Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003
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2002 -- 2003
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
CORPORATE LAW ECONOMIC REFORM PROGRAM (AUDIT REFORM AND CORPORATE
DISCLOSURE) BILL 2003
EXPLANATORY MEMORANDUM
(Circulated by authority of the Treasurer,
the Hon Peter Costello, MP)
Table of Contents
Corporate Law Economic Reforem Program (Audit Reform and Corporate
Disclosure) Bill 2003 1
Outline 1
Abbreviations 4
Financial Impact Statement 6
Regulation Impact Statement 8
Notes on Clauses 80
1.1
The Corporate Law Economic Reform Program (CLERP) was
initiated in 1997 as a vehicle for the ongoing review and reform of Australia's
corporate and business regulation to ensure that it is modern, responsive and
promotes business activity.
1.2 The most recent stage in the Government's reform
agenda is CLERP 9. A discussion paper -- Corporate Disclosure:
Strengthening the financial reporting framework -- was released in
September 2002 and proposed a range of measures designed to enhance audit
regulation and the general corporate disclosure framework. The Corporate Law
Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003
(the Bill) implements the CLERP 9 measures and recommendations
contained in the Ramsay report Independence of Australian Company
Auditors (Ramsay report). The Bill also takes account of the relevant
recommendations of the report of the Joint Committee of Public Accounts and
Audit's Report 391 (Review of Independent Auditing by Registered Company
Auditors). In addition, the Bill implements a number of recommendations of
the HIH and Cole Royal Commissions.
1.3 The Bill was released for public consultation on
8 October 2003 and over 50 submissions were received. The Business Regulation
Advisory Group was consulted on both the policy proposals and the provisions of
the Bill.
1.4 The underlying objective of the reforms is to
improve the operation of the market by promoting transparency, accountability
and shareholder activism. To this end, the Bill sets up a framework with the
following features:
• Measures designed to improve the reliability and
credibility of financial statements through enhanced auditor independence:
- The role of the Financial Reporting Council (FRC)
will be expanded to cover oversight of the audit standard setting process and
monitoring and advising on auditor independence.
- Auditors will be required to meet a general
standard of independence and make an annual declaration that they have
maintained their independence.
- Disclosure will be required of certain matters in
relation to all non audit services.
- Restrictions on certain employment and financial
relationships will be introduced and/or enhanced.
- Auditors will be required to rotate after five
years (and up to seven years where ASIC relief has been granted).
- Auditors will be required to attend company Annual
General Meetings (AGMs).
- Australian Securities and Investments Commission
(ASIC) will be given a power to impose conditions on auditors' registration.
• Improved enforcement arrangements:
- The operational capacity of the Companies Auditors
and Liquidators Disciplinary Board (CALDB) will be enhanced by appointing a
deputy chair and facilitating concurrent hearings. In addition, the majority
of members will be non accountants.
- A Financial Reporting Panel (FRP) will be
established to resolve disputes between ASIC and companies regarding the
application of accounting standards.
- Auditing standards will be made legislative
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instruments in the same way as Australian Accounting Standards Board (AASB)
accounting standards.
- Protection will be available for employees and
others who report suspected breaches of the law to ASIC and internally within
the company.
- The obligations for auditors to report suspected
breaches of the law to ASIC will be strengthened.
• Measures to better allocate and manage risk:
- Auditors will be able to incorporate and a regime
of proportionate liability will be introduced. Incorporation will protect
auditors who are not responsible for loss caused by another auditor in the
audit firm. Proportionate liability will ensure that liability rests with all
defendants in proportion to their contribution to the plaintiff's loss. The
proportionate liability reforms are of general application and are not confined
to auditors.
• Better disclosure to shareholders and improved
shareholder activism:
- The presentation of disclosure documents and the
operation of the secondary sale provisions are being improved.
- Disclosure requirements applying to director and
executive remuneration will be enhanced and shareholders will be better
equipped to hold directors accountable for their decisions regarding
remuneration.
- Shareholders will have greater ability to ask
auditors questions regarding the conduct of the audit and the content of the
audit report.
- Mechanisms for shareholders to participate and vote
in general meetings will be improved.
• Better enforcement mechanisms for continuous
disclosure:
- The maximum civil penalty for a contravention of
the continuous disclosure (and other financial services civil penalty)
provisions by a body corporate will be increased.
- Persons involved in a contravention of the
continuous disclosure regime by a body corporate will be subject to civil
penalties.
- ASIC will be given the power to issue infringement
notices specifying payment of a financial penalty in relation to contraventions
of the continuous disclosure regime.
• A specific duty on analysts to manage conflicts of
interest.
2
| AASB
|
Australian
Accounting Standards Board
|
| AAT
|
Administrative
Appeals Tribunal
|
| AGM
|
Annual
General Meeting
|
| ARWP
|
Audit
Review Working Party
|
| ASIC
|
Australian
Securities and Investments Commission
|
ASIC
Act
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|
Australian
Securities and Investments Commission Act 2001
|
| ASX
|
Australian
Stock Exchange Ltd
|
| AUASB
|
Auditing
and Assurance Standards Board
|
| CAB
|
Corporations
Amendment Bill 2002
|
| CAC
Act
|
Commonwealth
Authorities and Companies Act 1997
|
| CALDB
|
Companies
Auditors and Liquidators Disciplinary Board
|
| CEO
|
Chief
Executive Officer
|
| CFO
|
Chief
Financial Officer
|
| CLERP 9
|
Corporate
Law Economic Reform Program Paper No. 9 Corporate Disclosure -
strengthening the financial reporting framework
|
| Corporations
Act
|
Corporations
Act 2001
|
| CPAA
|
CPA
Australia
|
| FRC
|
Financial
Reporting Council
|
| FRP
|
Financial
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Reporting Panel
|
| G100
|
Group
of 100 Inc
|
| HIHRC
|
HIH
Royal Commission
|
| IAASB
|
International
Auditing and Assurance Standards Board
|
| IASB
|
International
Accounting Standards Board
|
| IASC
|
International
Accounting Standards Committee
|
| ICAA
|
The
Institute of Chartered Accountants in Australia
|
| IFAC
|
International
Federation of Accountants
|
| JCPAA
|
Joint
Statutory Committee of Public Accounts and Audit
|
| NIA
|
National
Institute of Accountants
|
| PDS
|
Product
Disclosure Statement
|
| Ramsay
report
|
Independence
of Australian Company Auditors
|
| SEC
|
Securities
and Exchange Commission
|
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Trade
Practices Act
|
Trade
Practices Act 1974
|
3.1
Implementation of the measures in the Bill will require
Commonwealth expenditure on an ongoing basis.
3.2 In the 2003-04 Budget, it was announced that the
Australian Securities and Investments Commission (ASIC) would be provided with
funding of $12.3 million over four years for its role in the
implementation of CLERP 9. This funding will enable ASIC to conduct
surveillance, investigate and take enforcement action in relation to alleged
contraventions of the CLERP 9 provisions. Further funding will be subject to
review.
3.3 It was also announced in the 2003-04 Budget that
$4 million would be provided over four years to support the expanded role of
the Financial Reporting Council, which will include oversight of audit standard
setting and auditor independence issues.
3.4 These allocations for ASIC and the Financial
Reporting Council total $16.3 million over four years, or
$4.1 million per annum.
3.5 Funds will be expended in the establishment of
the Financial Reporting Panel (FRP). There will also be ongoing costs
associated with the running of the FRP. Funding will be administered along
similar lines to the arrangements that apply to the Takeovers Panel, which
falls within the Treasury portfolio. The introduction of referral fees will
provide a mechanism for some of the running costs to be recouped.
3.6 The Bill will provide a mechanism for ASIC to
issue infringement notices for alleged contraventions of the continuous
disclosure provisions of the Corporations Act. These notices would contain a
financial penalty which would be payable to the Commonwealth.
3.7 The Bill contains provisions that amend the
administrative arrangements for the registration of auditors and the lodgement
of documents by auditors. While fees will be prescribed for these activities,
the low number of transactions involved means that there will be negligible
effect on Commonwealth revenue.
4
4.1
The Corporate Law Economic Reform Program (CLERP) was
initiated in the mid 1990s as a vehicle for ongoing review and reform of
Australia's corporate and business regulation to ensure that it is modern,
responsive and promotes business activity. Since that time, substantial
changes have been made to the Corporations Act and the corporate regulatory
framework more generally, particularly in the areas of accounting standards,
fundraising, directors' duties, takeovers and financial services reform. A
policy proposal paper covering cross border insolvency has also been released
is in the process of being implemented.
4.2 The Corporate Law Economic Reform Program (Audit
Reform and Corporate Disclosure) Bill 2003 (`the Bill') is the next stage in
the Government's reform agenda. It will promote the Government's broad
economic objectives of increasing employment and growth by ensuring that
regulatory structures remain strong, modern and flexible without burdening
business with unnecessary regulation. The proposals in the Bill will implement
measures that strengthen, as well as build on, the previous CLERP reforms.
4.3
The policy proposals contained in CLERP 9 were developed in
consultation with stakeholders and ASIC and build on the recommendations
contained in the Ramsay Report
(Independence of Australian Company
Auditors) which was released in October 2001
and the 1997 report of
the MINCO Working Party (
Review of the Requirements for the Registration and
Regulation of Company Auditors).
4.4 CLERP 9 was released in September 2002 and over
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60 submissions were received by the time the consultation period ended in
November. Since then, the Government has met with a broad range of
stakeholders to discuss the proposals.
4.5 The Treasurer released the draft Corporate Law
Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003
(the CLERP 9 Bill) for public comment on 8 October 2003. The period for
public comment closed on 10 November 2003. Over 50 submissions were received
from a broad range of stakeholders.
4.6 The Business Regulation Advisory Group (BRAG) was
consulted on both the policy proposal paper and the Bill. BRAG is made up of
senior representatives from the business community and was established
specifically to advise the Government on proposals arising out of CLERP.
4.7 The Bill also implements recommendations of both
the HIH and Cole Royal Commissions and takes account of relevant
recommendations of the Joint Committee of Public Accounts and Audit Report 391
(Review of Independent Auditing by Registered Company Auditors).
4.8
Audited financial statements are an important part of the
financial information that is available to the capital markets and an essential
element of effective corporate governance. Auditor independence is fundamental
to the credibility and reliability of auditors' reports and in turn independent
audits perform an important function in terms of capital market efficiency.
There has been widespread concern about the efficacy of the audit function,
including the independence of auditors, as a result of major corporate
collapses in Australia and overseas, including HIH.
4.9 The sound operation of Australia's financial
markets is dependent upon parties such as auditors providing information or
services to investors free from any bias, undue influence or conflict of
interest. Auditor independence is concerned with the auditor's capacity,
including the perception of that capacity, to exercise objective and impartial
judgment in relation to the conduct of an audit.
4.10 The accounting profession has undergone a
substantial transformation and the process of change continues. There has been
a continuing trend in Australia and overseas for audit firms to merge,
resulting in increased size, both domestically and internationally. Accounting
firms have established international networks, affiliating under common names.
There has also been a significant increase in non-audit services provided by
audit firms to their clients, both in terms of the range of services offered
and as a proportion of total firm revenue. Accounting firms have become
multi-disciplinary service entities and have entered into new forms of business
relationships with their clients which can potentially compromise
independence.
4.11 The impact on investment levels and efficient
operation of the market can be detrimental where shareholders and investors
lose confidence in the market as a result of the persons that they rely on not
acting independently. Given that a loss of confidence in the market can impact
severely on operation of capital markets and the economy more generally, it is
essential that broad measures be put in place which will promote independence
and ensure that parties operate free from conflicts of interest.
4.12 Over recent years there have been a number of
corporate collapses which have called into question the degree of independence
of auditors. These cases have demonstrated that while a company's actual
financial position may have been poor, the financial statements and the audit
report did not reflect the true condition of the company. This has impaired
the ability of shareholders and the market more generally to adequately assess
the financial health of their investment. The proposals to promote
independence will improve the quality and reliability of information provided
to the market.
4.13
The Bill looks to address these concerns by putting in
place a broad regulatory framework governing audit oversight and independence
arrangements. In doing so, the Bill retains the co-regulatory approach in
relation to auditor independence. Under the current requirements, while the
Corporations Act contains some provisions directed at relatively specific
employment and financial relationships, the professional rules issued by the
professional accounting bodies contain more comprehensive requirements. The
Ramsay report recommendations envisage the inclusion of a comprehensive
legislative framework of auditor independence requirements in the Corporations
Act which would be supplemented by the auditor independence rules in the
professional codes of conduct. The Bill incorporates the recommendations of
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the Ramsay report (as refined in the CLERP 9 policy paper) and the relevant
recommendations in the HIH Royal Commission (HIHRC) report. The objective is
to establish best practice requirements on auditor independence in Australia.
4.14
The Bill introduces the following key auditor independence
reforms:
• A general requirement of auditor independence.
• A requirement that auditors make an annual
declaration that the auditor has complied with the auditor independence
requirements of the Corporations Act and of any applicable codes of
professional conduct.
• The introduction of restrictions on specific
employment and financial relationships between auditors and their clients.
• The imposition of mandatory waiting periods before
partners of audit firms, directors of audit companies and audit personnel may
join an audit client as a director or in a senior management position.
• A requirement for the compulsory rotation of
auditors after a fixed number of years.
• A requirement for an auditor to attend the AGM of a
listed company at which the audit report is tabled and to answer reasonable
questions about the audit.
• A strengthening of the oversight arrangements of an
audit firm's procedures and processes, and the audit standard setting process.
In particular the Financial Reporting Council (FRC) will assume
responsibilities for overseeing the audit standard setting process and auditor
independence.
• A requirement for listed companies to disclose in
their annual directors' report the fees paid to the auditor for each non-audit
service, as well as a description of each service. In addition, the annual
directors' report of each listed company must include a statement by directors
whether they are satisfied that the provision of non-audit services does not
compromise independence.
4.15 Many of these requirements are contained in
rules of professional bodies and apply to members of those bodies only. The
majority of the above proposals will apply to all 7075 registered company
auditors regardless of membership of professional bodies. The audit committee
requirements will apply to all public companies and the fee disclosure
requirements will apply to public companies, registered managed investment
schemes and large (and certain small) proprietary companies.
4.16
The Bill includes a general requirement of auditor
independence which was recommended by the Ramsay report. The standard is
defined by reference to circumstances (a `conflict of interest situation')
whereby a an auditor or professional member of the audit team is not capable of
exercising objective and impartial judgment in relation to the conduct of the
audit. The standard also includes an objective test whereby a reasonable
person with full knowledge of all relevant facts and circumstances, would
conclude that the auditor, or a professional member of the audit team, is not
capable of exercising objective and impartial judgment in relation to the
conduct of the audit of the audited body.
4.17 The Bill requires an auditor to give the
directors of a company an annual declaration that the auditor has complied with
the auditor independence requirements of the Corporations Act and of any
applicable codes of professional conduct.
4.18
In formulating the general requirement of independence and
the declaration of independence consideration was given to whether to maintain
the status quo whereby a statement of best practice has been developed and
implemented by industry with no legislative sanction attached in the event of
non-compliance. This approach would not give rise to new or additional costs.
However, it would omit a key element of the proposed package of auditor
independence reforms which would be contrary to the recommendations of both the
Ramsay report and the HIHRC. In addition current professional requirements
apply to members of the professional bodies only and therefore are limited in
their application across the profession.
4.19
Consideration was also given to introducing the general
requirement of independence as a legal obligation. This would provide
consistent coverage of the entire profession and thereby achieve a level
playing field. It would also provide stronger sanctions to address instances
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of non-compliance.
4.20 The declaration of independence effectively
builds on the general statement of principle and is a means of assuring
investors, shareholders and the market more generally that the auditor is
complying with the general requirement to be independent.
4.21 The legislative measures will apply a consistent
and objective standard of conduct across the auditing profession and thereby
promote the credibility and reliability of auditing reports and financial
statements. The inclusion of an objective standard in the general auditor
independence requirement is critical for enforcement purposes because
objectivity, being a state of mind, is not, except in unusual circumstances,
subject to direct proof. The difficulties associated with identifying a
compromise of independence are also inherent in the nature of the audit
process. Accordingly, the perception of auditor independence, as demonstrated
by external facts and circumstances, under an objective standard, takes on
great importance.
4.22 A legislative requirement in many cases will
formalise and reinforce conduct which many auditors are, or should as a matter
of best practice be complying with. In this respect the compliance costs that
these proposals give rise to are expected to be minimal or at least comparable
to costs currently incurred by auditors.
4.23 There are a number of short-term costs that will
be incurred by auditors who do not, as a matter of best practice, act
independently of their client or who do not follow the rules of the
professional bodies. These costs will primarily be in the nature of
administrative costs arising as a result of implementing measures that are
necessary to comply with the requirements, such as the establishment of quality
control systems to detect and prevent threats to auditor independence. It is
expected that compliance with the general requirement and declaration of
independence will not give rise to any significant compliance burden in the
longer term.
4.24
There has been broad support for introducing a general
requirement of independence as a legal obligation in the Corporations Act.
This proposal has been the subject of consultation in the context of CLERP 9,
the Ramsay report and the HIHRC.
4.25
Option 2 is considered to provide the most assurance to
investors of the integrity of audited financial statements.
4.26
The Bill contains a comprehensive range of restrictions on
specific employment and financial relationships between an auditor and the
audit client. These restrictions incorporate the recommendations of the Ramsay
report which described these restrictions as `core circumstances which, if they
exist, necessarily mean that the auditor is not independent'. These `core
circumstances' are drawn from key international rules and principles (SEC rules
on audit independence, the independence rules of the International Federation
of Accountants and the European Union Commission Recommendation on auditor
independence).
4.27
Consideration was given to leaving the regulation of
specific employment and financial restrictions to the professional accounting
bodies Professional Statement F.1 on auditor independence. While this would
not involve any additional regulatory compliance costs, this would be contrary
to the Ramsay report recommendations that these restrictions should be
contained in the Corporations Act as they are fundamental restrictions that are
necessary to ensure auditor independence.
4.28
In formulating the specific restrictions on employment and
financial relationships, consideration was also given to their inclusion in the
Corporations Act as legal obligations. This approach would facilitate their
enforcement and is consistent with the approach recommended by the Ramsay
report. While this approach would involve some additional compliance costs,
they should not be too onerous given that auditors should already be complying
with similar, although less extensive requirements in Professional
Statement F.1.
4.29
Generally, there is broad support for introducing specific
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restrictions on employment and financial relationships between auditors and
their audit clients. There are concerns regarding the level of detail that is
required to put the provisions into a legislative form and some stakeholders
consider that it would be desirable to continue relying on the professional
rules. These proposals have been the subject of consultation in the context of
CLERP 9, the Ramsay report and the HIHRC.
