Background to Exemption I
Under the Companies Act 1963, as enacted, all companies, private and public, were required to have their accounts audited annually by an independent qualified auditor. The purpose of the audit is to report on the annual statutory accounts of the company. The auditor is required to state whether or not they give a true and fair view of the company’s affairs during the relevant period, its assets and liabilities at year-end comply with the Companies Acts and discloses the requisite information.
Following a task force review, an exemption from audit was made available in 1999 to smaller-scale companies. The exemption required that, in the period,
- turnover be less than €1,500,000;
- balance sheet size be less than €1,904,000, and
- average employees do not exceed 50.
Background to Exemption II
The thresholds were revised in the 2014 Act, as set out below.
It is a condition of the exemption that the company makes its annual return on time in the current year and any preceding year, if applicable.
The exception did not apply to group companies, banks and certain financial services companies under the pre-2014 legislation.It is available to group companies under the 2014 Act.
As soon as the exemption ceases to be available, the company must appoint an auditor.
Certification and Obligations I
The directors must certify their opinion that the conditions will be satisfied in respect of the financial year (and the preceding year) and that the company is entitled to and ought to avail of the exemption. This must be recorded in minutes.
Where the exemption is used, the balance sheet must contain a statement by the directors to the effect that they acknowledge their statutory duties to keep proper books of accounts and prepare annual financial statements, giving a true and fair view of the affairs of the company.
Members of the company holding at least on one-tenth of the voting rights can require that the company not avail of the exemption.
Certification and Obligations II
If an auditor’s appointment is to be terminated in order to take up the exemption, the auditor must give notice within 21 days, that there exist no circumstances which should be brought to the attention of the members. If such circumstances exist they must be stated. This notice must be sent to the CRO, and the company must send it to the members.
An auditor must be appointed where qualification for the exemptions cease
Whenever a company has availed itself of the audit exemption in respect of a financial year, the company shall, if required by the Director of Corporate Enforcement to do so—
- give to the Director such access to and facilities for inspecting and taking copies of the books and documents of the company, and
- furnish to the Director such information as the Director may reasonably require for the purpose of satisfying himself or herself that the company did, in respect of that financial year, complies with the conditions for exemption
2014 Act Audit Exemption I
There is an audit exemption available if a company is a small company, as defined. A company (other than a group company and certain financial services companies) qualifies as a small company in relation to a financial year—
- if the qualifying conditions are satisfied in respect of that year and the preceding financial year;
- if the qualifying conditions are satisfied in respect of that year and the company qualified as a small company in relation to the preceding financial year;
- if the qualifying conditions were satisfied in the preceding financial year and the company qualified as a small company in relation to that year.
The qualifying conditions for a small company are satisfied by it in relation to a financial year in which it fulfils 2 or more of the following requirements:
- the balance sheet total of the company does not exceed €4.4 million; (€6 million after 2017 Act)
- the amount of the turnover of the company does not exceed €8.8 million; (€12 million after 2017 Act)
- the average number of persons employed by the company does not exceed 50.
2014 Act Audit Exemption II
The “amount of the turnover”, is the amount of the turnover shown in the company’s profit and loss account. The “balance sheet total”, is the aggregate of the amounts shown as assets in the company’s balance sheet.
The average number of persons employed by the company is determined by dividing the relevant annual number by the number of months in the financial year of the company. The relevant annual number is determined by ascertaining for each month in the financial year of the company concerned, the number of persons employed under contracts of service by the company in that month
The company is not entitled to the audit exemption in a financial year if a notice, with respect to that year, is served, by one or more members (shareholders) holding at least 10% of the company’s voting shares.
If one or more members do not wish the audit exemption to be available to the company in a specified financial year is, then if the company is a subsidiary undertaking, if refers to their not wishing the audit exemption to be available to the subsidiary undertaking irrespective of whether its holding company and any other undertakings in the group avail themselves of the audit exemption in that year.
Small Group Audit Exemption I
A company may qualify for audit exemption if it is a small company in the financial year concerned. The criteria for a small company are those set out above. The audit exemption does not apply to the company in respect of its statutory financial statements for a particular financial year if it is a group company unless the group company qualifies as a small group in relation to that financial year.
The 2014 Act introduced an exemption from statutory audits for small groups of companies as defined. Formerly group companies always required an audit. The audit exemption is usually available to any group company in respect of its statutory financial statements for a particular financial year if the group qualifies as a small group in relation to that financial year.
A group is small in relation to the holding company’s first financial year if the conditions are satisfied in respect of that year. It qualifies as small in a subsequent financial year if the qualifying conditions are satisfied for that year and the preceding year, and the group itself qualifies as small in that year and the preceding year.
