The National Theatre Society Limited — 2004

Supplement to Audit Report

Accounts for 2003

The audited accounts of the company for 2003 show an operating deficit for that year of €801,944
bringing the cumulative deficit at 31 December 2003 to €1,586,519. In deciding on the appropriate audit
report on the 2003 accounts and, in particular, in considering whether any qualification of my report
might be necessary on the grounds of "going concern", I was cognizant of the growing scale of the deficit
and sought certain assurances from the company regarding the action being taken to reduce the deficit.
Subsequently I received a Letter of Representation from the Board signed by the Chairman which, inter
alia> stated that

"The Board continues to take such action as necessary to ensure that it mil haw sufficient working capi
foreseeable requirements for at least twdw months..*

"Steps are in train in order to reduce the compares deficit at 31st Decerrber 2003.33

I also received assurances from the then Managing Director that an operating deficit of €110,000 was
budgeted for 2004 and that the proposed measures to reduce overheads would have the long-term effect
of reducing the deficit. On foot of these representations and assurances I gave an unqualified audit
opinion on the 2003 accounts on 4 August 2004.

The operating budget for 2004 provided to me confirmed that it was planned to incur a deficit of
€110,000 in 2004.

Statement on System of Internal Control — 2003

The Board's Statement on the System of Internal Control which was prepared in conjunction with the
annual accounts stated that while no formal review of internal financial controls was carried out in 2003, it
was intended to carry out such a review for 2004. It was also stated that as the Board was reasonably
satisfied with the existing financial control arrangements it was not envisaged that there would be any
significant change during 2004.

Preparation of Accounts for 2004

When the accounts for 2004 were being prepared by the company for audit in April 2005 it became
apparent that the deficit for the year would be greatly in excess of not only the budgeted figure but also
the estimated figure of €1 million provided in the second half of 2004 to the Board. When this matter was
brought to the Board's attention it appointed an accounting firm on 27 May 2005 to assist it in
establishing the facts underlying the discovery and disclosure that the company's financial reporting
system had been substantially under-recording the operating loss for 2004.

Accounting Firm's Report

The firm reported in July 2005 that the misreporting of various revenues and costs relating to the monthly
management accounts for December 2004 was as a result of:

(a) a number of accounting errors and other factors relating to the preparation process of the
monthly management accounts during 2004; and
 (b) weaknesses in corporate governance, processes and systems which allowed these errors to go
undetected by management, the Finance and Audit Committee and the Board. The report
expressed criticism of the Board, the Finance and Audit Committee and management for not
identifying earlier the factors that contributed to the under recording of the operating loss for
2004 and for deficiencies in management accounts and internal controls.

The report also pointed to a number of fundamental process and internal control weaknesses in the
Finance function and expressed the view that the function was understaffed in 2004. The report endorsed
the proposals of the Abbey's Change Process Team for a new corporate structure and recommended
appropriate governance arrangements as well as a reconstituted Finance function with revised budgetary
and financial reporting systems. The Board accepted the findings and recommendations of the report.

Operating Deficit for 2004

The operating deficit for 2004 has been established as €1,854,194 for the purposes of the annual accounts
as against an initial budgeted deficit of €110,000.

It is now apparent that this initial budgeted deficit for 2004 was unrealistic in the absence of strong
corrective action being taken by the company. In practice, the budgeted deficit diminished as a factor in
the financial management of the company during 2004. For example, by August 2004, draft management
accounts were projecting a deficit of €1 million at end-2004.

The company's efforts to address the financial risk associated with a major new area of expenditure viz.
activity relating to the centenary of the Abbey, were not successful thereby compounding the problem of
trying to live within its means.

Remedial Action

I note that since the receipt of the accounting firm's report, the Board has taken steps to implement the
recommendations contained in the report.

John Purcell
Comptroller and Auditor General
August 2005