4.30
Option 2 has been adopted as a means of strengthening the
current restrictions in the professional rules by making the requirements legal
obligations within the Corporations Act. The Bill therefore sets up a
legislative framework for auditor independence and audit oversight which is
currently only dealt with in a cursory way in the law. The requirements will
improve both actual and the perception of independence and thereby lead to
greater confidence in the credibility and reliability of audited financial
statements.
4.31
The CLERP 9 Bill imposes a mandatory waiting period on
partners of audit firms, directors of an audit company and professional members
of the audit team before they can join an audit client as a director or in a
senior management position.
4.32 The Ramsay report noted that a particular
concern in Australia has been retired audit partners joining the boards of
their audit clients. Where this occurs, it is often seen as a particular
threat to the independence of the audit firm.
4.33
The CLERP 9 policy paper proposed that partners in an audit
firm that were directly involved in the audit of the audit client should be
subject to a 2 year waiting period before joining the client company as a
director or in a senior management position.
4.34
Consideration was also given to the recommendations of the
HIHRC which extended the 2 year restriction on partners directly involved in
the audit of the client to 4 years and included senior audit personnel in the
scope of the restriction. The HIHRC recommended that partners of audit firms
not directly involved in the audit should be subject to a 2 year waiting
period.
4.35 The HIHRC also recommended that there should be
a prohibition on any more than one former partner of an audit firm, at any
time, being a director of or taking up a senior management position with the
audit client.
4.36
There is general acceptance of the need for a mandatory
waiting period for purposes ensuring that there is a perception of independence
between the auditor and audit client. However, concern has been expressed by
the accounting profession regarding the 4 year restriction instead of the 2
year waiting period proposed in the CLERP 9 policy paper.
4.37
The underlying policy objective is to strike an appropriate
balance between promoting auditor independence and not unduly impeding audit
professionals joining companies and bringing with them valuable financial
expertise. Option 1 will achieve that balance.
4.38
The Bill provides that the annual directors' report of a
listed company must disclose the fees paid for each non-audit service provided
by the auditor during the financial year, as well as a description of each
service. In addition, the board of directors (in accordance with advice of the
audit committee where applicable) must make a statement as to whether in their
opinion the provision of non-audit services provided by the auditor compromise
auditor independence, and an explanation of why those non-audit services do not
compromise independence. These provisions are in accordance with
recommendations of CLERP 9 and the HIH Royal Commission.
4.39
In developing the requirement that audit committees explain
why the provision of non-audit services is compatible with independence,
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consideration was given to whether the provision of non-audit services should
be prohibited entirely.
4.40 A blanket prohibition on certain non-audit
services would provide the maximum assurance to shareholders and regulators
that the auditor and its client are not contracting non-audit services that
threaten independence.
4.41 When an audit firm provides non-audit services
to a client it is serving two different sets of clients: management in the case
of non-audit services; and the audit committee, the shareholders and all those
who rely on the audited financial statements in the case of the audit. In
serving these different clients the audit firm is subject to conflicts of
interest.
4.42 A rule prohibiting audit firms from providing
non-audit services to their clients would be relatively easy to administer and
would not preclude an audit firm from providing non-audit services, as long as
those services are not provided to audit clients.
4.43 Such an approach would however place Australia
out of step with many jurisdictions and would not recognise that the provision
of non audit services per se does not compromise independence but rather it is
the possibility of dependence on the financial stream flowing from those
services. The HIH Royal Commission report did not propose a blanket
prohibition on non-audit services.
4.44 A modification of this approach would be to
prohibit only specified non-audit services as in the US. This may give rise to
a culture of adherence to rules rather than the underlying principle of
ensuring independence. It would be almost impossible to draft legislation
specific enough to prohibit non-audit services based on the substance of work
to be performed.
4.45
An alternative to prohibiting some or all non-audit
services is to require the disclosure of those services and the fees earned in
relation to those services. This would reduce the potential for conflicts of
interest to arise and ensure that any compromise of independence is evident to
the market. As long as there is appropriate disclosure this approach provides
flexibility to auditors to perform a range of services that are in the public
interest, that do not compromise independence and are beneficial to audit
effectiveness. A disclosure-based approach would provide sufficient
information for investors to determine for themselves whether they believe the
non-audit services contracted are reasonable.
4.46 In addition, there is no solid evidence of any
specific link between audit failures and the provision of non-audit services,
and non-audit services have been provided by audit firms to their clients for
many years. A ban should not be imposed in the absence of compelling evidence
of a problem.
4.47 Option 2 recognises that audit firms
increasingly need specialists to provide critical audit support. Attracting
and retaining these specialists, and motivating them to provide direct audit
support, may be hampered if they were to be prohibited from providing non-audit
services to clients. On some occasions it may be advantageous to the company
and shareholders for the auditor to provide non-audit services, particularly
where that service benefits from an intimate knowledge of the business.
Therefore, an unintended consequence of a prohibition on auditors providing
non-audit services to their clients could be to reduce the effectiveness of
business advisory services received by the company.
4.48 The mandatory disclosure of non-audit services
and the fees attaching to those services will help the market identify the
extent of non-audit services provided and the degree of fee dependence. It is
not expected that the requirement will give rise to significant compliance
costs as the accounting standards already require companies to disclose fees
for audit and non-audit services on an aggregate basis. To meet the proposed
obligation, companies will be required to keep separate records of fees for
audit and non-audit services. It is anticipated that many companies would
already keep such records and there would therefore not be any administrative
costs in the form of record keeping. In terms of the actual disclosure, it is
expected that compliance costs will be negligible.
4.49
Generally stakeholders supported a disclosure based
approach to the provision of non-audit services. Some stakeholders considered
that the provision of non-audit services should be banned altogether. The
proposal to require disclosure in relation to all non-audit services was the
subject of extensive discussion in the report of the HIH Royal Commission and
was consulted upon as part of consultations on the Bill.
4.50
In keeping with the principles based approach underlying
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CLERP a disclosure-based solution as in option 2 is preferred. Disclosure of
the non-audit services contracted between auditors and their clients is
sufficient to enable shareholders to determine whether the amount and nature of
those services poses an unreasonable threat to independence whilst providing
companies the flexibility to garner maximum benefit from the expertise gained
in an audit engagement.
4.51
The Bill requires the lead engagement and review partners
in an audit engagement team to be rotated after a maximum of five years service
on a particular audit client. A two-year period would need to pass before
either partner could be reassigned to the client. Overall, the lead engagement
and review partners would only be allowed to perform any five out of seven
successive annual audits. ASIC will be able to provide relief from the
rotation requirements in circumstances where there would be a significant
burden on the auditor and/or client were they not allowed the extension.
4.52
An audit partner rotation requirement - after seven years
rather than five -- currently forms part of the Joint Code of Professional
Conduct of the ICAA and CPAA. Although the coverage of these professional
bodies captures most auditors, it is necessary to provide for a rotation
requirement in legislation in order to ensure its consistent application across
the entire profession.
4.53 Audit partner rotation was considered an
appropriate measure to promote independence by ensuring that audit partners do
not remain with clients for significant periods which allow inappropriate
relationships to develop which may compromise independence. It was considered
appropriate that the rotation requirements be limited to the lead engagement
and review partners as it is these partners who are responsible for the audit
opinion and have the ability to control the work of other members of the
engagement team. It is at this level that independence concerns are greatest.
It was also consider appropriate to require rotation after five years as a
means of enhancing the perceived independence of audit partners.
4.54 As a result of the rotation requirements, audit
firms may incur costs as new auditors take time to become familiar with the
client, its operations and associated risks. These costs will be present at
each new audit engagement however the costs could be minimised through
appropriate transitional arrangements between the auditors. Under the Bill's
transitional arrangements the rotation requirements will not apply until two
years after the Bill comes into effect. This will give auditors and listed
companies time to prepare for a change in auditor should one be needed as soon
as the requirement takes effect.
4.55
Rotation of audit firms was also considered whereby
companies would need to select a new audit partnership or firm to undertake its
statutory audits after a fixed period of time. This would entail an entirely
new audit firm being employed on the audit which would potential impose
significant cost, disruption and loss of experience for companies.
4.56 In addition, given the small market for auditors
in Australia, especially at the large end of the market which is characterised
by only four suppliers of audit services, it was considered that companies
should be free to choose their auditor.
4.57 The marginal benefit of rotating audit firms
rather than just partners would be minimal and would not justify the
significant compliance costs, in terms of disruption and loss of expertise that
it would entail.
4.58
A number of submissions commented on the period after which
auditors should be required to rotate. Many submissions raised concerns that
rotation after five years could adversely impact on small firms. To address
these concerns, the Bill provides the Australian Securities and Investments
Commission with a power to extend the rotation period to seven years in
appropriate circumstances.
4.59
Given the characteristics of the Australian market for
audit services it is considered appropriate to require the lead engagement and
review partners to rotate after no more than five years. This approach is in
keeping with developments overseas and builds on best practice requirements
already contained within the rules of the professional bodies.
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4.60
The Bill requires auditors of listed companies (or their
representatives) to attend company AGMs.
4.61
Consideration was given to whether attendance should remain
voluntary as is currently the case under the Corporations Act. This would
allow auditors the choice of whether they attend. Given the importance of the
role of external auditors, mechanisms to strengthen accountability were
considered desirable especially given that the AGM is the only forum where the
auditor and the persons to whom the auditor is accountable can meet on a face
to face basis.
4.62
A compulsory attendance requirement was considered
preferable as it would maximise shareholders' opportunity to ask questions of
the auditor and in this way promote the independence and the accountability of
auditors.
4.63 The attendance of the auditor at the AGM may
give rise to costs for companies to secure the auditor's attendance. It is
difficult to quantify such costs as they would be dependent upon individual
fees charged by auditors and the length of time the auditor spends at the AGM.
The benefits of improved accountability are however considered to outweigh any
additional costs.
4.64
This issue was considered in the context of the Audit
Review Working Party and CLERP 9. Generally stakeholders were supportive of
compulsory attendance by auditors at AGMs.
4.65
Given the improvements to auditor accountability which will
flow from attendance at AGMs, Option 2 is supported.
4.66
The Bill also introduces the right for members of a listed
company to submit written questions to the auditor before the AGM. Where
questions are submitted, auditors will be required to consider those questions
before the AGM and the listed company would be required to make those questions
available for attendees at the AGM.
4.67
Consideration was given to maintaining the status quo
whereby shareholders are able to ask questions of the auditor regarding the
conduct of the audit and the contents of the audit report if they are in
attendance at the AGM. This approach did not however take account of the fact
that shareholders for whatever reason may not be able to attend company
meetings. It was considered desirable to facilitate shareholders' ability to
ask questions regardless of whether they are in attendance at the meeting.
This would place all shareholders on a more even footing.
4.68
Consideration was given to facilitating written questions
to be submitted by shareholders prior to AGMs and requiring auditors to provide
answers to written questions and questions asked at the AGM. This however
would place a significant burden on auditors to respond to what could possibly
be hundreds of questions.
4.69
This option would allow shareholders to submit written
questions and to ask questions from the floor of the AGM but does not include a
corresponding obligation on the auditor to answer all questions. Written
questions submitted would serve to highlight to shareholders in attendance at
the meeting and to company directors where concerns exist with the audit or the
audit report and could promote questions from the floor. Some costs would be
directly incurred by the company in passing the questions to the auditor and
costs would be incurred by the auditor in examining the questions and providing
a list of questions to be made available at the AGM. The benefits however of
highlighting areas of concern and promoting greater accountability of auditors
are considered to outweigh any additional costs.
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4.70
Although the proposal to allow questions via e-mail was
flagged in the CLERP 9 paper, little comment was received one way or the other
on this issue. Some stakeholders did however suggest that shareholders should
be able to submit questions whether by email or other medium.
4.71
On balance, Option 3 is supported as it strikes an
appropriate balance between enhancing accountability of auditors and promoting
shareholder activism on the one hand and ensuring auditors are not unreasonably
burdened with having to provide substantive responses to all questions received.
4.72
Over time there has been a growing recognition that, while
the self-regulatory nature of the profession has benefits, the impact of the
profession on industry and commerce is so great that some supervision of the
profession is needed to ensure its self-regulatory mechanisms are both adequate
and appropriate.
4.73 Currently there is minimal oversight of the
auditing profession by Government agencies. Instead, the professional
accounting bodies play a large role in overseeing the profession. Concerns
exist that this does not promote independence, nor the perception of
independence, as the professional bodies could be expected to champion the
interests of their members rather than broader community interests. There is
the added concern that auditors who are not members of the professional
accounting bodies are subject only to minimal supervision by ASIC (for example,
the requirement to lodge a triennial statement). As a means of addressing
these concerns the following options were considered.
4.74
Consideration was given to establishing a new Auditor
Independence Supervisory Board (AISB) as proposed in the Ramsay report on the
Independence of Australian Company Auditors.
4.75 Under this option the professional bodies would
continue to develop ethical and procedural rules dealing with appropriate
standards of behaviour for their members and the manner in which accountancy
practices are to be conducted.
4.76 The AISB is a mechanism that could provide that
supervisory function and provide an independent analysis of the self-regulatory
functions and practices of the profession.
4.77 This option however would see the creation of a
separate board with associated costs to the industry of establishing and
maintaining the board.
4.78 In addition AISB would not take on any functions
relating to audit standards setting.
4.79
This option proposes to expand the current role of the
Financial Reporting Council (FRC) to include oversight of auditor independence.
The AISB independence oversight function in addition to its existing role of
providing broad oversight of accounting standard setting.
4.80 The benefits of having the FRC monitor auditor
independence would be similar to option 1 however the cost burden would be
spread over existing FRC stakeholders, being the Government, accounting
profession and business.
4.81 In order to promote greater independence in the
auditing profession, responsibility for audit standard setting could be brought
within the FRC's functions and thereby complement the FRC's current functions
in relation to the setting of accounting standards. This proposal would
complement the FRC's current role and would bring under one umbrella
responsibility for standard setting within the financial reporting framework
thereby achieving synergies in the administration of accounting and auditing
standard setting.
4.82
Some submissions argued that the FRC was not the
appropriate body to be responsible for the oversight of auditing standards and
independence, as it did not have the appropriate membership and experience.
Other submissions supported the proposed role for the FRC. These concerns have
been taken into account in finalising the Bill.
4.83
Option 2 is preferred as it achieves independent oversight
of the profession while at the same time building on the existing arrangements.
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4.84
Insurance plays an important role in the Australian
economy. It provides a mechanism for transferring and pooling the risk of
financial loss to entities with the expertise to manage the risks involved.
4.85 Professional groups have traditionally dealt
with their unlimited liability exposure for professional default through
professional indemnity insurance, which insures against loss arising from
professional services offered by the insured professional.
4.86 Australia is currently experiencing a `hard
insurance market' that is, a market characterised by tougher risk selection by
insurers. While the Australian experience has been exacerbated by the collapse
of a major domestic player in HIH (which held around 35 per cent of
the professional indemnity market), globally most classes of insurance have
moved into a hard market cycle in the last two years drawn especially by a
world-wide downturn in investment returns and losses arising from the terrorist
attacks on 11 September 2001. In the case of professional indemnity
insurance, this has been compounded by major claims emerging out of the
collapse of Enron and other major corporations in the United States of America
and elsewhere.
4.87 Specifically, professional groups are reporting
that they are experiencing extreme difficulties with the availability and cost
of professional indemnity insurance. This is a result of fewer insurers
offering the product, while those insurers that do are severely restricting the
scope of services they are prepared to cover.
4.88 Exposing professionals to unlimited personal
liability could have significant supply side ramifications if it discourages
new entrants and leads to the exit of existing players in these occupations.
4.89 There is evidence to suggest that the lack of
professional indemnity insurance is leading to a withdrawal of services
provided by some occupational groups.
4.90 For example, the Institute of Chartered
Accountants reported in a January 2003 survey of members that over half are
considering to cease, or have ceased, offering services, particularly audit,
because of rising insurance costs. The Association of Consulting Engineers
Australia also reported in a January 2003 survey that firms are withdrawing
services in areas where insurance is unavailable or unaffordable, such as
pollution control, asbestos removal and air-conditioning treatment to combat
legionnaires disease.
4.91 Such developments, obviously, have broad
economic ramifications.
4.92 The inability of professionals to obtain
liability insurance on reasonable terms becomes even more problematic in
circumstances where Australian governments increasingly are requiring such
cover by law. For example, the Financial Services Reform Act 2001
obliges financial players to have `adequate means of compensating' wronged
consumers. This will, in effect, mean that in a large number of cases,
professionals will be required to hold professional indemnity insurance.
4.93 From the data available, it is not possible to
determine how many professional service providers are operating without
insurance cover for a part or all of their business. Clearly, it will not be
possible for consumers to access appropriate damages in the case of liability
if a professional is operating without insurance or sufficient assets.
4.94 Professional groups report that the greatest
impact of the lack of professional indemnity insurance is being felt by small
to medium sized businesses and businesses in regional areas. Less impact is
being felt by large firms who have sufficient capital to self-insure up to
certain levels and insure above these levels on the international reinsurance
market. This will cause an impact on competition where only larger firms can
continue to provide professional services.
4.95 The primary concern for Government with the lack
of appropriate insurance therefore is threefold. Firstly, many professionals
may be operating without appropriate insurance cover, and divorcing themselves
from assets through discretionary trusts and the like, leaving consumers unable
to access appropriate damages in the case of negligence. Secondly, a
contraction of supply of professional services is likely to lead to reduced
competition. Finally, the withdrawal of professional services, especially in
areas critical to public health and the like, will adversely impact on the
wellbeing of the community.
4.96 It is likely, moreover, that most, if not all,
of the generally higher costs of professional indemnity insurance will
ultimately be passed on to consumers.
4.97 The CLERP 9 paper discussed the accounting
profession's ongoing concerns about the present unlimited liability regime to
which auditors are exposed for professional default. The accounting
profession, and other professional groups, have proposed that the current rules
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of joint and several liability should be replaced with proportionate liability
as one of the possible remedial measures to address their concerns about the
consequences of unlimited liability.
4.98 The CLERP 9 paper proposed that the Commonwealth
should seek the agreement of the States and Territories to introduce
proportionate liability for economic loss and property damage on a nationally
consistent basis.
4.99 Auditors, and other professional groups, have
traditionally dealt with their unlimited liability exposure for professional
fault through professional indemnity insurance. Insurance plays an important
role in the Australian economy. It provides a mechanism for transferring and
pooling the risk of financial loss to entities with the expertise to manage the
risks involved. Professional indemnity insurance insures against loss arising
from professional services offered by the insured professional.
4.100
The objective of the proposed action is to:
(a) Prevent the `deep-pocket' syndrome which is
synonymous with professionals. The `deep-pocket' syndrome occurs when
professionals are the targets of negligence actions not because of culpability
but because they are insured and have the capacity to pay large damages awards.
(b) Allow insurers to more accurately price risk.