Small Group Audit Exemption II
The qualifying conditions for a small group require that two of the following three criteria be fulfilled:
- the balance sheet total of the holding company and the other members of the group taken as a whole does not exceed €4.4 million (€6 million net and €7.2 million gross after 2017 Act);
- the turnover of the holding company and the other members of the group does not exceed €8.8 million (€12 million net and €14.4million gross after 2017 Act); and
- the average number of employees of the holding company and other members of the group taken as a whole does not exceed 50.
The above turnover, balance sheet total and the number of employees requirement apply to the group as a whole.
The balance sheet total is the aggregate amount shown as assets of the group companies and other entities, ignoring inter-group balances. The turnover is that shown in the accounts. Intergroup sales are ignored.
Where any period is less than a full financial year, the amounts are adjusted proportionally. The Minister may amend the above thresholds above, to take account of EU Directives and requirements.
Small Group Audit Exemption III
The audit exemption applies where the above conditions are satisfied in respect of the company and the group for the particular financial year unless and until circumstances arise by reason of which the exemption ceases to apply.
Where the exemption applies, many of the provisions in respect of audit do not apply to the company in that year, including the provisions in relation to
- audit information and the auditor’s report;
- circulation of statutory financial statements;
- members’ rights to demand financial reports;
- publication of financial reports;
- documents to be annexed to the annual return are modified and amended to take account of the absence of audit.
Further Small Group Audit Exemption Conditions
The audit exemption for small companies is restated in amended terms by the 2017 Act. If a company is a member of a group, then as well as the company qualifying as a small company, the largest group of which it is a member must meet the general small company size regime criteria in order to qualify as a small group.
A standalone company which is not a group member which qualifies as a small company is entitled to the audit exemptions subject to meeting the other requirements.
Accordingly, a group member must qualify as a small entity in itself and the largest group of which it is a member must also meet the criteria for a small group. A company may be disqualified from the audit exemption because the largest group of which it is a member, does not meet the criteria for a small group. Where the group does not qualify in this case, none of the companies may avail of the audit exemption.
In determining whether the financial statements have been filed on time, the initial annual return is ignored. The audit exemption is available to a company provided that the annual returns with financial statements required are filed on time. The company may not be a securitisation vehicle nor may a member of its group be a securitisation vehicle.
Group Exemption Denied I
The audit exemption not available for group companies unless the annual return (with accounts as above) is filed on time by each of the holding company and the other members of the group. There is not be reckoned as another member of the group for the purposes of this requirement a subsidiary undertaking that is not a company registered under the Irish Companies Acts.
The audit exemption is not available if a notice is served on the company by a member which requires an audit. The member must hold not less than 10% of the aggregate voting rights of the company. Notwithstanding that the audit exemption conditions are complied with in respect of a group, the holding company and members of the group are not entitled to the exemption if a notice is served on the holding company irrespective of whether it is served on one or other members of the group.
Where no notice has been served on the holding company but a notice has been served on another member of the group, then the member is not entitled to the audit exemption in the year concerned, irrespective of whether its holding company and other group members avail themselves of the audit exemption. Where no such notice has been served on the holding company, then may avail of the group exemption.
Group Exemption Denied II
A company is not entitled to the audit exemption if it is a financial services companies referred to in Schedule 5 of the Companies Act or a securitisation company. Similar provisions apply in relation to groups. If any member is within certain classes of listed financial services entities or if any of the members is a credit institution, insurance undertaking, securitisation body or a body whose securities are admitted to a trading on a regulated market, the exemption is not available.
The audit exemption is not available unless the annual return is made on time in compliance with the Companies Act. The required financial statements or abridged financial statements must be annexed. Other than in the case of the first year of trading, the annual returns and financial statements must have been returned on time in the previous year.
An equivalent group audit exemption is also denied in similar circumstances. Each of the annual returns must have been duly made in the relevant year and the previous financial year. This applies to the holding company and to other members of the group.
A holding company that prepares group financial statements that does not qualify for the group exemption is not exempt, even if it would otherwise qualify for exemption by itself.
Dormant Company Exemption I
Where a company has no significant transaction in the financial reporting period and has assets and liabilities with its group member, (e.g. it is owed or owes monies to group members), a further audit exemption may be available. It is intended to apply to dormant companies within groups, which typically hold inter-group balances, without trading or other financial activity.
It applies to limited companies, designated activity companies, unlimited companies and companies limited by guarantee, which are part of a group, but which would not otherwise qualify for audit exemption.
