Clarification of interpretive dispute concerning audit committees

Date 23 feb. 2009
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Clarification of interpretive dispute concerning the obligation of companies and groups of companies subject to inspection from the Danish Financial Supervisory Authority to appoint an audit committee

On 22 December 2008, subject to Section 31(8), of the Act on Authorized Public Accountants (The Act) of 17 June 2008, the Danish Ministry of Economy and Business Affairs issued executive order No. 1389 of 22 December 2008 (The Executive Order) on audit committees.

 

The Executive Order concerns the obligation of companies and groups of companies, subject to inspection from the Danish Financial Supervisory Authority (the DFSA) to appoint an audit committee.

 

Against the background of frequent inquiries concerning the interpretation of The Executive Order, the DFSA clarifies a number of disputes in their ruling of 15 January 2009.

 

 

Exemption from the obligation to appoint an audit committee

Under certain circumstances, Section 1(2) of The Executive Order sanctions exemption from the obligation to appoint an audit committee for companies founded as a labor market related life insurance company or as a non-occupational pension fund.

 

The DFSA indicated that the exemption only applies if the collective board of directors, including the chairman, subsists of an even number of persons, of which one half must be appointed by employers, and the other half by employees. The above must appear from the bylaws etc. Employers and employees also include representatives appointed by these organizations.

 

 

Placement of the audit committee in a group of companies

Referring to Section 2(4.2) pertaining to the placement of the audit committee in groups of several companies, the DFSA noted that the provision in practice implies that the committee – with the exception of financial holding companies –must always be placed in a company subject to inspection from the DFSA.

 


The independently qualified member

In consequence of Section 5 of The Executive Order, at least one member of the audit committee must be independent of the company and have qualifications within financial accounting or auditing. This requirement thereby also applies to auditing committees in companies and groups of companies subject to inspection, as well as to common companies who are under an obligation to appoint an auditing committee.

 

Under Section 5(1) of The Executive Order, the board has an obligation to ensure that at least one member of the audit committee is independent of the company and has qualifications within financial accounting or auditing. In the event that is not the case, the board must immediately convene a general meeting with a view to meeting the requirement, cf. Section 5(1.3). The DFSA established that this implies that the board within reasonable time ensures that a new member with the relevant qualifications is appointed. It was further declared that The Executive Order does not entail that the board is compelled to convene a general meeting. If e.g. the company’s bylaws allow members to be appointed by convening the board of representatives, this will suffice. Insofar as the interpretation of Section 5(1-2), the DFSA otherwise referred to the EU recommendation of 15 February 2005 concerning the part played by the common board members and members of inspection organs in publicly quoted companies, and concerning committees appointed on the board/management body.

 

Section 5(3-4) of The Executive Order regulates the required qualifications of the independent member. In its ruling, the DFSA made it clear that it is insufficient for the independent member merely to have experience with the Danish Financial Statements Act. Given that no statute of limitation has been indicated in relation to the experience requirements, there will be made no further demands about the time-related connection between the attainment of the required experience and working on the audit committee.

 

Lastly, the DFSA noted that the term of office for the independent member should be the same as for the other board members.

 

Thus, the DFSA has eased the formal requirements of Section 5 of The Executive Order regarding replacement of the independent member and the requirements in connection with the experience of the member. The board of directors will not be compelled to convene a general meeting if the independent member takes up office on the audit committee. Provided that the bylaws sanction a different procedure for the replacement of a member, the board of directors can refer to them. It remains, however, that the requirements regarding the experience of the member is strictly insisted upon, and that these requirements must be complied with in connection with a replacement of the independent member.

 

 

Summary

In their ruling of 15 January 2009, the DFSA has clarified a number of disputes concerning the interpretation of the relatively new executive order on audit committees.

 

Thus, the DFSA has clarified the content of The Executive Order in so far as the exception in Section 1(2) concerning companies founded as a labor market related life insurance company or as a non-occupational pension fund, as well as the requirements of the organizational placement of the audit committee. The DFSA has further clarified interpretation disputes in relation to the independent member of audit committees in companies and groups of companies subject to inspection from the DFSA.

 

 

 

If you have questions for the decision or require additional information on the rules on audit committees, please contact attorney Dan Moalem (dmo@mwblaw.dk).

 

The above does not constitute legal counselling, and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.