Currently under joint and several liability insurers have to price for the
negligent actions of third parties. Proportionate liability enables insurers
to insure only against the negligent conduct of the insured.
(c) Assist professionals to obtain suitable cover at
more reasonable premiums.
(d) To limit the liability of defendants for the loss
suffered by a plaintiff to the extent to which each defendant is responsible
for the plaintiff's loss.
4.101
The Commonwealth would not directly or indirectly intervene
in the professional indemnity insurance market to ensure professionals have
adequate insurance cover to pay awards for damages in the event that liability
is proved.
4.102
The Commonwealth would directly intervene in the market for
professional indemnity insurance to subsidise those professions experiencing
difficulty in obtaining appropriate, affordable insurance.
4.103
The Commonwealth is unable to directly implement this
option, but can encourage states and territories to implement this option.
4.104 The Review of the Law of Negligence
recommended that in cases involving an allegation of negligence on the part
of a person holding himself or herself out as possessing a particular skill,
the standard of reasonable care should be determined by reference to:
(a) What could reasonably be expected of a person
professing that skill?
(b) The relevant circumstances at the date of the
alleged negligence and not a later date.
4.105 This rule could, obviously, be applied
generally to all professionals.
4.106
New South Wales and Western Australia have enacted
professional standards legislation in their
Professional Standards Act
1994 (NSW) and
Professional Standards Act 1997 (WA). These Acts
focus on minimising claims against professionals by improving professional
standards, requiring risk management strategies, compulsory insurance cover,
ongoing professional education and appropriate complaints and disciplinary
mechanisms, in return for limited liability.
4.107 The Commonwealth could not implement a
professional standards legislation scheme, as such. However, Commonwealth
support for such a scheme, by amending the Trade Practices Act 1974, the
Corporations Act 2001 and the Australian Securities and Investments
Commission Act 2001, is essential to ensuring any state and territory
professional standards legislation is not undermined.
4.108 The current New South Wales scheme is most
likely to form the basis for any national model of professional standards
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legislation.
4.109
The other option that has been considered in developing a
national model for proportionate liability is whether there should be some form
of consumer carve out in order to protect small consumer plaintiffs. The
carve-out could operate so that joint and several liability would apply in
cases where the plaintiff was a consumer. Consumer would be defined by
reference to the definition of consumer in the
Trade Practices Act 1974.
4.110
The principle objective of implementing proportionate
liability for economic loss is to place downward pressure on professional
indemnity insurance premiums.
4.111 Proportionate liability will overcome the `deep
pocket' syndrome inherent in a joint and several liability regime which often
sees one party bearing full responsibility for loss or damage despite the fact
that a number of parties may have contributed to the loss. Proportionate
liability means that liability rests with all defendants in proportion to their
contribution to the plaintiff's loss. This is contrasted against joint and
several liability where a defendant can be held liable for the total loss
sustained, even if they contributed to the loss in a small way.
Groups
likely to be affected by the proposed action include:
(a) purchasers of professional services:
(i) `consumer' type purchasers; and
(ii) `business' type purchasers.
(b) providers of professional services.
4.112
This option might be justified in circumstances where the
Government was confident that problems in the professional indemnity insurance
market were of a short-term, cyclical nature. While low investment returns on
the global insurance market clearly represent a cyclical element to the current
problems in the domestic market, these problems also reflect key structural
factors. These include the demise of Australia's major domestic provider in
this class of insurance, HIH, and the fact that Australian society has become
increasingly litigious, to the point of almost being equivalent with the United
States of America.
4.113 There is a strong consensus among all
Australian jurisdictions that action is needed to address these two structural
issues. In essence, the challenge is to attract a higher proportion of global
risk capital back in to the Australian market for liability insurance.
4.114 Relevant too is that professionals are
increasingly being required by law to hold professional indemnity insurance.
For example, the Financial Services Reform Act 2001 obliges financial
players to have `adequate means of compensating' wronged consumers. This will,
in effect, mean that in a large number of cases, professionals will be required
to hold professional indemnity insurance. Obviously, this becomes problematic
when such insurance is simply unattainable or beyond the financial capacity of
professionals. It seems, in fact, that there is a body of legal opinion which
suggests that the law, and the consumer protection it purports to offer, would
be nullified in these circumstances.
4.115
Although this option would obviously allow professionals to
access affordable professional indemnity insurance, there are several factors
which argue against the Commonwealth directly subsidising professional
indemnity insurance premiums. In particular, it would represent a potentially
inequitable cross-subsidisation between general taxpayers and the providers and
users of professional services.
4.116 Government intervention in this form also runs
the moral hazard risk that it could lead to rapid, significant increases in
premium costs as the normal market constraints to pricing would effectively be
removed or relaxed. Further, such a moral hazard response would negate the
potential benefits of the option.
4.117
The Commonwealth is unable to directly implement this
recommendation. Many states and territories have implemented this or a similar
recommendation, or are considering implementing this or a similar
recommendation.
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4.118 Implementing this option would re-balance the
interests of defendants and plaintiffs, as was the general objective of the
Review of the Law of Negligence.
4.119 This option can be viewed as another element in
an overall package of required responses.
4.120
The Government has supported the implementation of
professional standards legislation. The Government expects to introduce
legislation to give effect to professional standards legislation in the 2003
Spring Sittings.
4.121 The Insurance Council of Australia has stated
that professional standards legislation is one of four pillars to improve the
affordability and availability of professional indemnity insurance. The other
three pillars are amendments to section 54 of the Insurance Contracts Act
1984, implementing proportionate liability for economic loss and amending
the Trade Practices Act 1974.
4.122 This option can be viewed as another element in
an overall package of required responses.
4.123
The Commonwealth, and several of the States, including New
South Wales, do not favour a consumer carve out because this could undermine
the benefits of proportionate liability in terms of insurance claims, and would
make it more difficult for insurers to price premiums. A carve out, while
offering some consumer protection, could also have an adverse impact on small
business defendants.
4.124
Proportionate liability has been under consideration by
SCAG and MINCO since 1994. One of the threshold issues that was required to be
addressed was whether proportionate liability could be confined either to the
auditing profession or to the professions generally.
4.125 This issue was addressed by the Davis Inquiry
into the law of joint and several liability which was established by the then
Commonwealth and New South Wales Attorneys-General in February 1994. The Davis
Inquiry concluded that proportionate liability reforms should not be confined
to professional activities because this would lead to unnecessary anomalies.
For example where a builder, an architect and a local authority were found to
be concurrently liable in relation to a claim for economic loss, only the
architect would normally be regarded as engaging in professional activities.
However, the loss caused by the wrongdoing of each is precisely the same, and
the Davis Inquiry argued that none should be excluded from consideration simply
on the basis of an ill-defined division between professional activities and
others. This position in relation to the scope of the proportionate liability
reforms has been accepted in the national model that has been endorsed by all
governments in 2003.
4.126 It is accepted that while proportionate
liability for economic loss limits the exposure of professionals to those
matters for which they are personally responsible, it does not prevent other
parties who have contributed to the wrongful act being liable for damages. As
part of the proportionate liability principle, any contributory negligence on
the part of a plaintiff is also taken into account in awarding damages.
4.127 Moving to proportionate liability for economic
loss better reflects the responsibilities of professionals to their clients.
4.128 The main benefit, from an economic perspective,
of implementing proportionate liability for economic loss is that since
insurers are insuring only the risk of a particular professional, and not the
risk of other professionals, insurers can be more confident in insuring risk.
4.129 Under this proposal, the costs to plaintiffs of
the risk of the insolvency or inability to trace defendants may be transferred
from co-defendants to the plaintiff.
4.130
There is broad support for the proportionate liability
reforms, particularly from the professional groups. The proposals have been
the subject of consultation in the context of the CLERP 9 policy paper and the
consultations undertaken by the Treasury Ministers with the insurance industry
and the professions in relation to insurance issues. In developing the
nationally agreed model, the Commonwealth has also worked in close consultation
with the States and Territories.
• The criticism has been made that proportionate
liability for economic loss places an onerous burden on plaintiffs to join all
defendants to the action to recover full compensation. This argument can be
countered in two ways.
• First, full compensation is a misnomer if
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defendants are not able to access affordable professional indemnity insurance.
In the current climate, professionals are faced with extremely high premiums
some with very high deductibles. It is this climate which is forcing some
professionals to run `bare', that is, without adequate professional indemnity
insurance. Proportionate liability is viewed by the majority of stakeholders
as being a fundamental component of the current proposed package aimed at
putting downward pressure on professional indemnity insurance premiums.
• Second, procedural rules associated with
proportionate liability for economic loss are designed to provide the
appropriate balance between the interests of plaintiffs and defendants.
• It operates so that, in applying proportionate
liability to a claim, a court should have regard to the responsibility of any
potential defendant who is not a party to the proceedings. Further, it
requires defendants to notify a plaintiff in writing of the identity and
alleged role of any other potential defendants of whom they are aware would
also provide protection to plaintiffs. Defendants who fail to co-operate would
risk being ordered to pay costs.
4.131 Given these procedural protections, it is
highly unlikely that consumers will be materially disadvantaged by these
reforms. Fundamentally, they are intended to ensure that professional
indemnity insurance can be purchased at reasonable prices and that consumers
therefore can have greater confidence that the professionals with whom they
deal are in fact covered by such insurance.
4.132 The Commonwealth Department of Prime Minister
and Cabinet, Commonwealth Department of Finance and Administration and the
Commonwealth Attorney-General's Department have been consulted.
4.133
Option 1 would not achieve the stated objectives. Although
this option will have no cost on business, it will not improve the existing
problems business is currently facing in obtaining affordable and appropriate
insurance cover. This option could also be expected to exacerbate the problem
of some businesses not having appropriate insurance or assets to cover any
payment for damages in the case of liability being proved. This would
obviously leave consumers of professional services in a worse position in these
circumstances than they would otherwise be.
4.134 Although option 2 would achieve the dual
objectives of providing protection to professionals and consumers, this would
be at a significant cost to Government due to the potential cross-subsidisation
between general taxpayers and the providers and users of professional
services.
4.135 The Commonwealth supports the implementation of
option 3. However, the Commonwealth is unable to directly implement this
option. For this reason, the Commonwealth has encouraged the states and
territories to implement this, and other, recommendations of the Review of
the Law of Negligence. Once again, this option is viewed as one element of
a broader set of measures.
4.136 The Government has endorsed option 4, to
support any state or territory that implements professional standards
legislation, and expects to introduce legislation to this effect into
Parliament in the Spring Sittings 2003. This option is considered to be only
one element in an overall package of reforms.
4.137 The Commonwealth believes that option 5 does
not achieve the stated objectives and may in fact undermine the desired effect
of proportionate liability for economic loss.
4.138 On balance, option 6 would appear to achieve
the stated objectives better than any of the other options put forward. It
would have no financial cost to business.
4.139 It is considered that the national model for
proportionate liability when implemented in all jurisdictions, will contribute
to an improvement in the professional indemnity insurance market across
Australia.
4.140
In addition to proportionate liability, liability of
auditors is also being addressed through the incorporation of audit firms.
4.141
To address the concerns, it is proposed that the
Corporations Act be amended to allow audit firms to incorporate.
4.142 Incorporation of auditors will address
liability concerns arising as a result of accounting firms being structured as
partnerships. The partnership structure means that all partners of the firm
can be liable for losses caused by one partner despite the fact that they may
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have had no involvement in the conduct causing the loss. Incorporation will
help sheet home liability to those who are actually responsible for loss or
damage by quarantining the liability of auditors within audit firms to the
particular auditor(s) who have caused the loss. In addition, incorporation
will give audit firms a broader range of options in determining how the
business is structured and managed.
4.143
Consideration was given to introducing a form of limited
liability partnership. However, it is recognised that the regulation of
partnerships in Australia is primarily a matter of State and Territory law.
4.144
Stakeholders are generally supportive of a mechanism to
allow incorporation of auditors.
4.145
Implementation of option 1 is preferred. It will not be
mandatory to incorporate and the legislative requirements will only give rise
to compliance costs if audit firms choose to incorporate. Firms that choose to
move from the partnership structure to an incorporated entity will face one off
costs associated with the incorporation of a company and obtaining the
necessary approvals for the company to operate as an auditor. In addition,
there will be the annual costs associated with operating an incorporated
company.
4.146 In terms of the impact on plaintiffs, a
plaintiff could no longer make claims on the assets of the firm and then all
individual partners of the firm. The plaintiff in this circumstance would be
limited to recovering from the individual negligent auditor and from the assets
of the incorporated entity. On balance it is considered that the benefits of
auditor liability reform which the market would receive, outweigh any
additional costs that might be borne by plaintiffs.
4.147
Analysts promote the operation of informed and efficient
markets by collecting and analysing information about companies and financial
products. The research prepared by analysts helps to filter the wide range of
information available to investors about product issuers and investments.
4.148 Analysts may face conflicts of interest that
have the potential to undermine their independence and hence the objectivity of
research provided to investors. These conflicts are most acute in conglomerate
financial services firms that provide services (such as investment banking) to
companies they are analysing. In these circumstances, an analyst may be
influenced to provide positive research reports about client companies.
4.149 However, the potential for conflicts of
interest to arise is not limited to analysts. Financial services licensees and
their representatives may also face conflicts of interest that have the
potential to undermine their independence, and therefore the objectivity of the
service they provide.
4.150 Market failure can result if financial services
licensees and their representatives do not manage their conflicts effectively.
Therefore it is considered that any new provision requiring the management of
conflicts of interest should not apply only to analysts. Rather, it should
apply more broadly to financial services licensees, and their representatives.
4.151
The key objective is for financial services licensees and
their representatives to manage conflicts of interest effectively, including
through transparent disclosure of relevant conflicts, so that the market will
have confidence in the integrity of the services they provide. Adequate
disclosure of conflicts will assist investors and others in assessing the
objectivity of any views provided. This facilitates informed investment
decision-making and encourages confident participation in financial markets.
4.152 Financial services licensees and their
representatives are covered by the licensing, conduct and disclosure regime
contained in the Corporations Act. Currently licensees are obliged to `do
all things necessary to ensure that the financial services covered by the
licence are provided efficiently, honestly and fairly'. There is no explicit
duty in relation to the management of conflicts of interest. However, certain
conflicts must be disclosed in relation to retail clients considering whether
to acquire financial services or products or whether to act on personal advice.
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4.153
This option involves retention of the status quo, whereby
guidance on the management and disclosure of conflicts by financial services
licensees is primarily provided by industry initiatives.
4.154 This option could benefit consumers and the
community by promoting industry awareness of independence issues. It could
also benefit industry, through the flexible and adaptable nature of a voluntary
regime, while incurring no additional Government expenditure or regulatory
change.
4.155 The main cost of this option is that the
standards might not be sufficiently stringent to ensure that investors are
adequately protected and have confidence in the advice they receive. Events
such as investigations by United States' regulators into the impact of
investment banking on research have shown that industry self-regulation may not
be adequate. The cost to consumers is that existing industry guidelines are
not legally enforceable nor externally monitored for compliance, although
compliance costs for industry are lower.
4.156 ASIC's research report into analyst
independence, released in August 2003, concluded that Australian industry
guidelines had not been adopted as uniformly and closely as is appropriate.
Further, ASIC concluded that the industry guidelines are not sufficient to
overcome the deficiencies in analyst firm's management and disclosure of
conflicts of interest that it identified in its report.
4.157 A consideration of the costs and benefits
suggests that while industry initiatives would continue to play a valuable
role, government initiatives might further improve outcomes.
4.158
This option involves ASIC providing guidance via a policy
statement on the level and manner of disclosure of conflicts required under the
general duty to provide financial services `efficiently, honestly and fairly'.
This approach was originally proposed in the CLERP 9 paper.
4.159 This option could be expected to result in
higher standards than relying on industry initiatives alone. In addition, ASIC
could link its guidance to the general duty to act `efficiently, honestly and
fairly'. This could facilitate enforcement action by ASIC under the licensing
regime against licensees. Consumers could benefit from more transparent
disclosure of conflicts. A collaborative approach is also a more flexible and
less costly means of influencing business practices than additional
prescriptive legislative rules.
4.160 There would be costs associated with ASIC
developing and administering further guidance, although consultation with
industry would help to minimise these costs. Principles-based guidance, which
is flexible enough to accommodate different operating structures and overseas
developments, is unlikely to impose substantial compliance costs on industry.
4.161 ASIC guidance, developed in consultation with
stakeholders, would help to ensure an appropriate response to managing
conflicts of interest and this would benefit consumers without imposing
unnecessary compliance costs on industry.
4.162
This option involves introducing in the law an additional
duty in relation to the management of conflicts of interest to supplement the
general duty to provide financial services `efficiently, honestly and
fairly'.
4.163 A conflicts management duty would be in
addition to the `efficiently, honestly and fairly' duty. Introducing an
additional duty would provide a stronger legislative backing for any guidance
issued by ASIC, while being consistent with the Government's principles-based
approach. This would make it clearer that ASIC could take enforcement action
rather than relying on compliance with the general duty. It could promote
certainty by making each licensee's responsibility for managing conflicts of
interest clearer on the face of the legislation.
4.164 It is unlikely to impose additional obligations
on most licensees, because licensees are already expected to manage conflicts
(either as part of the general duty or a matter of best practice). Both an
additional duty and ASIC guidance may impose a higher cost on licensees not
currently managing conflicts of interest adequately. However, ASIC guidance
would be worthwhile in terms of enhanced enforcement and investor confidence.
4.165 On balance, an additional duty would clarify
and reinforce the overriding obligation to manage conflicts of interest by
supplementing the general duty to act `efficiently, honestly and fairly'.
4.166
Industry supported a principles-based approach. The main
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concerns expressed were that any additional obligations not require the
breaking up of conglomerates and not impose detailed prescriptive guidelines on
industry.
4.167 The CLERP 9 proposal for further ASIC guidance,
in conjunction with effective industry initiatives, received strong support
from industry. This approach involved general duties and guidance rather than
a heavily prescriptive approach. It was considered that stakeholders could
actively contribute to ASIC's consultation process to ensure the guidelines
effectively address analyst independence and conflict management issues.
4.168 ASIC supported the addition of a specific
licensing obligation to manage conflicts as a means of enhancing its capacity
to remedy inadequate conflicts management practices.
4.169
ASIC guidance, supported by a specific licensing obligation
in relation to the management of conflicts of interest, will deliver a
market-based solution for managing conflicts of interest. This will benefit
consumers by improving industry standards. An additional duty in relation to
the management of conflicts will supplement the general duty to act
`efficiently, honestly and fairly' and provide a firmer legislative basis for
the development of ASIC guidance. These initiatives will ensure that conflicts
of interests are managed effectively.
4.170 The effectiveness of ASIC guidance should be
monitored after there has been some experience with its operation. This would
provide an opportunity to consider whether any further legislative changes are
required.
