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Directors Compliance Statements - Burden or opportunity?

February 2005 - Corporate & Commercial. Legal Developments by Landwell.

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The Burden

Section 45 of the Companies (Auditing and Accounting) Act 2003 (the "Act") will when it is brought into force, require the Directors of all plc's and large private companies to include two Compliance Statements in their report in the annual financial statements. In the Act large private companies are defined as being those with gross assets in excess of ?7.62 million and turnover in excess of ?15.2 million.

There are two Compliance Statements required:-

  1. A General Compliance Statement (detailing policies and procedures to ensure compliance with relevant obligations and the processes for testing and reviewing them) which must itself be reviewed every 3 years.
  2. An Annual Compliance Statement confirming the companies procedures, the effectiveness of them and that the Directors have used all reasonable endeavours to secure Compliance with relevant obligations.

The Act defines the "Relevant Obligations" company must comply with as being its obligations under:-

  1. the Companies Acts,
  2. all Tax Law; and
  3. other Laws which provide a legal framework in which a company operates and that may materially affect the company's financial statements.

While it is not certain when this section of the Act will be commenced, the Minister has indicated he would like the section to be in place in respect of accounting periods ending 1 January 2005. Meanwhile the Director of Corporate Enforcement issued, at the end of July, draft guidance notes on how the obligations on Directors might be interpreted. The consultation paper is some 50 pages long illustrating how difficult and complex this area is. It is possible that directors will be required to make compliance statements in respect of 2005 (if Section 45 was commenced in respect of financial years ending in 2005) The Compliance Statements will be in relation to a company's compliance with its relevant obligations "in the financial year" i.e. for the duration of the 2005 financial year of the company.

Companies covered by the Compliance Statement requirements in the Act will need to invest time and resources to start to address the issues raised by the Act now. Questions that should be asked now include how adequate are the company's current compliance policies and procedures? how effective are they at securing compliance? what is the Company's Compliance universe? i.e. its relevant obligations, 'etc'. This will require company's to not only carry out an initial review of compliance procedures but be prepared to, in effect, carry out a quasi legal audit of compliance in the relevant year. The company's internal controls will need to be able to support this activity and for many companies that will involve a rethink or redesign of current systems of internal control on non-financial matters. We have already advised a number of clients in this process, working with multidisciplinary team in conjunction with PricewaterhouseCoopers so that we can deal with all the tax and legal obligations to be covered and bring the necessary audit methodology to the required compliance process.

The Opportunity

Working with colleagues from PricewaterhouseCoopers, we have developed a detailed step plan or roadmap to assist companies to review and update their compliance processes which can be briefly summarised as follows:

Establish Compliance
Project Team

Identify Compliance

Evaluate 'As is'
Compliance Process

Identify Gaps and Develop
Action Plan

Implement Revised Compliance
Policy and Procedures

Establish Monitoring Procedures

Test and Report on Effectiveness
of Procedures

Board of Assessment
of Compliance

One benefit we have seen from these reviews is the opportunity to have a fresh look at an organisations internal control processes and the management and operation of those processes. In many cases this has led to resource re-allocation and/or the bringing in of new resources to give the compliance function the support and strength it needs to deal with the Act. This has also afforded management with the opportunity to set the tone from the top, in terms of compliance and to foster an improved compliance culture in the organisation.

Whilst compliance with laws is obviously not new (companies have always had to be compliant) what is new is the requirement to be able to clearly show and demonstrate such compliance, by reference to documented and clear compliance policies and procedures. Good internal controls in relation to compliance were always good practice, now it is the law!


Edwards Evans
Commercial Department

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