The Act under Section 167 requires that certain companies establish an audit committee. An ancillary requirement of the audit committee formation is a statement in the directors’ report confirming that this has been done or, as the case may be, if the company has decided not to do so setting out the reasons why. The formation of a committee for the relevant companies and the related statement in the directors’ report is only applicable where the financial year commences on or after 1 June 2015. Therefore, directors should take the relevant steps required from the first day of the next full financial year that commences after 1 June 2015.
A company which has one or more subsidiaries will be taken together when ascertaining whether they are required to form an audit committee.
Up until the commencement of the Act only ‘public interest entities’ needed to establish an audit committee. This has now been extended to ‘large companies’ under the Act. The following are considered ‘large companies’ with regards to the formation of an Audit Committee:
Large Company (s167) – must exceed both criteria in current and preceding financial year
|Turnover exceeds*||€50 million|
|Balance sheet total exceeds*||€25 million|
*The meaning of ‘turnover’ and ‘balance sheet total’ in this context is the same as that set out in section 350 for what qualifies as a small company. Turnover means the amount of turnover shown in the company’s profit and loss account and balance sheet total means the aggregate of the amounts shown as assets in the company’s balance sheet. Therefore, when ascertaining whether a group is required to form an audit committee, any inter-group transactions or balances, groups should have inter group transactions eliminated. See more at Section 167.
The above thresholds need to be exceeded for two consecutive financial years in order for the company to qualify as a ‘large’ company in the context of an audit committee.
If a company (or group) decide not to set up an audit committee (which is permitted under the Act) it must disclose the reasons for this in the director’s report. Failure to do this, or indeed failure to include a statement confirming that a committee has been set up, will result in the directors being guilty of a category 3 offence and also has implications for the audit report.
The structure of an audit committee and the responsibilities are set out in Section 167 of the Act.