The Act of 17 December 2008 makes it compulsory for some types of companies to set up an audit committee, whereas, in the past, this was only highly recommended by various corporate governance codes. The requirement since 2008, laid down in sections 526bis et seq. of the Belgian Companies Code, aims to promote high-quality financial information and suggests a revised allocation of tasks within the boards of directors of those companies that have audit committees.
Together with inclusion in the Companies Code of the requirement to set up an audit committee, the independence criteria for their members have also been beefed up (sec. 526ter Companies Code) compared to those applicable previously. Even though audit committees are anchored in the Companies Code, European and Belgian lawmakers have held back from regulating the liability of their individual members or of audit committees as a whole. This article discusses how their members’ liability is currently assessed.
1. Mandatory establishment of audit committees
Since the Act of 17 December 2008, which came into effect on 8 January 2009, it has been compulsory for listed companies to set up an audit committee within their board of directors.[1] It is recommended that it should have at least three members. It should also only be made up of non-executive directors on the board, at least one of whom has to demonstrate necessary experience in the fields of accounting and audit.
2. Tasks of audit committees
Audit committees have at least the following tasks:
a. to monitor the financial reporting process;
b. to monitor the effectiveness of the company’s internal control and risk management systems;
c. to monitor the internal audit, if any, and its efficiency;
d. to monitor the statutory audit of the company’s annual accounts; and
e. to assess and monitor the statutory auditor’s independence and the independence of the auditor responsible for auditing any consolidated annual accounts, in particular as regards the provision of additional services to the company.
Regular interaction among the audit committee, the statutory auditor and the board of directors is recommended and necessary in order to enhance the financial reporting of listed companies and make it as complete as possible, and to limit the liability of board members who are not audit committee members (see below).
3. Expertise in the field of accountancy and audit, and new independence criteria
As mentioned in the introduction, audit committees have to have at least of one non-executive independent member who can demonstrate necessary expertise in the field of accounting and audit. This may be a degree in economics or finance, or relevant professional experience in these fields. The independence criterion has to be evidenced by the company annually when preparing its annual report and for the first time when appointing such an independent director.
Compared to the previous independence criteria set down in the old section 524 of the Companies Code, those laid down by sec. 526ter are stricter, being based on the European Commission’s Recommendation of 15 February on the role of non-executive or supervisory directors of listed companies and on the committees of the supervisory board.[2] Since 1 July 2011, all independent directors of listed companies have had to meet the new independence criteria.
The legal recognition of audit committees is aimed at promoting high-quality financial information, thus reinforcing public confidence that this information gives a true and fair view. Nevertheless, strengthening the independence criteria (especially the absence of significant business relationships and the numerous incompatibilities for holding the office) may well make it more difficult to appoint people who are independent within the meaning of the Companies Code.
4. Greater liability?
Some writers claim that audit committee members are exposed to a greater liability than board members not on the audit committee due to the fact that neither European nor Belgian regulations lay down any specific rules regarding their liability.
The first assumption is that an audit committee is always composed of directors and is constituted within the board of directors. Sec. 522(1) of the Companies Code stipulates that one or more advisory committees can be set up within the board of directors and under its responsibility. From this perspective, it could be argued that members of an audit committee are not under any greater liability, as the audit committee has only an advisory role. This would mean that the entire board of directors remains liable for execution of the tasks assigned to the members of the audit committee. However, this does not mean that members of the audit committee are not responsible for their actings within the audit committee, though their liability as a member of the audit committee does not exceed that as a member of the board of directors.
That said, the proposition that the audit committee has merely an advisory role is challenged by its authority in terms of the “one-to-one” rule, as provided in section 133[3] Companies Code, which raises the question of whether a special liability regime should be laid down for audit committee members.
As the audit committee comprises exclusively (non-executive) directors, their liability should be assessed within the framework of the existing standard rules on directors’ liability. As a result, board members are responsible for performing the duties entrusted to them and are individually liable to the company for any shortcomings in their management and administration. The extent of this duty of care is determined according to the professional skills that can be reasonably expected from a normal, prudent director in the same circumstances.
Furthermore, board members are all jointly and severally liable for breaches of the Companies Code or the company’s articles of association. However, directors can be relieved of liability for any breach in which they played no part if no fault can be attributed on them and if they report the breach at the next general shareholders’ or board meeting after they become aware of it.