4.171
The Government aims to promote an informed market for
financial products (such as shares, debentures and managed investment products)
through disclosure requirements that apply to the issuers of these products.
4.172 These disclosure requirements are intended to
address information asymmetries between product issuers and investors. In the
absence of these requirements, issuers of financial products may withhold
adverse information from investors or selectively disclose materially price
sensitive information about their products to particular investors. In
addition, the nature of financial products means that investors may be unable
to obtain the information that they require to make an informed decision about
whether to acquire or dispose of a financial product. Alternatively, the
overall cost to investors of compiling this information may greatly exceed the
cost to an issuer of obtaining and disseminating the same information.
4.173 Disclosure requirements are intended to
facilitate confident investor participation in financial markets (especially in
relation to so-called `retail investors') by ensuring that investors have equal
and timely access to the information necessary to evaluate investment
opportunities (as well as to determine whether a particular investment is
suited to their needs).
4.174 Disclosure requirements are also intended to
ensure that shareholders are properly informed in relation to their rights to
participate in, and exercise voting rights at, company general meetings. This
enables shareholders to influence the direction of companies in which they
invest.
4.175 It is important to ensure that disclosure
requirements are not too burdensome for issuers so that they increase the cost
of capital. It is also necessary to ensure that disclosure requirements
achieve an appropriate balance between the need to maintain an informed market
and the need to safeguard the commercial performance of issuers by allowing
them to withhold information whose disclosure might be commercially
detrimental.
4.176 CLERP 9 examined three aspects of disclosure by
product issuers:
• fundraising provisions that generally apply when
financial products are first issued to retail investors (as well as in certain
secondary sale situations);
• continuous disclosure provisions (which apply to
product issuers that are disclosing entities and require them to disclose
materially price sensitive information on an ongoing basis); and
• shareholder disclosure in relation to company
meetings and resolutions.
4.177
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The Bill addresses three issues in relation to the
disclosure requirements governing fundraising.
• Difficulties encountered by retail investors in
easily comprehending the contents of prospectuses and other disclosure
documents.
• Additional compliance costs associated with the
need for issuers of continuously quoted managed investment products to disclose
information that has already been made publicly available and therefore readily
available to investors.
• Excessive limitations on financial institutions
that receive wholesale placements of financial products to on-sell these
products to retail investors within 12 months without a disclosure document.
4.178 It is considered Government legislative action
is needed to correct these problems because they relate to requirements set out
in the fundraising provisions of the Corporations Act.
4.179
The objective of the fundraising provisions is to
facilitate confident investor participation in Australia's primary securities
market without imposing unduly high costs on issuers (thereby increasing the
cost of raising equity capital).
4.180 The fundraising provisions are contained in
Chapters 6D and 7 of the Corporations Act and are administered by the
Australian Securities and Investments Commission (ASIC). The provisions of
Chapter 6D apply to shares and debentures and, with some exceptions, Part 7.9
applies to all other financial products.
4.181 The fundraising provisions require offers of
financial products to retail/unsophisticated clients to be accompanied by a
disclosure document that contains information relevant to the offer. These
clients are unsophisticated in financial markets and receive additional
protection under the Act, principally through the disclosure of relevant
information to enable the client to make an informed choice about the financial
product in question. They specify the information that is required to be
contained in disclosure documents and provide penalties and other remedies for
inadequate disclosure.
4.182 The fundraising provisions only apply to offers
to retail clients. They do not apply to offers made to wholesale clients (such
as financial institutions) as these persons are deemed to be able to safeguard
their own interests without the need for mandatory disclosure.
4.183 These amendments are intended to improve the
practical operation of the fundraising provisions in line with the Government's
intention to ensure investors are fully informed when making investment
decisions.
4.184
It was considered that the problems identified in relation
to the fundraising regime could only be addressed through legislative
amendments.
4.185
The reforms in the Bill introduce a `clear, concise and
effective' presentational requirement that is intended to avoid disclosure
documents that are unclear, vague or ambiguous.
4.186 This amendment mirrors provisions introduced by
the Financial Services Reform Act (the FSR Act) into the prospectus regime.
This does not detract from the content of a disclosure document but ensures
that it more effectively conveys the required information to the investing
public.
4.189
Option 1 is to not make amendments to Chapter 6D in line
with Chapter 7.
4.190 This approach will have a minimal impact on
industry. However, it will result in investors potentially not receiving
effective disclosure. Disclosure documents have grown increasing complex.
Whilst it is important to disclose the content required under the Act, a
tendency to use legally proven or established language has meant that such
documents are usually at the expense of clarity and brevity. Given that a
disclosure document's main aim is to inform unsophisticated investors of
relevant information, a document that does not convey such information in a
manner that can be readily understood will be of limited effectiveness as an
information source. It is not intended to detract from the content of a
disclosure document but ensure it effectively conveys the required information
to the investing public.
4.191
Option 2 is to insert into Chapter 6D a provision mirroring
that in subsection 1013C(3), which requires a PDS to be worded and presented in
a `clear, concise and effective manner'. This would bring Chapter 6D wording
and presentation of disclosure documents into line with Product Disclosure
Statements (PDS) in Chapter 7.
4.192 This option may involve an increase in
compliance costs for product issuers to the extent that new disclosure
documents may have to be modified to comply with this requirement. This could
involve extra drafting time to ensure a document meets both the content and
presentational requirements of the Act. That said, industry may benefit though
shorter documents that involve less printing costs and easier marketability to
the market.
4.193 Further, it is expected that greater
understanding of how this presentational requirement works in practice will
develop given the application of the `clear, concise and effective' requirement
to both Chapters 6D and 7 of the Act.
4.194 Retail investors and the wider investing market
will benefit through access to more useful information when making decisions
about financial products.
4.195
The reforms in the Bill provide concessionary disclosure
arrangements in relation to further issues of continuously quoted managed
investment products.
4.196 These amendments mirror provisions introduced
by the FSR Act into the prospectus regime and reduce the overall cost to
managed investment scheme operators of preparing a PDS.
4.197
Option 1 is to maintain the current legislative provisions.
These provide that in determining what information needs to be contained in a
PDS (the name of the disclosure document required to be prepared under Part 7.9
of the Corporations Act), the issuer (or other responsible person) is simply
required to take account of the effect of the enhanced disclosure provisions
that apply to disclosing entities.
4.198 This option would ensure that retail investors
continue to receive all relevant information in the PDS accompanying the offer.
However, managed investment scheme operators that issue these products would
continue to bear the preparation, printing and distribution costs associated
with the provision of information that has already been disclosed to the
market.
4.199
Option 2 is to amend Part 7.9 of the Corporations Act to
insert provisions modelled on section 713 (that apply in relation to products
covered by Chapter 6D). These provisions would permit issuers of managed
investment products that are continuously quoted securities to issue shorter,
or transaction specific, PDS (and allow ASIC to deny an issuer access to these
arrangements if it has not met its disclosure obligations in the past 12
months). The PDS would be required to inform investors of their right to
obtain free of charge copies of documents lodged with ASIC in relation to the
issuer. These amendments would bring Part 7.9 into line which Chapter 6D (in
relation to the framework of disclosure applying to continuously quoted
securities).
4.200 This option would reduce the cost to managed
investment scheme operators of preparing a PDS. Furthermore, that the PDS
would inform investors of their right to obtain information that was excluded
from the PDS and that retail investors may consider relevant in making a
decision to acquire a continuously quoted managed investment product, would
reduce the risk that all relevant information may not be accessed before such a
decision is made.
4.201
Retail clients are entitled to information through a
disclosure document, such as a prospectus, when securities are being issued.
The secondary sale provisions are designed to prevent the avoidance of the
fundraising regime through the issue of securities to an intermediary, who then
on-sells those shares to retail clients. These provisions were strengthened
through legislative amendments contained in the FSR Act that required a
disclosure document to be prepared if either the issuer or the seller intended
that the relevant financial products be on-sold within 12 months.
4.202 The Bill proposes to improve the operation of
these provisions to ensure the placements market can operate efficiently.
However, these amendments ensure investors are protected by receiving relevant
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information to make an informed decision.
4.203
Option 1 is to revert to the pre-FSR Act position in
relation to secondary sales (under which the intention test would apply only to
the issuer and not the subsequent seller).
4.204 This would provide greatest benefit to issuers
and financial institutions. Financial institutions would have few constraints
on their capacity to on-sell financial products to retail clients (provided
they did not deliberately intend to circumvent the relevant fundraising
provisions). This may reduce the cost of capital to issuers, since financial
institutions would not require an additional risk premium in relation to
constraints on their capacity to dispose of the financial products.
4.205 However, this option moves away from the
Government's intention in the FSR Act to strengthen the anti-avoidance intent
of the secondary sales provision. Going back to the pre-FSR Act position could
mean that retail investors and the wider market do not have access to
appropriate information.
4.206
Option 2 is to make no legislative amendments to the
anti-avoidance provisions.
4.207 This option ensures that retail investors
receive adequate disclosure in relation to financial products on-sold within 12
months of being issued without a disclosure document. However, this option
relies on ASIC Class Order relief to enable the practical operation of the
placements market. Without relief, the current provisions of the law imposes
significant demands on secondary sales as financial institutions accepting
share placements would be required to incur the expense of preparing a
disclosure document if they wanted to on-sell these securities to retail
investors within 12 months of issue. They would therefore demand an additional
risk premium from issuers, thereby increasing the cost of equity capital
raising.
4.208 Even though ASIC relief could apply,
introducing legislative change provides greater certainty of both the legal
position and the Government's intention to facilitate the secondary sales
market whilst ensuring investors are protected through access to relevant
information.
Option 3
4.209 Option 3 is to build on the post-FSR Act
amendments to not require further information in relation to secondary sales of
securities where:
• prospectus-like information has been disclosed to
the market; or
• a prospectus in relation to the same class of
securities has been lodged with ASIC.
4.210 This option balances the interests of retail
investors on the one hand and those of financial institutions and issuers on
the other. It allows financial institutions to on-sell financial products
where retail investors have reasonable access to equivalent information to that
which would otherwise have been required to be contained in a disclosure
document covering the relevant financial products.
4.211 Legislative change also provides a basis for
additional ASIC relief where appropriate.
4.212
There was support for the Bill's proposal to improve the
presentation of disclosure documents through a `clear, concise and effective'
requirement. The Bill recognises that this presentational requirement does not
detract from the content of the information required under the Corporations
Act.
4.213 There was also support for the Bill's proposals
in relation to continuously quoted securities and secondary sales. A range of
technical queries were raised in submissions and have been largely addressed in
the final Bill.
4.214
The Bill extends the existing `clear, concise and
effective' presentation requirement for Product Disclosure Statements to
disclosure documents to more effectively convey information to the investing
public.
4.215 It is considered that the benefits of improved
disclosure to retail investors would exceed any potential increase in
compliance costs for the issuers of these products.
4.216 Further, the Bill:
• allows issuers of continuously quoted managed
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investment products to issue shorter, or transaction specific, PDSs (with
other information available on request); and
• provides an exemption from the anti-avoidance
provisions for secondary sales in relation to financial products for which
retail investors can gain ready access to relevant information through:
- prospectus-like information that has been disclosed
to the market; or
- a prospectus in relation to the same class of
securities has been lodged with ASIC.
4.217 It is submitted that these two measures will
reduce costs for financial institutions through introducing practical reforms
to the regime, whilst ensuring that retail investors receive appropriate
protection.
4.218
The problem consists of inadequate compliance by disclosing
entities (especially listed disclosing entities) with their continuous
disclosure obligations. This is reflected in a failure by listed entities to
make full and timely disclosure of materially price sensitive information in
relation to their listed securities. Both the ASX and the Australian
Securities and Investments Commission (ASIC) have identified a need to create
an improved culture of compliance with these provisions amongst listed
entities.
4.219 This problem has a significant impact because
continuous disclosure is fundamental to the integrity of Australian securities
markets. It is important that all investors should have equal and timely
access to price sensitive information released by disclosing entities.
Inadequate disclosure has the potential to discourage confident investor
participation in securities markets. This in turn could reduce the liquidity
of these markets and hence the efficiency of the price discovery process.
4.220
The objectives of the proposed measures are to increase
compliance with the continuous disclosure obligations that apply to disclosing
entities.
• This objective is most significant in relation to
the most actively traded listed disclosing entities that feature the largest
direct and indirect retail shareholder participation.
4.221 Responsibility for ensuring that disclosing
entities comply with their continuous disclosure obligations is shared between
ASIC and the relevant market operator (in relation to entities that are listed
on the ASX, the Bendigo Stock Exchange (BSX) and the Stock Exchange of
Newcastle (NSX)).
• ASX accounts for over 99 per cent of Australia's
listed disclosing entities.
4.222 The continuous disclosure rules that apply to
ASX, BSX and NSX listed entities are contained in the listing rules of the
relevant market operator.
• In general, listed disclosing entities are required
to immediately disclose materially price sensitive information to the relevant
market operator so that it can be made available to investors. Entities are
permitted to withhold information from immediate disclosure if it falls into
the so-called `carve-out'. This `carve-out' is intended to avoid premature
disclosure of potentially misleading or commercially damaging information.
However this information may only be withheld so long as it remains
confidential.
4.223 Market operators have frontline responsibility
for monitoring compliance with their continuous disclosure rules and for
maintaining an informed market (including requiring listed entities to remedy
inadequate disclosure). They are also responsible for issuing guidance to
listed entities in relation to their compliance with these rules.
4.224 In light of the significance of continuous
disclosure for market integrity, the continuous disclosure rules of ASX, BSX
and NSX have been given statutory backing in Chapter 6CA of the Corporations
Act 2001 (the Corporations Act). Inadequate disclosure by a listed entity
can result in criminal and civil action by ASIC, which administers the
Corporations Act.
• ASIC currently has primary responsibility for
enforcement in relation to inadequate disclosure by listed disclosing entities
(including by seeking criminal and civil penalties). The penalties are
intended to function as a deterrent to contraventions.
4.225 The continuous disclosure requirements that
apply to listed disclosing entities are therefore based on a combination of
`quasi-regulation' by market operators, reinforced by explicit governmental
regulation in the form of criminal and civil penalty provisions contained in
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the Corporations Act.
4.226 ASIC also has direct responsibility for
monitoring and enforcing continuous disclosure by unlisted disclosing entities.
The continuous disclosure rules that apply to these entities are contained
solely in the Corporations Act.
4.227
In the course of developing the policy proposals relating
to continuous disclosure that were contained in the CLERP 9 paper, a systematic
review was undertaken of all of the major components of the current framework
of enforcement.
4.228 This included an examination of:
• the division of responsibility between ASIC and
market operators (in relation to continuous disclosure by listed disclosing
entities);
• procedures for the dissemination of materially
price sensitive information to investors; and
• the operation of the current enforcement framework.
4.229 An examination was also undertaken of the
operation of the continuous disclosure frameworks of several other
jurisdictions, including the United Kingdom, the United States, Canada
(Ontario), New Zealand, Hong Kong and Singapore.
4.230 Four options were considered following
examination of the current enforcement framework. It is necessary to consider
the impact of these options on the following persons: investors in securities
issued by disclosing entities, the disclosing entities themselves, market
operators (who have front line responsibility for monitoring compliance with
their continuous disclosure rules) and ASIC, which has responsibility for
administering the provisions of the Corporations Act which provide statutory
backing to these rules and impose similar obligations on unlisted disclosing
entities.
4.231
Option one is that ASIC should assume direct responsibility
for monitoring and enforcing continuous disclosure rules in relation to both
listed and unlisted disclosing entities (as opposed to the continuous
disclosure framework that applies to listed disclosing entities continuing to
consist of both `quasi-regulation' and `explicit government regulation').
• This option involves adopting the UK approach, in
which the Listing Authority of the Financial Services Authority has direct
responsibility for enforcing compliance with a single set of continuous
disclosure obligations that apply to all listed entities.
4.232
Under this option, front line responsibility for enforcing
compliance with the continuous disclosure provisions that currently apply to
listed entities would be transferred from the relevant market operator to ASIC.
• ASIC would have added front line responsibility for
monitoring disclosure and disseminating information in relation to listed
disclosing entities to its current responsibility for penalising
non-compliance.
4.233 The main benefit of this option would be to
address concerns about potential conflicts of interest between the commercial
objectives of market operators and their responsibilities for market
supervision (especially administration of their listing rules in relation to
listed entities that may be commercial partners or rivals).
4.234 However, this option would involve additional
costs for ASIC (including the adoption of more complex arrangements to recover
these costs from relevant market operators). In addition, it is not clear that
a body such as ASIC would be as well as equipped as the relevant market
operator to perform this function (especially if it lacked responsibility for
monitoring trading activity).
4.235 Finally, it should be noted that market
operators are already required to adopt measures to handle conflicts between
their commercial and supervisory responsibilities. There is no evidence that
these arrangements are not operating adequately.
4.236 The likely costs associated with this option
appeared to exceed any benefits that could be achieved from increasing ASIC's
responsibilities in this area.
4.237 As a consequence, it has been decided to retain
the current allocation of responsibility between market operators and ASIC.
Market operators are best placed to act as front line regulators because of
their responsibility for monitoring trading activity as well as for receiving
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and disseminating price-sensitive information disclosed by market entities.
Maintaining adequate disclosure by listed entities is also fundamental to the
obligation of market licensees to maintain `fair, orderly and transparent'
markets for financial products.
• ASIC should continue to focus on penalising
inadequate disclosure (generally in relation to matters referred to it by the
relevant market operator).
4.238
Option two is to require market operators to play a greater
role in penalising contraventions of their continuous disclosure rules by
relevant listed entities, especially in relation to less serious contraventions
of the regime, which might not be appropriately dealt with through criminal or
civil proceedings instituted by ASIC.
• It is important to distinguish this from market
operators relying on their existing operating rules to impose a range of
penalties (ranging from censures to substantial fines) against participants in
relation to disciplinary action for contraventions of their trading and conduct
of business rules.
4.239
Under this option, market operators would play a greater
role in penalising less serious contraventions of their continuous disclosure
rules by listed entities (through the imposition of penalties ranging from
censures to fines). ASIC would have retained responsibility for dealing with
serious contraventions.
4.240 This option would have implications for market
operators and for listed entities that had not complied with their continuous
disclosure obligations.
4.241 This option would impose some additional costs
on market operators, since they would be required to create mechanisms and
tribunals for investigating and penalising less serious instances of inadequate
disclosure by listed entities.
4.242 It would also impose costs on entities that
contravened their continuous disclosure obligations (although these costs would
be appropriate as a means of deterring contraventions).
4.243 The main disadvantage of this option is that
market operators may not have adequate investigatory powers to punish
contraventions. It could also be argued that a requirement for market
operators to penalise less serious contraventions of the regime might detract
from their responsibility to provide guidance to listed entities and maintain
an informed market by remedying inadequate disclosure.
