
Section 74 of the Company Law Enforcement Act 2001 requires an auditor to file a report if, in the course of his or her work, he or she comes across information which leads to the formation of the view that "there are reasonable grounds for believing that the company or an officer or agent of it has committed an indictable offence".
The hurdle is a reasonable high one in that it must be a view that an offence has been committed, as against might have been. Once such a view is formed, there is no scope for common sense appraisals of the situation. If the accounts are filed to the Companies Office 24 hours late as a result of an oversight, then a report has to go to Mr Appleby. The bureaucrats are inside the gates.
Auditors can no doubt explain to their clients that the law is the law and that it is not their fault that a report has to be sent off, but senior executives or directors in such situations would be less than human if they didn't experience a subtle change in their feelings towards auditors in general. The more serious the infringement which has to be reported, presumably, the larger will be the irritation or anger which will be felt. A change in the nature of the relationship between auditors and client companies is now underway.
The area the Jesuits might enjoy is where accountants come across information when conducting non-audit work for a firm and are then, subsequently, appointed to do audit work. The view which has emerged from the consultations between the profession and Mr Appleby's office seems to be that a person can't unknow something. The appointment to conduct audit work, therefore, kick starts the accountant's policing function and the information previously gleaned about the company must be considered. So a report must wing its way to Mr Appleby.
Because of this, executives and directors of companies small or large who are worried there could be something not quite perfect about their companies' affairs, might feel inclined to employ auditing services from one firm and other services from another. (This could in time become mandatory anyway.)
For larger accountancy firms, it is now obligatory that auditing partners are informed if their firm has provided other services to their client. If the firm has, then the partner who undertook that work might have information relevent to the audit and inquiries must be made. However, the partner being asked the question is placed under no new obligations as a result of section 74. The professional ethical rules which always applied will continue to apply to persons in such a position.
This divergence in the level of onus between two partners from the same firm could make for an interesting sub-plot to a scenario where a problem with a major client's accounts was in the process of being discovered. Hollywood scriptwriters please note.
Auditors are protected by the new legislation from liability in carrying out their new legal duty to report suspected offences. However, the same does not apply to the companies which employ them.
Given the penalties which can apply to auditors who ignore their new responsibilities, it is likely that some will find themselves spending time making inquiries into particular aspects of a company's affairs to see whether a report needs be filed to Mr Appleby or not. These hours will then be charged to the client company. The same applies if the auditor decides it is best if he or she takes legal advice. As the matters at issue are likely to be complicated ones, the professional costs are likely to be impressive. Again you could understand the client being irked.
Some sociologists say backward societies don't so much catch up on more developed ones as leapfrog them. Certainly the Republic's corporate scene has changed very quickly from being one which was all but unregulated to one which is subjected to a level of scrutiny that exceeds that of many other Western jurisdictions. Whether all this scrutiny will lead to the disclosure of more corporate malfeasance is another question however.
Auditors have always been under an ethical obligation to report serious cases of suspected malfeaseance discovered in the course of their work. The record shows that the vast majority of auditors go through their working lives without ever stumbling across such matters. If auditors have been complying with their professional ethical rules, then the new law may in time be seen to be redundant. Time will tell.
