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GAZETTE
P R A C T I C E
N O T E S
D i r e c t o r s R e s p o n s i b i l i t i es
i n F i n a n c i a l S t a t e m e n t s
o f C o m p a n i e s
OCTOBER 1994
Increased Risks for
Company Directors
A recent change in accounting
standards introduced by the
accountancy profession means that
directors of companies are being
asked by their auditors to assume
greater responsibility for the accounts
of their companies than they are
required to do by law. In particular
some statements being proposed by
auditors, for insertion in the financial
statements of companies, exceed what
is reasonable. In some cases auditors
have even sought to transfer
responsibility for the audit opinion
itself onto the directors.
Directors of companies should obtain
legal advice before accepting the
wording of statements of directors'
responsibility as, otherwise, they may
be assuming additional responsibility
beyond their legal obligations. While
the consequences remain to be tested
before the courts, these statements
will become publicly available
through the Companies Registration
Office and could, in some
circumstances, constitute an
admission of liability to shareholders
or other persons dealing with the
company, especially in an insolvency.
The following note sets out the
background to this in greater detail
and also includes a suggested
alternative wording (with explanatory
notes). The suggested wording will
not be appropriate in all circumstances
and care should be taken to consider
what is suitable in each case.
Background - Cadbury Report on
Corporate Governance
In the United Kingdom the Cadbury
Committee on the Financial Aspects
of Corporate Governance published a
Code of Best Practice in December
1992 ("the Cadbury Code").
Practitioners will be aware that the
Cadbury Code sets forth a wide range
of standards for corporate governance
and disclosure which are being
followed in Ireland, particularly by
quoted companies. One of these
requirements is that a statement
should appear in accounts explaining
the responsibilities of directors in
relation to financial statements.
New Auditing Standard for all
Companies
The Auditing Practices Board (the
body which regulates audit standards
for the accountancy bodies) has issued
Statements of Auditing Standards No.
600 ("SAS 600") dealing with
auditors' reports on financial
statements. Auditors are encouraged
to distinguish between their own
responsibilities and those of the
directors of the company by including
in their report a statement that the
financial statements are the
responsibility of the reporting entity
directors, reference to a description of
those responsibilities and clarification
that the auditor's duties rest only on
his obligation to express an opinion
on the financial statements. Where the
financial statements of the company
do not include an adequate description
of the directors' responsibilities SAS
600 requires that the auditor's report
should include a description of those
responsibilities.
Response of the Audit Practitioners
Auditors are including as a statement
in the draft financial statements of
companies (usually in the directors'
report) a proposed statement of
directors' responsibilities drafted by
themselves and in some cases
imposing greater responsibility on the
directors than are required by SAS
600, which, itself, exceeds the
requirements of Irish company law.
The Company and Commercial Law
Committee of the Society is concerned
that many directors of companies are
signing financial statements that
include these statements without
obtaining appropriate legal advice. In
so doing directors may be assuming
greater responsibility and hence
greater risks than they are required to
do by law.
The following is a specimen statement
for inclusion in the financial
statements of companies setting out
directors' responsibilities in relation
to the financial statements. It should
be noted that this statement may not
be appropriate to all circumstances
and should be used as a guideline
only.
Draft
Statement of Directors'
Responsibilities in Relation to
Financial Statements
The following statement which should
be read in conjunction with the
auditors' statement of auditors'
responsibilities set out below is made
with a view to distinguish for
shareholders the respective
responsibilities of the directors and of
the auditors in relation to the financial
statements.
The directors are required by the
Companies Acts, 1963 to 1990, to
have prepared financial statements for
each financial year which gives true
and fair view of the state of affairs of
the company and the group as at the
end of the financial year and of the
profit or loss for the financial year.
Following discussions with the
auditors, the directors consider that in
preparing the financial statements on
[pages [ ] to [ ]] the company has
used appropriate accounting policies,
consistently applied and supported by
reasonable and prudent judgements
and estimates and that all accounting
standards which they consider to be
applicable have been followed
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