• Market operators argued that they should be
responsible for maintaining an informed market and that ASIC should be
responsible for penalising breaches.
4.244 The problem with this option is market
operators indicated that they would be unwilling to make the necessary
amendments to their operating rules.
4.245 It has been decided, therefore, that ASIC
should retain primary responsibility for penalising contraventions of the
continuous disclosure regime.
4.246
Option three is for the establishment of some form of peer
review involvement to penalise inadequate disclosure by listed entities. A
peer review panel would review alleged contraventions by listed entities to
determine whether a penalty should be imposed (either by the panel itself or by
the courts on the application of ASIC) and might play a useful role in
providing guidance in relation to compliance with continuous disclosure
obligations.
4.247
The main potential benefit that could be derived from this
option would be to ensure that the continuous disclosure provisions are
interpreted in accordance with market practice. It may also have the potential
to increase compliance, by providing increased guidance to relevant entities
and giving them a sense of ownership in relation to continuous disclosure.
4.248 However, consultation with market operators and
ASIC revealed a number of potential disadvantages associated with this option.
• It could involve significant administrative costs
(deriving from the need for the Government to establish and maintain a peer
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review body, either on a stand alone basis or as a separate division of the
Takeovers Panel);
• It would have significant potential to limit the
capacity of market operators and ASIC to respond to contraventions;
• It could lead to inconsistent interpretations of
the continuous disclosure obligations of listed entities (which would not
assist compliance); and
• It is not clear that a peer review panel would
boost levels of disclosure among listed entities.
4.249 On the basis of these considerations it has
been decided that the introduction of a peer review panel would not benefit
investors and was more likely to reduce the effectiveness of enforcement of the
continuous disclosure framework.
4.250 It has also been decided that market operators
should be solely responsible for providing guidance to listed entities in
relation to complying with their continuous disclosure rules and that the
prospect of conflicting interpretations of these requirements was likely to
reduce rather than enhance compliance.
4.251 It was noted that the Takeovers Panel has a
remedial rather than a punitive role in relation to takeovers disputes. In
relation to continuous disclosure, it is considered that this remedial role is
best performed by market operators.
4.252
Option four is to leave the current framework largely
unchanged but to strengthen the enforcement framework by enhancing ASIC's
capacity to penalise contraventions of the continuous disclosure regime
(including alleged contraventions that are referred to ASIC by the relevant
market operator).
4.253 Three measures are proposed:
• an increase in the maximum civil penalty that a
court may impose on bodies corporate in relation to a contravention of the
continuous disclosure regime from $200,000 to $1 million;
• allowing ASIC to seek civil penalties against
individuals directly and knowingly involved in such contraventions; and
• permitting ASIC to issue infringement notices to
bodies corporate in relation to less serious contraventions of the continuous
disclosure regime.
4.254
This option would have implications for entities that
contravene the continuous disclosure provisions (including their directors and
shareholders) and ASIC.
4.255 The main benefit of this option is its
potential to provide improved incentives towards compliance with the continuous
disclosure framework by increasing the likelihood that contraventions will be
penalised. The proposal for the introduction of an infringement notice
mechanism may also benefit ASIC by reducing the costs of pursuing less serious
contraventions of the regime. This benefit would accrue if entities elect to
pay the applicable penalty rather than continuing to pursue the matter in the
courts.
4.256 Increased compliance with the regime will
benefit investors who rely on timely disclosure of materially price sensitive
information by disclosing entities in order to make investment decisions in
relation to their securities.
• Investors still suffer as a consequence of less
serious contraventions.
4.257 The main costs of this option would fall on
disclosing entities that contravene the continuous disclosure regime. Firstly,
they will be exposed to the potential for much higher financial penalties
(although a court is only likely to impose the maximum possible penalty in
relation to particularly serious contraventions). In common with all financial
penalties imposed on bodies corporate, this would have some adverse
implications for shareholders.
4.258 Costs would also potentially fall on officers
of these corporations that are responsible for its disclosure practices and may
be knowingly and directly involved in a contravention. These officers would be
exposed to civil penalties in relation to their conduct as well as civil
actions for damages by investors (in addition to their current civil and
criminal liability).
4.259 Finally, the proposal to introduce an
infringement notice mechanism may also increase administrative costs to the
extent that ASIC would be able to pursue an increased number of contraventions
than is possible under the current framework (especially less serious
contraventions).
4.260 These proposals would not increase the
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obligations on disclosing entities. They will simply strengthen the
enforcement mechanism in relation contraventions of the continuous disclosure
regime.
4.261 The benefits of these proposed reforms outweigh
their costs.
4.262
Generally, there is broad support for increasing the
maximum civil penalty, although stakeholders generally did not support the
proposals to extend civil liability to individuals involved in a contravention
and give ASIC the power to issue infringement notices.
4.263 A number of stakeholders considered that the
extension of civil liability to persons involved in a contravention should be
accompanied by a due diligence/business judgment defence and confined to
officers or senior managers (and not those involved in the decision-making
process but who cannot effect disclosure). However, some submissions supported
the initiative. ASIC, in particular, considered that individuals should have
express obligations in the continuous disclosure context and that existing
Corporations Act provisions provide adequate safeguards.
4.264 A number of submissions also expressed concern
that the infringement notice power is unnecessary given ASIC's existing power
to bring civil penalty proceedings and that it would result in ASIC acting as
the judge, jury and executioner with respect to alleged contraventions. Some
stakeholders argued that the market operator is better placed to assess price
sensitivity and pursue continuous disclosure actions. Some submissions
favoured the establishment of an independent review panel or mechanism. Other
submissions, including ASIC and the ASX, however, supported the proposal.
4.265
As proposed in the CLERP 9 policy paper, the CLERP 9 Bill
will adopt option 4 and will not adopt options 1 to 3.
2.266 This conclusion is based on the assumption that
the requirements of the current regulatory framework are broadly adequate.
There is no need to require the disclosure of additional information, to
reallocate responsibilities between ASIC and market operators or to introduce
some form of peer review panel.
• Market operators should maintain front line
responsibility for providing guidance to listed disclosing entities in relation
to their continuous disclosure obligations, for maintaining an informed market
and for remedying inadequate disclosure.
• ASIC will retain primary responsibility for
penalising contraventions of the regime.
4.267 The main problem in relation to continuous
disclosure relates to inadequate compliance with the existing rules and gaps in
ASIC's capacity to penalise less serious contraventions.
4.268 Option four fills a significant gap in the
current enforcement framework.
4.269 This proposal contains safeguards commensurate
with the magnitude of the potential penalties involved.
• Before issuing an infringement notice, ASIC would
be required to hold a private hearing at which the entity would be given an
opportunity to give evidence and make submissions.
• Compliance with an infringement notice is not taken
as an admission by the entity of liability or a contravention of the
Corporations Act. Furthermore, if it complies, the entity is not subject to
court proceedings or further penalties in relation to the matter.
• If an entity elects not to comply with the
infringement notice, ASIC would bear the evidential burden of proving its case
in court. An entity would only become liable to comply with the notice if ASIC
is able to satisfy the civil standard of proof. Only the court would be able
to force an entity to comply with the notice.
• ASIC may only publish details of an entity's
compliance with an infringement notice.
4.270 The proposal should not increase the potential
for different interpretations of the continuous disclosure rules as ASIC is
already responsible for enforcement in relation to contraventions of these
rules and, in deciding whether to issue infringement notices, ASIC would be
required to consult with the relevant market operator.
4.271
Shareholders can and should play a key role in promoting
good corporate governance practices by influencing the management of
corporations through participating at general meetings. The practical
opportunities for shareholders, particularly at the retail level, to play this
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role is restricted because relevant information is not communicated in a form
that is useable and timely.
4.272
It is sought to increase the practical opportunities for
shareholders to assess and influence the performance of the board by
effectively participating in general meetings of corporations.
4.273
This option looks to maintain the status quo. To maintain
the current position means that many shareholders will continue to be subject
to practical hurdles in relation to effective participation in shareholder
meetings. Inadequate shareholder participation has indirect costs because
widespread effective participation would lessen the chances that poor corporate
governance practices, leading to loss of shareholder value, will be allowed to
continue.
4.274
This option looks to implement proposals in the original
CLERP 9 paper. These proposals aim to facilitate increased shareholder
participation, particularly at the retail level, by:
• allowing improved presentation of information
regarding meetings so it can be more easily understood;
• facilitating use of electronic communications for
meeting information and other reports to shareholders.
4.275 The likely benefits are an increased level of
well informed shareholder participation and likely decreases in costs for
companies in terms of less printing. Companies that do not already have
website technology would need to invest in it, but the proposals do not make
such an investment mandatory.
4.276 CLERP 9 also includes a proposal to require
disclosure by directors of additional information concerning other
directorships in annual reports. The proposal is to address a perception that
a number of directors take on too many board positions and cannot properly
perform their responsibilities. There are not significant direct or indirect
compliance costs on the part of directors or the corporations. The benefit is
that shareholders will be directly informed about the other offices of board
members and can, where appropriate, seek to influence the number of positions
directors take on.
4.277
This option would require companies to provide electronic
information distribution, internet voting and similar facilities for
shareholders. This would ensure all shareholders with access to the internet
would have the same opportunities to participate in corporate meetings.
However, this could impose significant compliance costs on corporations that do
not already have the technology to provide those facilities. It would be
desirable to provide companies with a suitable time period to acquire the
technologies and shareholders without access to internet themselves would still
not have access.
4.278 In relation to the disclosure of directorships,
it would be possible to provide for a maximum number of directorships. This
would have the benefit that no director would be able to exceed a maximum, but
at the cost of flexibility. Opportunities for some directors to input valuable
skills and experience to corporations could be lost by adopting an arbitrary
maximum.
4.279
The proposals received support from the majority of
submissions. However, in light of submissions it was decided to limit the
proposal concerning disclosure of directorships so that it applies only in
relation to directorships on the boards of other listed entities.
4.280
The CLERP 9 proposals, as modified in light of
consultation, offer the prospect of substantially meeting the objectives at
little cost or disadvantage. Accordingly, this option is preferred over
retaining the status quo or adopting prescriptive requirements.
4.281
An effective regulatory framework requires strong
enforcement mechanisms and timely resolution of disputes. It is essential that
standards that govern conduct in the industry are able to be enforced and that
there are strong sanctions in the event of the breach of those standards.
4.282 Disciplinary bodies operating within the
enforcement framework must also have the necessary credibility to perform an
effective disciplinary function.
4.283 Obligations to report misconduct should be
clear and comprehensive and those parties such as employees who may be in
positions to report misconduct should be able to do so without fear of
retribution from employers.
4.284 Some concerns have been raised about the
effectiveness of accounting and auditing enforcement mechanisms. Key standards
by which auditors must abide when conducting audits will not, in the event of a
breach of the standard, attract any direct penalty. This differs to the
position with accounting standards which are legally enforceable under the
Corporations Act. As a consequence ASIC has a more limited suite of powers
available when pursuing enforcement action relating to misconduct of
auditors.
4.285 Further, where there is a dispute between ASIC
and companies on the application of the accounting standards and true and fair
view requirement contained in the Corporations Act, ASIC must initiate legal
proceedings in order to resolve the matter. Judicial proceedings can be costly
and slow, resulting in the market being misinformed about a company's financial
situation for prolonged periods. There are also some concerns about the
unfamiliarity of courts with subject matter concerning the application of
accounting standards and the true and fair view.
4.286 Concerns also exist with machinery arrangements
of the key auditor disciplinary board, the Companies Auditors and Liquidators
Disciplinary Board (CALDB). In particular, the membership base of the Board
does not promote the perception that its hearings are independent from the
accounting profession. The CALDB consists of a Chairperson (who must be a
barrister, solicitor or legal practitioner) and two other members nominated by
the ICAA and CPAA.
4.287 In addition, some provisions currently
contained in the Corporations Act are narrow in scope. In particular,
requirements for auditors to report misconduct to the regulator are not
comprehensive and employees, who may be in a position to identify and report on
corporate misconduct, are not confident to do so for fear of retribution from
their employers. As a result, conduct that should ordinarily attract some form
of sanction, or at least investigation, may go unchecked.
4.288
The CLERP 9 measures are designed to create an enforcement
regime that provides the right incentives for auditors to maintain their
professional independence and to adhere as closely as possible to the best
practice standards expected of a professional auditor. An effective
enforcement regime cannot rely solely on tough penalties for those convicted of
breaches but must also provide alternatives to court action where possible, and
incentives for all parties involved to cooperate with regulators in identifying
those who have behaved improperly. It is important therefore that the
enforcement regime be proactive, not solely reactive.
4.289 The institutional arrangements involved in the
auditor disciplinary process at all levels should also have credibility in the
market in order to achieve the objectives above.
4.290
The Bill contains a number of mechanisms designed to
enhance enforcement mechanisms in the law.
4.291
Auditing standards are currently developed by the Auditing
and Assurance Standards Board (AuASB) but are approved by the executive
councils of the ICAA and CPAA. The standards provide guidance and prescribe
the minimum criteria for the conduct of audit services. Compliance with
auditing standards, which is mandatory only for members of CPAA and ICAA, is
enforced through members' professional rules. Members of the ICAA and CPAA can
be disciplined by the Companies Auditors and Liquidators Disciplinary Board
(CALDB) for failing to follow auditing standards. In this respect auditors can
be deregistered for failing to comply with the standards. However no specific
enforcement action can be taken by the regulator in the event of a breach of
the standard.
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4.292
This option proposes that the Corporations Act be amended
to give auditing standards the force of law. The effect of the proposal would
be to require all registered company auditors to use auditing standards when
they are performing auditing work in accordance with the requirements of the
Corporations Act.
4.293 Auditing standards perform an important role in
the financial reporting framework and by giving legislative backing to auditing
standards, this role will be reinforced. In addition, legislative backing will
provide a mechanism by which appropriate sanctions and remedies can be imposed
for a breach of the standards. The standards will apply to all auditors
regardless of whether they are members of the professional bodies and in this
respect the proposal will establish a consistent standard of conduct applying
to all auditors across the industry. In addition, a broader range of sanctions
will apply in the event of a breach.
4.294 Auditors who are members of the professional
bodies will already comply with the auditing standards and consequently this
proposal will give rise to little, if any, compliance costs for those parties.
4.295 For others, who are not members of the
professional bodies (as noted less than 10 per cent of all company auditors)
and who do not comply with auditing standards as a matter of best practice, it
is expected that some compliance costs will be incurred in having to conduct
audits according to the standards. These parties may have to put in place
revised or additional procedures for performing audits in a manner that
complies with the requirements in the standards. These procedures, which may
involve additional checking of transactions and maintaining comprehensive
working papers and records of the audit, may lead to increased costs in the
short term while the new procedures are being developed and implemented. It is
expected that in the longer term this proposal will result in a small increase
in ongoing compliance costs, primarily in respect of the additional test
checking that may be required and the need to maintain working papers. These
increased costs for individual auditors will be offset by the benefits that
will flow to capital market participants through the knowledge that all audits
are conducted in accordance with a common set of rules.
4.296 This proposal will affect all registered
company auditors. However given that members of the professional bodies
already comply with auditing standards the impact of the proposal will be
limited to less than 10 per cent of company auditors are not members of the two
professional bodies.
4.297 The proposal will also impact on the Auditing
and Assurance Standards Board who will be required to redraft standards into
legally enforceable instruments. A one-off cost will be incurred by the AUASB
to perform this task.
4.298
In developing this proposal consideration was given to
maintaining the status quo by retaining the standards as professional
standards. This approach was not adopted as it would not guarantee the
application of the standards consistently across the entire industry and it
would not facilitate enforcement of the standards by the regulator. Retaining
the standards as industry standards would therefore result in a narrower
application of the standards and more limited suite of enforcement options.
4.299
Stakeholders raised concerns with the proposal to give
auditing standards the force of law. In particular stakeholders considered
that the standards set out broad principles that are expressed in terms which
are not currently amenable to legislative backing. Consequently, redrafting of
standards will be required which could adversely impact on international
harmonisation objectives. In addition, it was argued that standards are
already legally enforceable in an indirect way. Some submissions did however
support this initiative. In particular ASIC considers that this initiative
will reinforce the importance of auditing standards, increase the likelihood
that a change in a standard will have an immediate effect across the industry
and ensure that breach of the standard will attract appropriate remedies.
4.300 Notwithstanding the reservations expressed in
some submissions, giving auditing standards the force of law will result in all
key requirements associated with the preparation and audit of company financial
statements having direct legal under-pinning. This, in turn, would strengthen
ASIC's ability to enforce the financial reporting requirements in the
Corporations Act and to investigate and prosecute any breaches of those
requirements. It is envisaged that the required redrafting of the standards
would result in the standards retaining a principles based approach.
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4.301
Option 1 is preferred as it will apply minimum standards of
conduct for auditors consistently across the industry and ensure that minimum a
breach of those standards is capable of attracting a sanction.
4.302
The Financial Reporting Panel (FRP) is based on a similar
body in the United Kingdom which has proven to be an effective alternative
dispute resolution body. It would represent a less expensive method of
resolving disputes between ASIC and companies and ensure that disputes are
resolved in a timely and efficient way.
4.303
Consideration was given to maintaining the status quo so
that in circumstances where ASIC and a company were in dispute about the
application of accounting standards or the true and fair view, the matter would
need to be resolved by pursuing the matter in court. This situation is
disadvantageous for the market, the company and ASIC for a range of reasons.
Judicial proceedings can be slow which means that disputes can go unresolved
for a significant length of time leaving the market misinformed about a
company's financial situation for some time. In addition, judicial proceedings
are costly for the company and ASIC and courts may lack the expertise to
determine disputes dealing with the application of accounting standards. The
cost and complexity of pursuing matters in court means that financial reporting
issues effectively remain unaddressed. The FRP would provide a mechanism for
an independent third party to determine contested issues that avoids these
disadvantages.
4.304
This option involves establishing an FRP to serve as an
alternative dispute resolution mechanism in circumstances where there is a
dispute between ASIC and a company regarding the application of accounting
standards or the true and fair view and the matter cannot be resolved through
negotiations between the parties. FRP determinations would not be binding on
either ASIC or the company and either party could still decide to pursue the
matter in court. Where a company does not accept an FRP determination and ASIC
subsequently initiates court proceedings, the Court may have regard to the
findings of the FRP.
4.305 These measures are unlikely to result in any
additional compliance burden for participants in the industry as the body would
generally be used as an informal and expeditious alternative to court
proceedings, and participants would not be encouraged to have legal
representation.
4.306 The FRP will be budget funded and an initial
establishment cost and ongoing running costs will be incurred.
4.307
There is broad stakeholder support for the FRP.
4.308
Given the benefits expected to flow from the establishment
of the FRP, option 2 is preferred.
