The Reportable Irregularity Obligation for the Independent Reviewer
The Companies Regulations, 2011 has made provisions for the reporting of a reportable irregularity by the Independent Reviewer. This follows in the footsteps of Section 45 of the Auditing Professions Act where an auditor is obligated to report a reportable irregularity.
While the principle underpinning the reportable irregularity is the same for the independent reviewer and the auditor, there can be no doubt that this reporting obligation places an extra-ordinary burden upon the independent reviewer. The audit is designed for the most part to facilitate the detection of unlawful acts by the auditor. The very nature of an independent review ensures that there is very little chance that the independent reviewer will ever be able to detect unlawful acts, unless the independent reviewer goes beyond the call of duty and designs procedures that would enable him/ her to detect unlawful acts.
Over and above these procedures the independent reviewer must report any act or omission by management that causes or has caused the company to trade under insolvent conditions. This is different to the duties of an auditor where there is no direct obligation to do so. For an auditor a reportable irregularity states by definition that all reportable irregularities must be unlawful, however for an independent reviewer in this one circumstance the act or omission that causes the company to trade under insolvent conditions does not have to be unlawful. Why the difference?
Is the Auditing Professions Act going to be updated? Does this mean that the independent reviewer has to report anything management does that may cause the company to trade under insolvent conditions? Eg: a bad business judgment made by management in "good faith". It is not unlawful for a director to make "mistakes", yet the independent reviewer would be obligated to report this mistake to the Companies Intellectual Property Commission. The Companies Act, 2008 does not even define insolvent circumstances; it simply provides a solvency test. So must the independent reviewer in the ordinary course of his or her duties conduct the solvency tests simply to establish their reporting responsibilities?
The argument could be made that trading under insolvent circumstances is trading recklessly and would constitute a breach of a directors fiduciary duties and would then be an unlawful act. However this would be a rare occasion. By the manner in which the regulations are written, it is clear that the act or omission that causes the company to trade under insolvent circumstances does not have to be unlawful. This is completely at odds with the essence of the term "irregularity".
So it is evident that the commission may be on the receiving end of massive amounts of letters from independent reviewers. The whole concept of the review was to reduce the regulatory burden on companies and their accountants. However this new obligation on the independent reviewer is going to increase the burden, and directors are going to ensure that their companies need neither an independent review or an audit by simply restructuring their businesses to become owner managed and as a result fall under 350 public interest points.
In the late 1890's a judge stated that the auditor was a watchdog, not a bloodhound. Never did it cross his mind that the independent reviewer, a new breed of assurer, was to become this bloodhound; even more so than the auditor. As a result, I fear that the independent review is not going to be cheaper than the audit after all!
Professor Steven Firer
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