Notwithstanding the audit committee’s advisory task and given the lack of a special liability regime for its members, which means they are responsible for fulfilling the audit committee’s aforementioned legal tasks, all the members of the board of directors will be liable for faults committed by the audit committee’s members in the exercise of those tasks. Other board members who are not audit committee members can then only be relieved of their liability if they can prove that, once the audit committee has reported to the board of directors on the execution of its tasks, they did not participate in the relevant infringement and that no fault can be attributed to them.
Non-audit committee members thus have to pay extra attention to the fulfilment and reporting of audit committee tasks. Some legal scholars interpret this as increasing the liability of non-audit committee members, since it supposes thorough knowledge of internal control and audit matters. However, this is a controversial standpoint since sec. 526bis of the Companies Code only requires one of the audit committee’s members to prove these abilities.
Finally, the question that is often raised is whether personal liability can be limited by not being present at audit committee or board meetings. If it can, members do not have to demonstrate that they took no part in the breach. This would be only too easy, however, and is not accepted by scholarly writers. On the contrary, they take the opinion that this attitude only increases one’s liability, since it is generally accepted that, in the case of claims resulting from errors committed during their period in office, board members need only show that they were not able to prevent them.
Another new issue that arises with the mandatory requirement of setting up an audit committee is the distinction between the reporting tasks to be carried out by the board of directors and supervision of the statutory auditor. Since the audit committee is charged with monitoring the legal audit requiring to be done by the statutory auditor, the distinction between the tasks to be fulfilled by each of them has become smaller (e.g. both the statutory auditor and the audit committee can be held liable for faults in the reporting). Some writers argue that, since the distinction is smaller, there is a greater risk that both parties might be held to be jointly liable instead of their being judged separately on their respective liability.
5. Conclusion
In the absence of any specific Belgian or European regulations, audit committee members and other board members are all subject to the general liability rules. Board members who are not members of the audit committee thus have to be vigilant and exculpate themselves by proving that, after the audit committee has reported to the board on the execution of its tasks, they did not play a part in the breach and that no fault can be imputed to them. As a result, it is essential to establish proper, conscientious, regular lines of communication between the audit committee and the board of directors.
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[1] Companies meeting two or more of the following thresholds are not obliged to set up an audit committee:
- average of fewer than 25 employees;
- a balance total of EUR 43,000,000;
- annual net turnover of EUR 50,000,000.
For these companies, the tasks assigned to the audit committee may be performed by the board of directors, provided the company has at least one independent director and, if the chairman of the board is an executive director, he does not act as the board’s chairman when it operates as an audit committee.
[2] As a result an independent director has to meet at least the following criteria:
1. the director has not been an executive member of the management body, member of the management committee or person entrusted with the daily management, in either the company or an affiliated company or person, during the five years immediately preceding his or her appointment;
2. the director has been a non-executive director for no more than three consecutive terms during a maximum period of 12 years (new criterion compared to the previous sec. 524);
3. the director has not been a member of the managerial staff (“leidinggevend personeel / personnel de direction”) of the company or of an affiliated company or person during the three years immediately preceding his or her appointment;
4. the director does not receive or has not received any remuneration or other significant pecuniary advantage from the company or from an affiliated company or person, other than the bonuses and remuneration received in his or her capacity as a non-executive member of the management body or as a member of the supervisory body (new criterion compared to the previous sec. 524);
5. the director does not hold any interests in the company that represent 10% or more of the capital or of the corporate funds or of a category of shares of the company, and in any case does not represent a shareholder who falls under the conditions set forth in this point 5;
6. the director has not or has not had within the past financial year a significant business relationship with the company or with an affiliated company or person, either directly or as a partner, shareholder, member of the management body or member of the managerial staff (“leidinggevend personeel/ personnel de direction”) of the company or of a person that maintains such a relationship (new criterion compared to the previous sec. 524);
7. the director is not or has not been at any time during the past three years, a partner or employee of, or of a company or person affiliated to, the company’s current or former external auditor (new criterion compared to the previous sec. 524);
8. the director is not an executive member of the management body of another company in which an executive director of the company is a non-executive member of the management body or member of the supervising body, and has no other significant ties with executive directors of the company through his or her involvement in other companies or bodies (new criterion compared to the previous sec. 524);
9. the director’s spouse, legal cohabitant or relatives to the second degree do not act as a member of the management body, member of the management committee, person entrusted with the daily management or member of the managerial staff (“leidinggevend personeel/ personnel de direction”) in the company or in an affiliated company or person, and do not meet any of the criteria in points 1 to 8.
[3] Providing in a decision-making power of the audit committee in respect of the assessment of independency of the statutory auditor of a listed company.
