New rules on audit committees in public interest entities (including insurance companies, branches of insurance companies and main branches of insurance companies) will start to apply on 21 October 2017. As there is not much time left, it is important to check whether the characteristics of audit committee members, their competences, the degree of their independence, the composition of the committee and internal regulations are adequately addressed.
The new rules are laid down in the Act on certified auditors, entities entitled to audit financial statements and on public supervision dated 11 May 2017.
Supervisory board’s audit committee function
The new law considerably reduces the possibility of supervisory boards to perform the functions of an audit committee, which has been a very common practice. From now on, insurance companies’ supervisory boards are unlikely to be entrusted with audit committee functions.
New requirements for audit committee members
Independence rules for members of audit committees have been tightened up. Formerly, only one member of the committee had to be independent. Now the majority of the members, including the chairman, must be independent.
The new law significantly expands the scope of the independence criteria to be fulfilled. In the context of the independence criteria for members of audit committees, it may be helpful to refer to the Polish Financial Supervision Authority’s standpoint on this matter dated 27 September 2017. According to the regulator, audit committee members are allowed to serve supervisory board member roles (or audit committee member roles) in other intra-group companies.
In addition, audit committee members should possess the requisite ability and knowledge of an insurance business. This condition can be met in two ways: if at least one member of the audit committee has such ability and knowledge, or if individual members of the audit committee jointly have the expertise. Besides that, at least one member of an audit committee must have relevant knowledge and experience in the field of accounting and auditing.
Penalties for breach of the new law
A company’s failure to meet the new statutory obligations may result in severe penalties imposed on both the company and the members of its governing bodies (such as management board members, supervisory board members, audit committee members). Such financial penalty may amount to 10% of the company’s net revenue, while penalties on members of the company’s governing bodies can be up to PLN 250,000 (ca. EUR 58,000) and may include a ban on functioning as a management board member or supervisory board for up to three years.