4.309
Registered company auditors who fail to adequately and
properly carry out their duties as an auditor, can be disciplined and/or
deregistered by the Companies Auditors And Liquidators Disciplinary Board
(CALDB). Matters are brought before CALDB by ASIC and it is up to ASIC to make
their case for action against an auditor. Grounds which may be argued by ASIC
may include breach or non-compliance with the requirements of auditing
standards. A breach of auditing standards is not, however, a ground in itself
for deregistration of a company auditor.
4.310 It is proposed in CLERP 9 that the arrangements
for taking disciplinary action against registered company auditors will be
strengthened to:
• provide for a majority of members of the CALDB,
with appropriate skills, who are non-accountants;
• allow the CALDB to sit in more than one division
simultaneously and provide for the appointment of a deputy chairperson for the
CALDB; and
• enable the CALDB to provide information obtained in
the course of a disciplinary proceeding to the investigation and disciplinary
committees of the ICAA, CPAA and NIA and other prescribed professional bodies
as appropriate, to facilitate the disciplinary procedures of those bodies.
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4.311 These initiatives will enhance the operation of
the CALDB, promote the independence and perceptions of independence, and also
facilitate coregulatory arrangements by allowing the CALDB to work more
effectively with the professional bodies.
4.312 These measures are unlikely to result in any
compliance burden for participants in the industry as the changes merely look
to strengthen the current institutional and machinery arrangements rather than
impose new obligations.
4.313 Allowing the CALDB to sit in more than one
division simultaneously will give the board greater flexibility in hearing
cases. The proposal will require the membership of the Board to be increased
which will give rise to increased operational costs.
4.314 The proposals update the current legislative
arrangements for the CALDB and facilitate their operations by increasing their
capacity to conduct hearings. They do not change the policy underlying the
role and functions of the Board.
4.315
Stakeholders are generally supportive of this initiative.
4.316
It is also proposed that the Corporations Act be amended to
expand the matters which auditors must report to ASIC to include any attempt to
unduly influence, coerce, manipulate or mislead the auditor. Currently
auditors are required to notify ASIC in writing as soon as possible if the
auditor has reasonable grounds to suspect that a contravention of the
Corporations Act has occurred. To date, there has been little use of the
current provisions.
4.317 By clarifying the types of conduct which must
be reported by auditors it is anticipated that the provisions will be better
utilised and will ensure that instances of wrongful conduct are brought to the
attention of the regulator. The threat of being reported for wrongful conduct
will also provide a disincentive for companies to engage in such conduct.
4.318 The requirements are unlikely to require
auditors to undertake any additional monitoring and merely require the exercise
of judgement on the part of the auditors. As the proposals build on the
current obligations of auditors it is expected that only minimal, if any,
compliance costs will be incurred.
4.319
Stakeholders are generally supportive of this initiative.
4.320
It is proposed that employees, officers and subcontractors
be provided protection against retaliation from companies for reporting in good
faith on reasonable grounds a suspected breach of the corporate law.
4.321 This will encourage company employees, officers
and subcontractors who may often be in positions to witness misconduct, to
report those breaches. In addition, the measure will help to identify
instances of misconduct and will directly assist ASIC in enforcing the law.
4.322 This measure will not give rise to significant
compliance costs on the part of employers. However, in the event that the
provisions are breached, companies and/or their employees may become liable to
pay compensation to the victim. Other legal costs may also be incurred by
companies that are prosecuted under the provisions. Qualified privilege will
only be available to employees that report misconduct in good faith and on
reasonable grounds. This will limit the scope for vexatious allegations
against employers and in this way will limit the cost that employers may
experience in having to deal with reports of misconduct.
4.323
Stakeholders are generally supportive of this initiative.
4.324
In light of the benefits that will flow from better
enforcement as a result of the establishment of a Financial Reporting Panel,
enhanced disciplinary arrangements, a broader range of issues that must be
reported to ASIC and the provision of qualified privilege and protection for
whistleblowers, it is proposed that these measures be adopted.
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4.325
There are currently a number of areas in which legislative
requirements do not effectively promote accountability.
• Auditors are currently registered by ASIC. When
registering an auditor ASIC takes into account the educational qualifications
of the auditor as well as experience. Auditors are not however required to
meet specific competency standards (although the registration process envisages
the applicant having the necessary competencies) nor complete any specialist
training courses on auditing. While these requirements may be met through
compliance with the rules of the professional bodies, there are no explicit
legislative requirements of this nature. To ensure minimum competencies of
participants in the profession and the application of consistent standards
across the industry some form of action is required in order to promote the
accountability of auditors to their clients.
• The senior management of a company is responsible
for the preparation and content of financial statements. While liability may
be incurred by management where false representations in relation to the
financial statements are made, there is no specific legal requirement for
management to certify whether the statements comply with the law and the
accounting standards. There is consequently no incentive to ensure the
veracity of information contained in the financial statements beyond ensuring
that there are no misleading or false statements.
4.326
Improving the accountability of parties who are responsible
for preparing financial reports as well as those who independently attest to
the financial health of the company will promote the reliability and
credibility of the regulatory system, instil greater confidence in the market
and improve the efficiency of the market for audit services.
4.327
CLERP 9 proposes a number of legislative measures be
adopted to promote accountability
.
4.328
Currently directors of companies are required to declare
whether, in their opinion, the financial statement and notes to the statements
comply with the Corporations Act, the accounting standards and give a true and
fair view of the financial position of the company. There is no requirement
for CEOs and CFOs to make similar declarations despite the fact that for most
listed companies, CEOs and CFOs are responsible for the preparation and content
of the financial statements.
4.329
This option proposes that
CEOs and CFOs be required
to certify to the board of directors that financial statements are in
accordance with the Corporations Act and accounting standards and present a
true and fair view of the financial position and performance of the company.
The receipt of such a certificate by the board would be recorded in the board's
minutes, which can be inspected by ASIC.
4.330 The proposal will promote the reliability of
financial statements, as well as market confidence and will focus the minds of
senior company managers on the need to ensure the accuracy of the content of
financial statements. The proposal will also ensure that those who are
responsible for the preparation of financial statements are accountable for
their content thereby heightening the accountability of senior management.
4.331 Given that in most listed corporations, CEOs
and CFOs are responsible for the preparation and content of the financial
statements they should already be ensuring that financial statements are
prepared in accordance with the law and accounting standards despite the
absence of a specific legislative requirement for them to do so. As a matter
of best practice, many CEOs and CFOs currently certify to the board of
directors the truth and accuracy of the financial statements. As the
legislative changes will effectively formalise what is best practice, the
change will not give rise to significant compliance costs for those
corporations that already follow such practice.
4.332 For those CEOs and CFOs who do not currently
certify to the board, the principal cost would be in terms of the time they and
their staff need to devote to making the inquiries required to enable them to
certify to the board that the financial statements have been prepared in
accordance with the Corporations Act.
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4.333
Another option was for a requirement that company
management sign off on the financial statements to shareholders directly. This
approach was not adopted as it had the potential to blur the lines of
responsibility between company directors and company management. Under the
Corporations Act directors are responsible for the presentation and accuracy of
the financial statements to shareholders.
4.334
Consideration was given to maintaining the status quo
whereby CEOs and CFOs sign off on accounts to the board of directors as a
matter of best practice. In light of the importance of the accuracy of
information contained in financial statements and the important role that
senior company management plays in developing those statements, it was
considered desirable that this practice be formalised in legislation to ensure
its application across all companies. This approach was considered preferable
to relying on the broader, more general duties placed on management to ensure
the accuracy and completeness of financial statements.
4.335
Stakeholders are generally supportive of a requirement for
CEOs/CFOs to verify the accuracy of financial statements.
4.336
Option 1, having executive sign off to the board of
directors is the preferred option. This approach will retain the overall
responsibility of directors for the financial statements but will at the same
time impose a specific requirement on those responsible for preparing the
statements to turn their minds to the actual legal requirements and compliance
with the accounting standards.
4.337
In the case of company auditors, CLERP 9 proposes changes
to the education qualifications and practical experience requirements for
registration. Qualifications will be enhanced through the introduction of a
new requirement for the completion of a specialist auditing course prior to
registration, while the practical experience requirements will be revised to
include satisfactory compliance with a competency standard in auditing.
4.338
Currently an auditor will meet the necessary practical
experience requirements by demonstrating compliance with the time based
criteria specified in the Corporations Regulations. For processing
applications from prospective auditors, ASIC has developed guidelines which
attempt to assess the time-based criteria in terms of the breadth of experience
an applicant should have. A particular difficulty with this criteria has been
the inability of prospective auditors who are either resident in small regional
centres or members of small accounting firms to meet the time-based
requirements, notwithstanding that they might otherwise have extensive
experience in audit-type work.
4.339 The law currently requires prospective auditors
to have completed a three-year degree course in accountancy from an Australian
university, or to have other qualifications and experience which, in the
opinion of ASIC, is equivalent to such a degree. While the legislation does
not require any specialist auditor training, the accounting bodies require
completion of an advance training course in auditing before full membership of
the body can be obtained. As the majority of prospective auditors are members
of one of the accounting bodies, the practical effect is that most company
auditors currently registered by ASIC have undertaken specialist training in
auditing.
4.340 Consideration was given to maintaining these
current practices. While this approach would give flexibility to the industry
to determine how best to meet the educational requirements, it does not provide
for a consistent standard to be applied across the industry. In addition, the
problems faced by prospective auditors in small firms and in regional centres
in obtaining the pre-requisite practical experience would not be addressed.
4.341
A legislative requirement for auditors to meet competency
standard-based practical experience requirements and to complete specialist
auditor training will ensure that applicants for registration as company
auditors have demonstrated competence in the key skills required to perform the
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duties of an auditor. A competency based requirement will promote greater
confidence in the auditing profession.
4.342 Introduction of competency standard based
practical experience requirements will result in establishment costs associated
with the new arrangements being incurred by the accounting bodies, accounting
firms, prospective auditors and ASIC. Once implemented, ongoing administrative
costs associated with the actions needed to comply with the standard are likely
to be incurred by accounting firms and prospective auditors. These costs are
off-set by the benefits that will flow to the capital market participants
through having auditors who are more uniformly trained in a broad range of
audit situations. In addition, adoption of competency standards can be
expected to benefit the accounting bodies, accounting firms, prospective
auditors and ASIC by eliminating the appeals and hearing which currently occur
when an application for registration as a company auditor is rejected.
4.343 In terms of the specialist training
requirements, the requirements of the professional bodies only apply to their
members and consequently there do not exist comprehensive requirements which
apply across the board to all persons who are performing the function of
auditor. A legislative solution will ensure the application of robust
educational standards across the whole of the industry.
4.344 This requirement will not lead to significant
compliance costs for many auditors currently operating within the system. As
noted above, the specialist audit training course is equivalent to that
currently required by the professional bodies and many auditors would have
completed the current courses. It is expected that those who have completed
the current courses would be grandfathered into the new regime and therefore
would not incur any compliance costs as a result of this measure. For those
auditors who have not completed the auditing module required by the accounting
bodies, some costs associated with meeting the legislative requirements will be
incurred.
4.345
The proposal that accountants be required to meet the
practical experience requirements through satisfactory compliance with
competency standards and to complete specialist training prior to registration
was strongly supported in CLERP 9 submissions as well as submissions made in
the context of the Ramsay Report on the Independence of Australian Company
Auditors.
4.346
Option 2, undertaking an advanced course in auditing and
satisfying the practical experience requirements for registration through
compliance with a competency standard in auditing, is preferred as it will
ensure that all new applicants for registration as company auditors have the
key skills required to perform the duties of an auditor.
4.347
Under Australia's corporate regulatory framework, directors
and senior company employees exercise control over company resources on behalf
of shareholders, who have no direct operational control over the company.
While this relationship is the most efficient approach to operating a company
that is owned by hundreds or thousands of different parties, a recognised
limitation is that it can give rise to a principal-agent problem.
4.348 The principal-agent problem is characterised by
owners or principals (shareholders) of a venture hiring agents (professional
managers) to manage the affairs of that venture to achieve the investment
objectives of the principal. Agents are hired because they bring skills and
devote time to a venture that the principal is not in a position to provide
personally. In reality agents may not always act in a way that best achieves
the objectives of the principal.
4.349 Under the Australian corporate system directors
act as representatives of shareholders in guiding management as to the
company's strategic and administrative decisions. Directors are able to devote
time and effort necessary to oversee the management of the company and are
often compensated for this role.
4.350 In Australia, shareholders of public companies
elect directors by resolution at the annual general meeting (AGM). Directors
must stand for re-election at regular intervals and may be dismissed by a
resolution of the shareholders. As directors represent all shareholders in
their role, it is essential that their actions are transparent and that they
are accountable to shareholders in discharging their duties.
4.351 Directors are generally paid remuneration as
determined by shareholders by resolution at an AGM. Directors, in turn,
appoint senior employees of the company and determine their remuneration.
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4.352 Recently, shareholders and other stakeholders
in companies have expressed concern at a lack of transparency surrounding
company remuneration practices. In order to ensure that directors are
discharging their duties effectively (and hence to make informed decisions of
the appropriateness of the board's actions) shareholders require timely,
detailed information on the remuneration packages that provide incentives for
key staff to act in accordance with shareholders' objectives.
4.353 It is essential that directors, as
representative shareholders, communicate with shareholders to ensure that they
develop and apply an appropriate remuneration policy.
4.354
The Corporations Act requires disclosure in the annual
directors' report of:
• board policy for determining the nature and amount
of remuneration of directors and senior company executives;
• the relationship between such policy and company
performance; and
• the nature and amount of each element of the
remuneration of each director and each of the 5 most highly remunerated
officers.
4.355 In addition, the Corporations Act provides that
shareholders holding at least 5 per cent of the votes that may be cast at a
general meeting, or at least 100 members entitled to vote at a general meeting,
may require disclosure of the remuneration paid to each director of the company
or its subsidiaries. If this occurs, an audited remuneration statement for the
last financial year must be sent to all members entitled to vote.
4.356 Current accounting standards contain
requirements for the disclosure of directors' and executives' remuneration in
the notes to the financial statements. The aggregate remuneration of all
directors must be disclosed as well as the number of directors who receive
remuneration that falls within successive $10,000 bands. Aggregate
remuneration of executives must be disclosed for those executives who earn more
than $100,000 per annum. In addition, the number of executives whose annual
remuneration falls within each successive $10,000 band over $100,000 must be
disclosed.
4.357 The Australian Stock Exchange (ASX) Listing
Rules require companies to disclose, on a continuous basis, any information
that is "materially price sensitive". While this requirement includes
remuneration agreements entered into by a company, in practice it is likely
that few, if any, remuneration contracts would have a material impact on share
price. The ASX has informed companies that it intends to administer the
continuous disclosure rules so that, where a company announces the appointment
of a Chief Executive Officer, they must also disclose the key terms and
conditions of the relevant remuneration agreement.
4.358
The Government is committed to the principle of
transparency in disclosure of information about remuneration of directors and
senior executives.
4.359 In keeping with this objective, the Bill seeks
to ensure shareholders are provided with sufficient information about corporate
performance to allow them to make informed decisions about the board's
performance in setting remuneration for directors and executives.
4.360 In seeking greater disclosure of information
about remuneration, the Bill does not seek to intervene in the market by
placing limits on the quantum of director or executive remuneration. Instead,
it recognises that remuneration levels are a matter for directors having regard
to the circumstances of the market in which the company operates.
4.361 It is not appropriate for shareholders to play
a direct role in determining executive remuneration as under the Australian
corporate framework this role is delegated to the board. The Corporations Act
provides that the ultimate sanction available for shareholders where they
disagree with the actions of the board is to pass a resolution to remove some
or all of the members of the board.
4.362 The measures in the Bill reflect that
communication between shareholders and boards is the most effective means of
averting more disruptive actions, such as dismissal of board members over
operational decisions where such action could be avoided.
4.363
Three options have been identified as viable means of
overcoming the problem that has been identified and achieving the Government's
objectives:
• amending the Corporations Act;
• enhancing disclosure requirements in accounting
standards; and
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• relying on guidance developed by the market.
4.364
As a means of enhancing transparency and facilitating
accountability for decisions regarding remuneration, the Corporations Act could
be amended to broaden the scope and nature of the disclosures that are
currently required. The Government's objectives could be achieved by providing
more detailed guidance on the matters that need to be disclosed regarding
remuneration and applying the disclosure requirements to the entire corporate
group in addition to the listed entity.
4.365 Currently 5% of shareholders are able to
request that directors prepare a remuneration report and lay it before the
company's AGM. These provisions could be complemented by requiring companies
to include in their annual report a separate section which contains disclosures
that need to be made under the law and requiring that shareholders be given an
opportunity to comment on the report at the AGM and vote on a non-binding
resolution. This will serve as a channel for shareholders to articulate their
views on directors' decisions regarding remuneration. The resolution would
serve as an advisory opinion to assist the board in assessing the views of
shareholders as a whole, rather than relying on comments from the floor of an
AGM alone.
4.366 The Corporations Act already contains
provisions that require shareholder approval of payments made to persons who
hold board or managerial office. In particular, the Corporations Act generally
requires shareholders to approve retirement benefits. There are several,
significant exemptions to this general requirement. Shareholder approval is
not required if the payment relates to, among other things:
• Damages for breach of contract. This includes
damages agreed or `settled' between the entity and director.
• An agreement made between the company and the
person before the person became a director, as part of the consideration for
the person agreeing to become a director.
4.367 While it is consistent within the corporate
regulatory framework for directors to determine the amount of such payments,
given experience in recent times, it is arguable that shareholders should be
given an opportunity to have a say in such payments where they are large in
relation to the director's income whilst in office and their length of
service.
4.368 There are a number of advantages associated
with amending the law to put in place the above initiatives. In particular,
any legislative disclosure requirements would be mandatory and failure to
comply would be enforceable by ASIC.
• In addition, director and executive remuneration is
an issue of corporate governance as well as being a financial reporting issue.
As such, it is appropriate for the disclosures to be made in the annual
directors' report.
4.369 The proposed requirements will not adversely
impact on the ability of companies to offer remuneration packages that will
attract and retain the best executives. Boards of directors are faced with a
conflict of interest when determining their own remuneration and they must be
mindful of the need to justify executives' remuneration to shareholders.
Enhanced disclosure and greater shareholder activism will potentially give rise
to some costs although these are not expected to be onerous.
4.370
This option relies on the accounting standards to set
requirements for the disclosure of director and executive remuneration in
company financial statements.
4.371 The AASB is currently reviewing relevant
standards and has proposed amendments to its standard on Executive, Director
and Related Party Transactions (ED 106) to require detailed disclosure in
the financial statements of total remuneration paid and owed to all directors
and the five most senior non-director executives of an economic entity. The
AASB currently envisages that its revised standard will apply from 1 January
2004.
4.372 Given that disclosures required by the
accounting standards are focussed on financial information it may be argued
that accounting standards are the appropriate vehicle for such disclosure
requirements.
