Directors’ Compliance Statement
The Companies Act 2014 (the “Act”) was commenced 1 June 2015. For directors of companies, one of the new more significant requirements is the introduction of the Compliance Statement. It is mandatory for PLCs to include this Compliance Statement, as well as all companies limited by guarantee and private limited companies with a turnover in excess of €25 million and a balance sheet total of €12.5 million for the year.
Relevant directors will be required to make the following statement as part of the Directors’ Report:
- I acknowledge that I am responsible for securing the company’s compliance with its relevant obligations (as outlined below).
Additionally, directors must confirm that the following things have been done, or explain if not:
- Drawing up a “Compliance Policy Statement”, which sets out the company’s policies in relation to compliance with “relevant obligations”
- Putting in place arrangement/structures to secure material compliance with relevant obligations
- Conducting a review during the financial year of the structures in place.
Non-compliance with this requirement represents a Category 3 offence under the Act for each director to whom the default is attributable. Category 3 offences can result in attracting a term of up to six months’ imprisonment and/or a Class A fine (not exceeding €5,000).
The “relevant obligations” are specified as covering the following:
Given the volume of “relevant obligations” mentioned above, it is no surprise that directors are concerned about the introduction of this requirement.
Directors will make the above statement and confirmations in relation to financial periods commencing on or after 1 June 2015. The statement and confirmation refers to the structures being in place for the full financial period. So for example, organisations with financial periods ending 31 May 2016 should promptly consider how to obtain the right level of assurance for directors to enable them to sign the statement.
There are a number of steps an organisation may wish to consider implementing in order to meet the requirements:
Assign a sponsor – The first thing that an organisation needs to do is to assign someone with seniority to drive this agenda internally.
Map requirements – The relevant obligations for the company should be formally identified in the first instance. The individuals responsible for each obligation should then be mapped against the obligations in order to ensure that in each case an individual has been formally assigned responsibility. This will enable the relevant people to provide assurance to the directors that the compliance statement can be made.
Engage stakeholders – Engagement with directors is key at this point. Directors will ultimately be required to make the statements and as such need to be satisfied with the proposed approach to providing them with the assurance they need. Early and frequent communication on the requirements, the processes being undertaken and the results will avoid any unnecessary issues as the end of the year when the statement is being made.
Review structures – Part of the statement to be made by the directors includes confirmation that a review of the arrangements or structures in place during the financial year has been conducted. Given the breadth of the “relevant obligations”, this may take additional effort in the first year of the making the statement. The review should involve reviewing the design of the structures (e.g. how formalised structures are) as well as sample testing to provide assurance that the controls that are put in place are operating as intended. The review of the structures should be sufficient to provide reasonable assurance to the directors that the controls that are in place are operational and facilitate compliance with the “relevant obligations” of the organisation.
Action plan – On foot of the structure review above, a gap analysis should be prepared between the processes and structures in place against where the organisation needs to be. The aim is to establish where structures may need to be formalised or enhanced. An action plan with remediations, owners and timelines should be prepared with reference to the gap analysis and this should also be shared with the directors in order to ensure that everyone is clear on where they are going, what they are expected to do and when they are expected to get there.
One of the key requirements is that there is a Compliance Policy Statement in place that sets out the company’s policies regarding compliance. Once you have reviewed the structures to establish what policies are (or need to be put) in place, this will be an easier task to complete and can be included in your action plan.
Agree reporting and escalation – Reporting and escalation processes should be put in place. This will give the directors additional comfort that, where non-compliance incidences occur, these will be communicated to the board so that the directors can be cognisant of these incidents when drafting their comment on compliance. The reporting processes should also include assertions from management at the end of the year that no instances of non-compliance have been identified during the course of the year that have not been reported upon.
Continuous monitoring – There should be continuous monitoring on two fronts. The first is in relation to the identification of additional compliance requirements. For example, one of the compliance requirements is in relation to tax obligations and tax law changes each year. There should be a monitoring process in place to validate that tax obligation amendments have been taken into consideration in the updated compliance structure and framework. The second front is that, if a level of continuous monitoring is built into the framework with regard to compliance and non-compliance identification, this will make the review of the structures less arduous at the end of the year for reporting purposes.
To conclude, an amount of work may be involved in providing the required assurance in Year 1 and getting the action plan on track as early as possible should make the process a little easier for companies and directors alike. Directors should now consider what steps need to be taken to provide the required assurance to allow them to make the statements at the end of the financial year.