Section 42 of the Companies (Audit and Accounting) Act 2003 and section 41 of the 8th EU Directive set out the requirements for certain types of companies to establish an audit committee. These provisions have not yet been enacted into law; however, the Department of Commerce and Business Employment has indicated that the draft regulation adopting the provisions of the 2003 Act and the 8th Directive, with some amendments, will be published by the end of July 2009 and will be signed into law before end of 2009.

What companies are required to set up an Audit Committee?

The requirement to establish an audit committee applies to all public limited companies, including large private companies, relevant companies and public interest entities.

Section 42 requires all corporations, whether publicly traded or not, to establish and have adequate resources for an Audit Committee with certain responsibilities as defined in the Act, unless it is a corporation wholly owned subsidiary of another corporation.

In addition, large qualified private limited companies and relevant companies must establish an Audit Committee with all or some of the responsibilities defined, or decide not to do so.

A “qualified large private company” is defined as:

• A company limited by shares whose balance sheet exceeds 25 million euros and whose turnover exceeds 50 million euros both in the most recent financial year and in the immediately preceding financial year,

Prayed

• A private company limited by shares if the company and all its subsidiary companies together meet the above balance sheet and turnover criteria.

A “qualified relevant company” is defined as:

• A company or unlimited company whose total balance exceeds 25 million euros and whose turnover exceeds 50 million euros both in the most recent financial year and in the immediately preceding financial year, in which all the partners who do not have a limit on their responsibility are:

• Companies limited by shares or by guarantee, or equivalent bodies not governed by Irish law or a combination of both categories of bodies or
• Bodies of the type mentioned in rule (i) that are governed by the laws of a Member State of the EU or are equivalent bodies with a comparable legal form that are governed by the laws of a Member State or
• A combination of the categories of entities mentioned in the previous paragraphs (i) and (ii)

Prayed

• an unlimited partnership or partnership of the type described in paragraph (c) if the partnership or partnership and all of its subsidiary companies together meet the above balance sheet and turnover criteria.

Article 2.13 of the Directive defines “public interest entities” as:

• Entities that have issued transferable securities admitted to trading on a regulated market governed by a Member State (4),
• Credit institutions (5) (that is, banks and mortgage companies) and
• Insurance companies (6).

Which companies are not required to have an Audit Committee?

Any company limited by shares whose balance sheet and turnover are below the aforementioned limits

Any company or unlimited company of the type described above, whose balance sheet and turnover are less than the aforementioned limits.

All other forms of corporate entities not included, ie companies limited by guarantee and non-EU Member States and branches.

Audit Committee Requirements

The Audit Committee must be composed of at least 2 members.

The 8th Directive requires that at least one member of the Audit Committee be independent and have an accounting or auditing qualification.

A Director qualifies for appointment as a member of the committee if he or she:

• Is or has not been an employee of the company or subsidiary in the last 3 years
• He is not the Chairman of the Board of Directors.

The Audit Committee requires an appropriate term of reference that

• They have been prepared and approved by the Board of Directors
• They are presented to shareholders at the General Shareholders’ Meeting
• They are reviewed annually by the board
• Specify how the committee will carry out its duties and responsibilities
• Provide a schedule of meetings with management, the auditor, and the internal auditor.

Roles and Responsibilities of the Audit Committee

The main functions of an Audit Committee include:

• Monitoring of financial reports
• Supervise the process related to the financial risks of the company and the control and internal audit
• Supervise the internal and external audit processes.
• Review and monitor the independence of the auditor and the audit firm