4.373 One difficulty in relying on accounting
standards to achieve the Government's disclosure objectives is that the AASB is
an independent statutory body and the Government is not able to influence the
requirements contained in the standards.
4.374
A third approach to the disclosure of remuneration is to
rely on industry self regulation and produce its own standards for disclosure.
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This would require no action on the part of the Government other than to
encourage bodies to develop guidance for companies.
• The least prescriptive approach that the Government
could take would be to leave industry and investor groups to develop their own
guidelines for disclosure of executive remuneration. In particular, the
Government could rely on the work of the ASX's Corporate Governance Council.
The primary advantage of such an approach is that it would give companies the
flexibility to tailor their disclosures to the specific needs of their
investors.
• A disadvantage of this approach however is that
industry standards are not enforceable by law, which may allow situations to
arise where those that chose not to comply are those that have the poorest
governance practices more generally and whose shareholders would benefit most
from disclosure.
4.375
The Government has sought public comments on these
proposals. While there has broad support for many the proposals, concerns have
been raised about the impact of disclosure of remuneration on the level of
salaries and the potential blurring of responsibility for determining
remuneration caused by a non-binding shareholder vote.
4.376
It is proposed that a mix of all three options should be
adopted. To achieve this, the Government will introduce into the Parliament
legislative amendments to the existing disclosure requirements along the lines
of the proposals in option 1. It will also support the continued improvement
of disclosure requirements in accounting standards, in particular, the
Corporations Regulations will refer to accounting standards in prescribing
disclosures to be made. Finally, the Government supports the work of the ASX's
Corporate Governance Council and encourages companies to adopt the
recommendations of the Council where they go beyond the requirements of the
legislation and accounting standards.
4.377 In terms of the concerns raised in
consultations, it is noted that there is only anecdotal evidence that
disclosure leads to increases in remuneration. Concerns regarding the blurring
of lines of responsibility have been noted however the Bill ensures that
responsibility for determining executive remuneration remains with directors.
4.378
Over time, the form and content of information contained in
an entity's financial report has been expanded to the point where the report
can be a long and complex document.
4.379 While detailed financial reports are essential
for the purpose of meeting the information needs of sophisticated investors and
financial analysts, they can be confusing for smaller investors, many of whom
are unaccustomed to reading financial reports.
4.380
There is a need to include in either the statutory
directors' report or the annual financial report information to allow the users
of those reports to make an assessment of the operations of the entity, its
financial position and business strategies. The reports should be presented in
a manner which maximises their usefulness to all users, having particular
regard to the needs of people who are unaccustomed to reading financial
reports.
4.381 In some jurisdictions, the information needs of
capital market participants have been satisfied by either enhancing the
statutory directors' report or introducing an operating and financial review
containing management, discussion and analysis-type disclosures. Providing
shareholders with such information is increasingly being accepted in the
world's capital markets as an integral part of good corporate governance and
high quality financial reporting.
4.382 In other jurisdictions, the information needs
of capital market participants have been addressed through the use of
simplified financial reports which - in theory at least - can be more readily
understood by the users of the reports. In such cases, a simplified financial
report may be accompanied by expanded explanatory material about the financial
results.
4.383 Australia currently uses a mix of these
approaches for providing information to capital market participants.
• The Corporations Act requires the directors of an
entity to prepare a directors' report which contains a range of information
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about the entity, including the entity's operations and activities, the names
of the entity's directors, dividends paid or proposed, options over unissued
shares and particulars of the remuneration of directors and senior
executives.
• The Australian Stock Exchange (ASX) Listing Rules
require companies to include a review of operations and activities for the
reporting period in their annual report. Guidance about the issues to be
included in the review has been prepared and published by the Group of
100 Inc (G100). The Listing Rules also require the inclusion of a
commentary on the results for the period to be included in the preliminary
final report submitted to the Exchange.
• Accounting standard AASB 1039, which sets out
the requirements for the preparation of a concise financial report, provides
that a discussion and analysis of the principal factors affecting the financial
performance, financial position and financing and investing activities of the
company is to be included in every concise financial report prepared in
accordance with the standard.
4.384
Two principal options are available for ensuring capital
market participants are provided with the information needed to allow them to
make an informed assessment of the operations of an entity, its financial
position and business strategies:
• maintaining the status quo; and
• amending the Corporations Act to require each
listed company to prepare an operating and financial review as part of the
directors' report.
4.385
This option envisages the continuation of the existing
legislative requirements for the preparation of a directors' report and the
requirement in the ASX Listing Rules for the preparation of a review of
operations and activities, supplemented by additional discussion and analysis
about the financial results where a concise financial report has been
prepared.
4.386 Adoption of this option would impose no new
obligations on the business community.
4.387 As anecdotal evidence suggests many entities
have adopted a `minimalist' approach to compliance with these requirements,
capital market participants may not gain any significant benefit from a
decision to maintain the status quo unless mechanisms are put in place to
encourage, or require, a high level of compliance with the Listing Rules and
the requirements of AASB 1039. In this regard, it should be noted that
the introduction of any measures to further enhance the level of compliance
with the Listing Rules (assuming that such measures were needed or justified)
would be a matter for the ASX.
4.388
Under this option, the Corporations Act would be amended to
require the preparation of an operating and financial review as part of a
listed entity's directors' report. The review would require the disclosure of
the information members would reasonably require to make an informed assessment
of the entity's operations, its financial position, business strategies and
prospects for future financial years. As with the existing ASX Listing Rules,
the legislation does not set out detailed disclosure requirements. It is
expected that, in considering the issues to be addressed in their review,
directors will have regard to best practice guidance such as that prepared and
published by G100.
4.389 This option builds on the existing
requirements, with which directors and their senior executives should already
be familiar. As such, the requirement does not impose a significant new
regulatory burden on the entities to which it applies, provided that they are
already complying with the existing requirements.
4.390 One significant difference between this option
and the existing requirements is that under this option the disclosure
requirements will have force of law, with the disclosures being underpinned
and/or enforced by the sanctions contained in the Corporations Act. This is
expected to benefit all capital market participants through directors being
more diligent in the preparation of the operating and financial review.
4.391
The recommendation that directors prepare an operating and
financial review is contained in the report of the HIH Royal Commission. The
Government's decision to require the preparation of a review was announced by
the Treasurer on 7 October 2003 and draft provisions to give effect to the
decision were included in the draft Bill which was released for public comment
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on 8 October.
4.392 Comments received to date suggest that there is
broad support within the business community for the proposed requirement. Some
commentators have, however, suggested that the status quo should be maintained
to give the recommendations of the ASX Corporate Governance Council, which were
released in early 2003 and which seek to strengthen the ASX's existing
requirements for the preparation of a review of operations and activities, time
to become fully operative.
4.393
Option 2, with its underpinning by Corporations Act
sanctions, is considered to be the most appropriate means of ensuring all
capital market participants, and in particular those who are unaccustomed to
reading financial reports, receive information which enables them to
understand, and make an informed assessment about, an entity's operations, its
financial position, business strategies and prospects for future financial
years.
5
5.1
Clauses 1 to 3 of the Bill provide:
• that the Bill, when enacted, will be known as the
Corporate Law Economic Reform Program (Audit Reform and Corporate
Disclosure) Act 2003 (clause 1);
• when the various amendments contained in the Bill
come into operation (clause 2); and
• that the items contained in the various Schedules
to the Bill are to amend the Australian Securities and Investments
Commission Act 2001, the Corporations Act 2001 and (in the case of
amendments in Schedule 3 of the Bill) the Trade Practices Act 1974
in the manner indicated in each item (clause 3).
5.2 The Bill specifies the following commencement
dates for sections (currently clauses), Schedules and Parts of Schedules:
• Royal Assent:
- sections 1 to 3; and
- Schedule 12;
• one day after Royal Assent:
- Parts 2 and 4 of Schedule 4; and
- Schedules 6 and 7;
• 1 July 2004:
- Schedules 1 and 2;
- Parts 1, 3 and 5 of Schedule 4; and
- Schedules 5, 8, 9[1]
and 11[2];
• 1 January 2005:
- Schedule 10; and
• a day to be fixed by proclamation:
- Schedule 3
5.3 The following paragraphs provide an explanation
of the amendments contained in Schedules 1 to 11 of the Bill. An explanation
of the transitional and application provisions in Schedule 12 of the Bill will
be found with the substantive provisions to which each transitional/application
provision relates.
5.4
Schedule 1 of the Bill contains the amendments for the
reform of the audit provisions in the
Australian Securities and Investments
Commission Act 2001 (ASIC Act) and the
Corporations Act 2001.
Within the Schedule the amendments are grouped as follows:
| Part 1
|
Audit
oversight
|
| Part 2
|
Qualifications
of auditors
|
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Part 3
|
Auditor
appointment, independence and rotation requirements
|
| Part 4
|
Registration
of authorised audit companies
|
| Part 5
|
Auditors
and AGMs
|
| Part 6
|
Qualified
privilege
|
| Part 7
|
Expansion
of auditors' duties
|
| Part 8
|
Companies
Auditors and Liquidators Disciplinary Board
|
5.5
The text in this Part of the Commentary is divided into the
following topics:
• new and amended definitions;
• changes to objects of Part 12;
• changes to FRC's functions and powers;
• AUASB's establishment, functions, powers,
procedures, membership and other administrative matters;
• auditing standards; and
• liability for damages.
5.6 The Bill expands the responsibilities of the
Financial Reporting Council (FRC), which currently oversees the accounting
standard setting process, to oversee auditor independence requirements in
Australia and the auditing standard setting arrangements. To this end, the
existing Auditing and Assurance Standards Board (AuASB)[3] will be reconstituted with a Government appointed Chairman
under the auspices of the FRC, similar to the Australian Accounting Standards
Board (AASB). Auditing standards will have the force of law on the same basis
as AASB standards.
5.7 These arrangements will bring together, under a
single oversight body, policy advising, monitoring and technical oversight
functions for the key elements of the financial reporting framework. Having
broad policy direction coming from a single overarching body will ensure
coherent and effective oversight while at the same time protecting the
independence of the two technical boards within the structure.
5.8 Part 1 of Schedule 1 of the Bill amends
both the ASIC Act and the Corporations Act to implement the oversight
arrangements. In particular, this Part:
• sets out new functions for the FRC in relation to
auditor independence and oversight of the audit standard setting process;
• establishes the Auditing and Assurance Standards
Board (AUASB) as a statutory body corporate and sets out its functions, powers,
membership structure and administrative arrangements;
• gives the AUASB power to make auditing standards
for the purpose of the Corporations Act and to formulate auditing and assurance
standards for other purposes; and
• requires auditors to comply with standards made by
the AUASB when conducting Corporations Act audits and provide for the
imposition of penalties where auditors fail to comply with such standards.
5.9
The Bill contains a number of new and amended definitions
which are inserted into subsection 5(1) of the ASIC Act (see items 2 to 7) and
section 9 of the Corporations Act (see items 37, 38 and 39). Particular
definitions to note are:
• `AUASB' is an abbreviation for the Auditing and
Assurance Standards Board that is used in both the ASIC and Corporations Acts
(items 2 and 37);
• `auditing standard' is defined to mean either a
standard in force under proposed section 336 or a provision (paragraph) of such
a standard (item 38);
• `auditor independence requirements', which is
defined to mean the independence requirements contained in the Corporations Act
and the codes of professional conduct, has been included in the legislation to
facilitate the drafting of proposed subsections 225(1) and (2B)
(item 3);
• `Australian auditor', which is defined to mean an
individual auditor, an audit firm or an audit company that is conducting, or
has conducted, Corporations Act audits, has been included in the legislation to
facilitate the drafting of proposed amendments to Part 12 of the ASIC Act
(item 4);
• `international auditing standards', means standards
made by the International Auditing and Assurance Standards Board (IAASB) (a
body established by the International Federation of Accountants) (paragraph (a)
of the definition) or another body specified in the regulations (paragraph (b)
of the definition). Paragraph (b) has been included principally to provide
flexibility in the event that another overseas body/standard setter takes over
the role of the IAASB in developing a set of internationally accepted auditing
standards (compared with, definition of `international accounting standards')
(item 5);
• `member' means, in relation to the AUASB, a member
of that body (item 6);
• `professional accounting body' means a body
prescribed by the regulations for the purposes of the definition. It is
envisaged that Australia's three main accounting bodies will be prescribed:
CPA Australia, The Institute of Chartered Accountants in Australia and the
National Institute of Accountants (items 7 and 39).
5.10
Items 11 and 12 amend section 224 (Main objects of this
part) to reflect the CLERP 9 decision to reconstitute the AUASB as a
statutory body and to give auditing standards the force of law.
5.11 Item 11 inserts proposed paragraph 224(aa),
which provides that one of the objects of Part 12 is to facilitate the
development of auditing and assurance standards and related guidance materials
that:
• provide auditors with relevant and comprehensive
guidance in forming an opinion about, and reporting on, financial reports;
and
• require the preparation of auditors' reports that
are reliable and readily understandable by the users of the financial reports
to which they relate.
5.12
Items 14, 15 and 16 of the Bill amend section 225 of the
ASIC Act (Functions and powers of the Financial Reporting Council) to reflect
that the FRC will be responsible for overseeing both the AASB and the AUASB.
5.13 Provisions relating to the FRC's oversight of
the AUASB are modelled on the current AASB/FRC arrangements (see proposed
subsection 225(2A)).
5.14 One area in which the FRC's oversight functions
for the AUASB differs slightly in terms of wording, but significantly in terms
of outcome, from its existing functions in respect of the AASB concerns
promoting the adoption of international best practice standards in Australia.
As the AUASB already has a policy of adopting international best practice
auditing standards, the FRC's function refers to `promoting the continued
adoption' of such standards (see proposed paragraph 225(2A)(g)) to reflect the
current state of affairs. As the AASB is now also in the process of adopting
international best practice accounting standards, an equivalent amendment is
being made to the FRC's functions in respect of that body (see proposed
paragraph 225(2)(g)).
5.15
Item 14 of the Bill also amends section 225 of the ASIC Act
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to specify the FRC's functions in relation to auditor independence.
5.16 Proposed subsection 225(2B) provides that the
FRC's auditor independence functions include:
• monitoring and assessing the nature and overall
adequacy of:
- the systems and processes used by:
Australian auditors to ensure compliance with auditor independence
requirements; and
professional accounting bodies for planning and performing quality assurance
reviews of audit work to the extent to which those reviews relate to auditor
independence requirements; and
- the action taken by the professional bodies, and
the auditors who were subject to review, in response to recommendations
contained in review reports; and
- the investigation and disciplinary procedures of
the professional accounting bodies;
• monitoring the overall compliance by companies and
other entities with audit-related disclosure requirements, such as disclosure
in the financial report of fees paid to the auditor for the provision of
non-audit services and the inclusion in the directors' report of a copy of the
auditor's independence declaration;
• giving the Minister and professional accounting
bodies reports and advice about the above matters;
• monitoring international developments in auditor
independence, assessing the adequacy of Australian requirements in light of
those developments and giving the Minister and professional accounting bodies
reports and advice on any additional measures needed to enhance Australian
requirements; and
• promoting the teaching of professional and business
ethics by, or on behalf of, the professional accounting bodies to the extent to
which those subjects relate to auditor independence.
5.17 It is important to note that, notwithstanding
the FRC's extensive functions on auditor independence, its role is purely one
of monitoring activities and/or developments and providing appropriate advice
to Ministers or the accounting bodies. Enforcement of auditor independence
requirements is the responsibility of either ASIC or the accounting bodies,
depending on whether the independence requirement is contained in the
Corporations Act or a code of professional conduct of one of the bodies.
5.18
To assist the FRC in the performance of its auditor
independence functions, proposed section 225A (item 17) gives the FRC power to
obtain from each professional accounting body: information about, or documents
relating to:
• its code or proposed code of professional conduct
and proposed amendments to that code;
• its planning and performance of quality assurance
reviews, to the extent that those reviews apply to audit work undertaken by
Australian auditors; and
• its investigation and disciplinary procedures, to
the extent that those procedures apply to Australian auditors (proposed
subsections 225A(1) and (2)).
5.19 An accounting body will have qualified privilege
in respect of a disclosure it is required to make to the FRC. Similarly, a
person who makes, on behalf of an accounting body, a disclosure that the body
is required to make to the FRC also has qualified privilege (proposed
subsections 225A(3) and (4)).
5.20 The FRC may also give written notice to an
Australian auditor for the purpose of obtaining information about, or documents
(including audit working papers) relating to, one or more audits conducted by
the auditor and the measures adopted, or the procedures put in place, to ensure
the auditor was, and continues to be, independent of the audited body (proposed
subsection 225A(5)).
5.21 An auditor must comply with a notice to provide
such information, even it results in a breach of any obligation of
confidentiality between the auditor and the audited body. Where the FRC
requires a copy of a document to be given to it, it may require the document to
be certified by a particular person or a person holding a particular position
or office (proposed subsection 225A(6)).
5.22 The purpose of these subsections is to enable
the FRC to obtain information about the systems and processes that have been
put in place by auditors and to assess, by reference to material about
individual audits, whether those systems and processes are being followed by
the auditor when it conducts an audit. Proposed subsections 225A(9) and (10)
provide that a person who fails to comply with a notice commits a strict
liability offence that attracts a penalty of 10 penalty units. However, a
member of an audit firm does not commit an offence if, at the time the failure
to comply with the notice occurred, the member did not know the notice had been
given to the firm and the member took all reasonable steps to ensure compliance
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with the notice as soon as possible after the member became aware that a notice
had been given to the firm (proposed subsection 225A(13)).
5.23 To facilitate the FRC's function of monitoring
auditor independence, amendments are proposed to sections 127, 213 and 237 (see
items 8, 9 and 32) to allow ASIC and the CALDB to provide information to the
FRC and for the FRC to provide information to the CALDB and the professional
accounting bodies. Paragraph 237(2)(d) already enables the FRC to provide
information to ASIC.
5.24
As a means of assisting the FRC monitor auditor
independence, and as a mechanism to facilitate ASIC's enforcement role, item 40
amends the Corporations Act by inserting proposed section 307B which requires
auditors to retain all audit working papers for a period of seven years
after the date of the audit report. The provision provides that where the
working papers are kept in an electronic format, they must be convertible into
hard copy.
5.25 The legislation will allow ASIC to approve the
destruction of the audit working papers before the end of the seven year period
where an individual auditor dies or resigns their registration, an audit firm
is dissolved or an authorised audit company is wound up or ceases to be
authorised to conduct audits. However, before approving the destruction of any
working papers ASIC is required to consider whether:
• it is investigating any matters concerning the
auditor or audited body to which the papers relate;
• a professional accounting body has an investigation
or disciplinary action pending in relation to the auditor;
• there are civil or criminal proceedings in relation
to the audit or the contents of the financial report to which the papers relate
have commenced or are about to commence.