The audit exemption for dormant companies to a company if in relation to its financial statements for the financial year, the directors are of the opinion that it will satisfy the below conditions for that year. The decision must be minuted. The conditions are
- that the company must be dormant during the year;
- that it has no significant accounting transactions;
- its assets and liabilities must only be investments in shares of and amounts due to other group undertakings.
A significant accounting transaction is one that is required to be entered into a company’s accounting records.
Dormant Company Exemption II
Where the dormant company exemption applies, the general obligation to have the statutory financial accounts audited does not apply for that financial year. Unless and until circumstances arise, by reason of which the company no longer qualifies, the exemption continues. The provisions in relation to statutory auditors’ powers and provisions as to the report of the statutory auditors being prepared are inapplicable.
The audit exemption is not available unless annual returns have been properly made when due. A statement is to be included in the balance sheet to the effect that the exemption has been availed of.
In determining whether a company is dormant, there shall be disregarded any transactions arising from the taking of shares in a company by a subscriber to the constitution as a result of an undertaking in connection with the formation of the company, and any transaction consisting of the payment of Companies Registration Office fees.
Effect of Exemption
For so long as the audit exemption applies in respect of the statutory financial statements of a company or a group for a particular financial year, it is not obliged to have its statutory accounts audited. While the exemption applies, the provisions that confer any powers on statutory auditors or require anything to be done by or to or as respects statutory auditors, or make provision on the basis of a report of statutory auditors having been prepared in relation to the statutory financial statements of a company in a financial year do not apply.
Specifically, while the exemption applies, the following audit provisions do not apply to the company or are modified in so far as they assume or include an audit or auditors but not otherwise;
- report of statutory auditors on statutory financial statements for purpose of distributions;
- statement of particulars of non-compliance with director’s loans etc. provisions;
- disclosure of remuneration for audit, audit-related work and non-audit work;
- statement on relevant audit information;
- the form of statutory auditors’ report; signature of statutory auditor’s report;
- circulation of statutory financial statements;
- the right of members to demand copies of the report;
- requirements in relation to the publication of financial statements (excludes auditors’ report);
- financial statements and reports to be laid before the company in general meeting(excludes auditors’ report);
- documents to be annexed to annual return(excludes auditors’ report);
- special report on abridged financial statements;
- appointment of statutory auditors;
- obligations of statutory auditors.
Statement by Directors
If a company avails itself of the audit exemption in a financial year, the balance sheet prepared by the company in respect of that year shall contain a statement by the directors of the company that, in respect of that year—
- the company is availing itself of the audit exemption;
- that grounds for exemption are complied with;
- and that no shareholders notice requiring an audit has been served;
The directors must acknowledge that the obligations of the company under the Companies Act, to keep adequate accounting records and prepare financial statements which give a true and fair view of the assets, liabilities and the financial position of the company at the end of its financial year and of its profit or loss for such a year, comply with the provisions of the Act relating to financial statements, in so far as they are applicable to the company.
The statement must appear on the balance sheet in a position immediately above the signatures of the directors. If these obligations are not complied with, the company concerned and any officer of it who is in default shall be guilty of a category 3 offence.
If the company is a holding company that prepares group financial statements for the financial year concerned, the obligation applies both to its entity balance sheet and its group balance sheet.
Audit Exemption Unavailable I
A company is not entitled to the audit exemption in a financial year unless
- the company’s annual return is delivered to the CRO when due with the statutory financial statements or (as appropriate) abridged financial statements for that financial year annexed; and
- there has been delivered to the CRO its annual return to which the statutory financial statements or (as appropriate) abridged financial statements for its preceding financial year were annexed if the annual return is not the company’s first annual return.
Where the annual return is the company’s first annual return, the statutory financial statements or abridged financial statements are not required to be annexed.
Audit Exemption Unavailable II
A range of financial services sector companies is not entitled to the audit exemption. They are set out in Schedule 5 of the Act. It does not apply to a securitisation vehicle.
A holding company and the other members of the group are not entitled to the audit exemption if—
- the holding company is a company falling within any provision (in so far as applicable to a private company limited by shares) of Schedule 5, (with exceptions);
- any of those other members is a credit institution, an insurance undertaking, or a company falling within any provision of Schedule 5, (with exceptions);
- a securitisation company;
- or a body any of the securities of which are admitted to trading on a regulated market
References and Sources
Companies Act 2014 S.350, S.358- S.367 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch.18 Courtney
Keane on Company Law 5th Ed. (2016) Ch. 30 Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
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Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
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Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
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UK Practitioners Services
Tolley’s Company Law Handbook
Gore Browne on Companies
Palmer’s Company Law