Comment: There are growing concerns that the provisions of Section 45 of the Companies (Auditing and Accounting) Act 2003 "Directors' compliance statement and related statements" will have a serious impact on the attractiveness of the Republic as a location for inward investment, writes PJ Henehan

There is also anxiety about the additional burden of responsibility placed on non-executive directors by this legislation.

Section 45 requires the directors of certain companies to make a "compliance statement" with their annual report.

This compliance statement should confirm that the directors have internal control and other procedures in place to ensure compliance with the company's relevant obligations.

These relevant obligations include, explicitly, all company law and all tax law, and also "any other enactments that provide a legal framework within which the company operates and that may materially affect the company's financial statements".

This final catch-all will bring within the ambit of the action employment law, equality law, health and safety legislation, data protection, competition law and so on.

The foregoing list does not include the onerous legal requirements that affect particular industries, for example food or financial services, both of which are highly regulated.

Section 45 of the Act applies to all Irish public limited companies (plcs), whether listed or not, or any limited company with a turnover exceeding €15.3 million or a balance sheet greater than €7.6 million.

About 7,000 companies in all will be within the ambit of the legislation, according to the Office of the Director of Corporate Enforcement.

The size of the task needs to be put in context to explain the enormity of the burden being placed on companies and directors.

In this regard, the tax legislation alone that affects companies runs to more than 5,000 closely typed pages of text.

While there is a cost of scandal, there is also a cost of compliance. In this regard, Section 45 goes beyond what is required of companies in other jurisdictions, particularly the US.

One of the main success factors of the Irish economy has been our ability to attract a large number of foreign-owned companies to locate here. A disproportionate number of companies affected by Section 45 are likely to be foreign-owned.

Experience has shown that these are usually the companies that are most keen to be fully compliant.

The 2003 Act will impose a burden on them that will include substantial costs at a time when the cost of doing business in the Republic is already under scrutiny.

In the opinion of a senior executive in an Irish subsidiary of a large US company that carries on a wide range of sophisticated activities employing hundreds of people in the Republic, this section "at the stroke of a pen makes Ireland uncompetitive".

Competitiveness can be measured in a number of ways, not least of which is "perception". We all know that it does not take much to change people's perceptions.

The perception is that things have gone too far in the US. What is of concern is that the market perceives that Ireland has gone further than even the US.

A full comparison between Section 45, the Turnbull approach in the UK, and the US Sarbanes Oxley Act is not required to spot the significant differences. In this regard:

Sarbanes Oxley/Turnbull rules are confined to listed companies only;

Sarbanes Oxley is focused on internal controls and not compliance with laws and regulations;

The level of materiality is much lower under Section 45, with companies having to prepare lists of all relevant compliance obligations;

Sarbanes Oxley/Turnbull are designed to result in greater investor protection.

It is clear from the foregoing that we have gone beyond the requirements in force in larger countries. This makes us uncompetitive.

To make matters worse, similar size jurisdictions such as Luxembourg have not felt the need to follow our lead and this makes us uncompetitive in respect of them.

Both IBEC and the American Chamber of Commerce in Ireland have recently identified the regulatory burden on business as being a key competitiveness concern of their members.

Furthermore, the much greater time commitment and responsibility required of non-executive directors (the Act makes no distinction between executive and non-executive directors) is likely to make them choosier and more expensive in respect of any directorships they take on.

This would be unfortunate, because great reliance on non-executive directors is an important element of every new corporate governance framework.

In addition to this, because all foreign directors of Irish-affected companies are also in the firing line, it can therefore be assumed that Section 45 will be a significant talking point around boardroom tables the world over.

The cost of compliance with the legislation is conservatively estimated to be in the hundreds of millions of euro.

Based on some estimates, it could be as high as being equivalent to an increase in the corporation tax rate from 12.5 per cent to 13.5 per cent or even higher, or higher still for the 5 per cent of Irish companies affected (based on the total estimated corporation tax for 2005 of €5.7 billion).

It is respectfully submitted that the scope and cost of compliance is over-burdensome and that the legislation should only target plcs headquartered in the Republic that are listed on a stock exchange.

Such a change would be widely welcomed and should have a positive influence on the competitiveness ranking of the Republic as a location for foreign investment.

PJ Henehan is a senior tax partner with Ernst & Young. The opinions expressed in this article are the writer's own.