5.26 Failure to retain the working papers will be a
strict liability offence attracting a penalty of 50 penalty units. However, a
member of an audit firm does not commit an offence if, at the time the
contravention occurred, the member did not know of the matter and the member
took all reasonable steps to correct the contravention as soon as possible
after the member became aware of the matter.
Transitional arrangements
5.27 Proposed section 1454 of the Corporations Act
(inserted by item 2 of Schedule 12) provides that proposed section 307B applies
in respect of a financial year that begins on or after 1 July 2004.
5.28
Item 25 inserts section 235BA, which requires the FRC to
report annually to the Minister on its audit independence functions, including
the findings and conclusions that it reached in performing those functions and
the actions that it took in relation to those findings and conclusions.
5.29 The report, which may be included in the FRC's
annual report under section 235B or prepared separately, must be tabled in
Parliament.
5.30
Amendments to the ASIC Act to establish the AUASB, set out
its functions and powers, require it to have regard to the views of the FRC,
specify its meeting procedures and provide for its membership arrangements are
contained in items 18, 22 and 28 to 34.
5.31 Except where noted, these provisions mirror the
equivalent AASB provisions.
5.32
Item 18 of the Bill amends the ASIC Act to establish the
AUASB (proposed section 227A) and set out its functions and powers (proposed
section 227B).
5.33 Section 227A establishes the AUASB as a body
corporate thereby allowing it to employ staff and acquire property in its own
right. This means the AUASB will be a Commonwealth authority for the purposes
of the Commonwealth Authorities and Companies Act 1997 (CAC Act). This
Act sets out the reporting, financial and other requirements with which
Commonwealth authorities must comply.
5.34 As with the AASB, it is envisaged that the
AUASB's reporting obligations under the CAC Act will be covered by the report
that the FRC prepares in accordance with section 235B and the AUASB will not be
required to prepare a separate report specifically for the purposes of the CAC
Act. To this end, the Bill amends section 235B of the ASIC Act (see items 23
and 24) to require the FRC's annual report to contain:
• disclosures about the operations of the AUASB and
its committees, advisory panels and consultative groups (proposed subparagraph
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235B(1)(a)(iii)); and
• details of any change to the AUASB's priorities or
business plan that was made as a result of action taken by the FRC (proposed
subsection 235B(2A)).
5.35 Under proposed section 227B, the significant
functions of the AUASB will be to:
• make auditing standards for the purposes of the
Corporations Act;
• formulate auditing and assurance standards for
purposes other than those of the Corporations Act (for example, non-financial
audits such as performance or efficiency audits);
• formulate guidance on auditing and assurance
matters; and
• participate in the formulation of international
auditing standards so as to influence their content towards the achievement of
the objectives set out in section 224.
5.36 For the purpose of performing these functions,
the AUASB will have power to engage staff and consultants, establish
committees, advisory panels and consultative groups, and receive money
contributed towards its operating costs.
5.37 The AUASB will be empowered to make an
Australian auditing standard by issuing the text of an international standard
with any minimum modification to ensure that the standard operates effectively
having regard to the existing Australian legislative framework and
institutional regulatory arrangements. The AUASB may make such a standard
regardless of the fact that the international standard does not reflect the
views of the AUASB when it provided comments on the exposure draft of the
standard or when the AUASB participated in any deliberations during the
standard's development. The rationale for this is that it may be considered in
Australia's best interests to adopt an international standard with minimum
modification because it represents the results of many deliberations and
compromises necessary to achieve international acceptance.
5.38 The provisions dealing with auditing standards
refer to the AUASB `making' and `formulating' auditing standards. The word
`making' is used when the AUASB issues a standard for the purposes of the
Corporations Act while the word `formulated' is used when the standard is for
other purposes (for example, non-financial audits).
5.39
Item 22 inserts proposed section 234C which provides that,
when it is performing its functions, the AUASB must have regard to the FRC's
views concerning the broad strategic direction of the standard setter, follow
the general policy directions given to the standard setter by the FRC and take
into account the advice and feedback provided by the FRC on matters of general
policy.
5.40 The FRC does not have a power to direct the
AUASB in relation to the development, or making, of a particular standard (see
proposed subsection 225(7)).
5.41
Item 28, which inserts `Subdivision BA - The Auditing
and Assurance Standards Board' into Part 12 of the ASIC Act, contains
provisions which set out the procedural requirements for the conduct of AUASB
meetings and provisions concerning AUASB membership.
Meeting procedures
5.42 Proposed section 236E (Procedures) contains a
number of procedural requirements relating to the conduct of AUASB meetings.
As with the AASB, a meeting, or part of a meeting, concerned with the content
of an auditing standard must be held in public.
Appointment, resignation and termination of members of the AUASB
5.43 Proposed section 236F (Appointment of members of
the AUASB) sets out the procedures for appointing the Chair and other members
of the AUASB. These requirements mirror requirements currently applying to the
AASB.
5.44 Proposed section 236G (Resignation and
termination of appointment) deals with the manner in which the Chair or another
member of the AUASB may either resign or have their appointment terminated.
The independence of the AUASB is preserved by strictly limiting the grounds
upon which an appointment can be terminated.
5.45 In the case of resignation, the Chair is
required to provide a written resignation to the Minister, while other members
are required to provide a written resignation to the Chair of the FRC (proposed
subsection 236G(1)).
5.46 The Minister may terminate the appointment of
the Chair for misbehaviour or physical or mental incapacity. The Minister must
terminate the appointment of the Chair if the Chair:
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• becomes bankrupt;
• applies to take the benefit of any law for the
relief of bankrupt or insolvent debtors;
• compounds with their creditors;
• makes an assignment of his or her remuneration for
the benefit of their creditors; or
• contravenes section 237 (proposed subsections
236G(3) and (4)).
5.47 Proposed subsections 236G(6) and (7) deal with
the circumstances in which the FRC may or must terminate the appointment of a
member of the AUASB (other than the Chair). These subsections are expressed in
terms similar to proposed subsections 236G(3) and (4) and give the FRC the same
powers in respect of AUASB members as the Minister has in respect of the
AUASB's Chair.
5.48 Under proposed section 236H (Acting
appointments), the Minister will be able to appoint a person to act as Chair of
the AUASB during any vacancy in the office of Chair or at any time when the
Chair is absent from duty (proposed subsection 236H(1)). Similarly, the
members of the AUASB will also have the ability to appoint one of their number
to act as Deputy Chair during any vacancy in the office of Deputy Chair or at
any time when the Deputy Chair is absent from duty (proposed subsection
236H(2)). The FRC will also be able to appoint a person to act as a member of
the AUASB (other than Chair) during any vacancy in the office of member or at
any time when a member is absent from duty (proposed subsection 236H(3)).
5.49 Subsection 236H(1) is primarily intended to
ensure that any delegations, functions or powers that can only be exercised by
the Chair of the AUASB can continue to be dealt with during any period in which
there is either no Chair (for example, because of death, resignation or
expiration of appointment) or the Chair is absent (for example, because of
overseas representational requirements, recreation leave or illness). The
other provisions are intended to ensure that the AUASB retains the structure
and the number of members needed to operate effectively and efficiently.
5.50
Items 29 to 31 amend section 237 of the ASIC Act
(Confidentiality) to make the AUASB subject to the same confidentiality
requirements that are currently applicable to the FRC and AASB.
5.51 The practical effects of these amendments are
that the AUASB:
• will be required to protect from unauthorised use
or disclosure information that is given to it in confidence;
• may disclose information where such disclosure is
allowed by a law of the Commonwealth, is made to enable an authority or a
person in a jurisdiction outside Australia to perform or exercise a function or
power that corresponds to any of the functions or powers of the AUASB, or is
made to a body that sets international auditing standards; and
• may disclose information to ASIC to facilitate
ASIC's performance of its functions under the corporations legislation (other
than the excluded provisions[4]).
5.52 As a result of a separate amendment to
subsection 237(2) (see item 32), which is primarily designed to allow the
FRC to provide information to the CALDB and the professional accounting bodies,
the AASB and AUASB will also be authorised to provide information to the CALDB
and the accounting bodies to the extent that it facilitates the performance of
their respective functions.
5.53
Items 33 and 34 amend section 238 (Application of
money) to include provisions concerning the moneys of the AUASB. The moneys of
the AUASB may only be applied:
• in payment or discharge of the costs, expenses and
other obligations incurred by the AUASB in the performance of its functions or
the exercise of its powers;
• in paying or discharging, or reimbursing someone
for, the costs, expenses and other obligations incurred in connection with the
performance by the FRC of its functions and the exercise of its powers;
• in meeting the administrative expenses of the
committees and advisory groups the FRC establishes;
• in payment of any remuneration and allowances
payable to any person appointed to the FRC or the AUASB; and
• in making payments to the AASB (proposed subsection
238(2)).
5.54 Equivalent amendments are proposed to the
provision dealing with the moneys of the AASB (currently section 238).
5.55 The provisions have been structured so that
either the AASB or AUASB may:
• pay or discharge the costs, expenses and other
obligations incurred by the FRC; and
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• pay the remuneration and allowances payable to any
person appointed to the FRC.
5.56 The objective of these provisions is to enable
the expenses of the FRC to be shared by the AASB and AUASB in accordance with
decisions made by the FRC. The ability of the AASB and AUASB to make payments
to each other is also intended to:
• facilitate payment of FRC expenses where one body
makes the payments and the other body reimburses the first body (for example,
the AASB pays all of the FRC's expenses and is reimbursed by the AUASB); and
• allow the sharing of contributions made by
government, the accounting profession and business towards the cost of the
standard setting arrangements where the payment is made to one body but is
intended to be for the three bodies.
5.57
Item 22, which inserts Division 2A into Part 12 of the
ASIC Act, contains provisions dealing with:
• the interpretation of auditing standards;
• some of the powers of the AUASB to make
standards;
• requirements with which the AUASB must comply when
making standards; and
• the ability of the FRC and the Minister to give
directions to the AUASB.
5.58 The provisions of this Division are based on the
equivalent accounting standards requirements in Division 2 of
Part 12. The principal difference is the omission of requirements
equivalent to:
• section 230, which provides that accounting
standards for the preparation of financial reports for a period may require the
inclusion of comparative amounts for earlier periods; and
• section 231, which requires the AASB to carry out a
cost/benefit analysis of the impact of a proposed Australian or international
accounting standard.
5.59 Notwithstanding the omission of a provision
equivalent to section 231, the AUASB will still be obliged to prepare a
cost/benefit analysis of a proposed Australian auditing standard, or a
significant amendment to such as standard. The Government's requirements for
the preparation of Regulation Impact Statements (RIS), which are applicable to
the AUASB, includes a requirement for an analysis of costs and benefits.
5.60 Major features of Division 2A are:
• Proposed section 234A provides that auditing
standards are to be interpreted in a manner that promotes the objects of
Part 12 of the ASIC Act. In addition, the proposed section provides
that each auditing standard made by the AUASB is to be interpreted in a manner
that promotes the purpose or objective of that auditing standard, provided that
that purpose or objective is not contrary to the purpose or objective of
Part 12 of the ASIC Act.
• Proposed section 234B provides that auditing
standards may be of general application (that is, apply to all audits) or
limited application (that is, apply to different types of audit and specified
industries or entities).
• Proposed section 234D provides that the Minister
may give the AUASB a direction about the role of international auditing
standards in the Australian auditing standard setting system. However, prior
to giving a direction to the FRC, the Minister must obtain and consider a
report from the FRC about the desirability of giving the direction.
5.61 This provision is intended to provide a
mechanism for the Minister, upon the advice of the FRC, to require the AUASB to
move towards greater adoption of international standards if it is considered
appropriate and the AUASB has not moved in that direction of its own accord.
5.62 It is noted that the AUASB is already working
towards convergence of Australian auditing standards with international
standards. In addition, the AUASB is currently considering the appropriateness
of adoption of international auditing standards as Australian standards.
• Should the AUASB, through error or oversight, fail
to follow all the procedures associated with the making of auditing standards
when it makes or formulates a particular standard (for example, fails to have
regard to the views of the FRC), the error or oversight will not affect the
validity of the standard made as a result of those defective procedures
(proposed section 234E).
5.63
Proposed section 336 of the Corporations Act, which is
inserted by item 44, provides that the AUASB may make auditing standards for
the purposes of that Act. A standard, which must be in writing and must not be
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inconsistent with either the Corporations Act or the Corporations Regulations,
is a disallowable instrument for the purposes of section 46A of the
Acts Interpretation Act 1901. This means each standard made
by the AUASB has to be tabled in each House of the Australian Parliament within
15 sitting days after the day on which the standard is made (proposed
subsections 336(1) and (2)).
5.64 Auditing standards made by the AUASB are
expressed to apply to financial reports in respect of particular financial
periods. The Bill provides that, in the absence of a specific commencement
date in a standard, the standard applies to each financial period ending after
the commencement of the standard. The AUASB may, however, specify a later
commencement date and provide that the standard is to apply to all financial
periods either ending or starting on or after that date (proposed subsection
336(3)).
5.65 Proposed subsection 336(4) allows auditors to
adopt an auditing standard before the commencement date specified in the
standard, provided the standard does not expressly preclude early adoption.
Where an auditor adopts a standard prior to its commencement date, the
auditor's decision must be recorded in the audit report.
5.66
Proposed section 1455 of the Corporations Act, which
is inserted by item 2 of Schedule 12, is designed to give interim
legal backing to some or all of the auditing standards made by the AUASB, as
currently constituted, and issued by the Australian Accounting Research
Foundation (AARF) on behalf of The Institute of Chartered Accountants in
Australia and CPA Australia. The primary objective of the transitional
provision is to ensure there is, and continues to be, a comprehensive body of
standards available to provide guidance to auditors who are appointed to
conduct audits under the Corporations Act.
5.67 The auditing standards to be given interim legal
backing will be listed in regulations made for the purpose of proposed
subsection 1455(1) and will have effect as if they were made by the AUASB
under proposed section 336 on the day specified in the regulations.
Table 1 lists existing auditing standards. All standards that are
relevant to Corporations Act audits will be prescribed in the regulations.
5.68 Auditing standards that are given interim legal
backing cease to have effect on 1 July 2006, although provision is made
for the regulations to extend the period. During the two-year period (or such
longer period as may be allowed by the regulations) it is proposed that the
AUASB should review the standards and remake them in accordance with proposed
section 336.
5.69 As a means of facilitating a smooth transition
to legal backing, proposed subsection 1455(5) provides that a person will not
contravene proposed section 307A or 989CA or proposed subsection 308(3A) or
309(5A) by failing to conduct an audit in accordance with standards that have
been given interim legal backing, or include information in an audit report
prepared in accordance with such standards, if the contravention occurs before
1 July 2006. This gives the Board time to review the existing professional
standards. However, it should be noted that where a person fails to use a
standard that has been given interim legal backing disciplinary action could
still be taken against the person by either the CALDB or a professional
accounting body (see note, proposed subsection 1455(5)). As standards are
remade by AUASB, the relief provided under subsection 1455(5) will cease.
Table 1: Australian Auditing Standards as at 1 October 2003
| Reference
|
Title
|
Date
issued or revised
|
| AUS 102
|
Foreword
to Australian Auditing and Assurance Standards and Guidance Statements
|
January
2002
|
| AUS 104
|
Glossary
of Terms
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|
July
2002
|
| AUS 106
|
Explanatory
Framework for Standards on Audit and Audit Related Services
|
November
2001
|
| AUS 108
|
Assurance
Engagements
|
October
2001
|
| AUS 202
|
Objective
and General Principles Governing an Audit of a Financial Report
|
July
2002
|
| AUS 204
|
Terms
of Audit Engagements
|
June
2000
|
| AUS 206
|
Quality
Control for Audit Work
|
July
2002
|
| AUS 208
|
Documentation
|
July
2002
|
| AUS 210
|
The
Auditor's Responsibility to Consider Fraud and Error in an Audit of a Financial
Report
|
January
2002
|
| AUS 212
|
Other
Information in Documents Containing Audited Financial Reports
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|
October
1995
|
| AUS 214
|
Auditing
in a CIS Environment
|
October
1995
|
| AUS 218
|
Consideration
of Laws and Regulations in an Audit of a Financial Report
|
January
2002
|
| AUS 302
|
Planning
|
October
1995
|
| AUS 304
|
Knowledge
of the Business
|
July
2002
|
| AUS 306
|
Materiality
and Audit Adjustments
|
May
2001
|
| AUS 402
|
Risk
Assessments and Internal Controls
|
July
2002
|
| AUS 404
|
Audit
Implications Relating to Entities Using a Service Entity
|
July
2002
|
| AUS 502
|
Audit
Evidence
|
October
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1995
|
| AUS 504
|
External
Confirmations
|
July
2002
|
| AUS 506
|
Existence
and Valuation of Inventory
|
July
2002
|
| AUS 508
|
Inquiry
Regarding Litigation and Claims
|
July
2002
|
| AUS 510
|
Initial
Engagements - Opening Balances
|
July
2002
|
| Reference
|
Title
|
Date
issued or revised
|
| AUS 512
|
Analytical
Procedures
|
October
1995
|
| AUS 514
|
Audit
Sampling and Other Selective Testing Procedures
|
April
1998
|
| AUS 516
|
Auditing
of Accounting Estimates
|
October
1995
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|
| AUS 518
|
Related
Parties
|
July
2002
|
| AUS 520
|
Management
Representations
|
July
2002
|
| AUS 522
|
Audit
Evidence Implications of Externally Managed Assets of Superannuation, Provident
or Similar Funds
|
October
1995
|
| AUS 524
|
The
Auditor's Use of the Work of the Actuary and the Actuary's Use of the Work of
the Auditor in Connection with the Preparation and Audit of a Financial Report
|
July
2002
|
| AUS 526
|
Auditing
Fair Value Measurements and Disclosures
|
September
2002
|
| AUS 602
|
Using
the Work of Another Auditor
|
July
2002
|
| AUS 604
|
Considering
the Work of Internal Auditing
|
October
1995
|
| AUS 606
|
Using
the Work of an Expert
|
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July
2002
|
| AUS 702
|
The
Audit Report on a General Purpose Financial Report
|
March
2002
|
| AUS 704
|
Comparatives
|
July
2002
|
| AUS 706
|
Subsequent
Events
|
October
1995
|
| AUS 708
|
Going
Concern
|
July
2002
|
| AUS 710
|
Communications
with Management on Matters Arising from an Audit
|
May
1999
|
| AUS 802
|
The
Audit Report on Financial Information Other than a General Purpose Financial
Report
|
May
2002
|
| AUS 804
|
The
Audit of Prospective Financial Information
|
July
2002
|
| AUS 806
|
Performance
Auditing
|
July
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2002
|
| Reference
|
Title
|
Date
issued or revised
|
| AUS 808
|
Planning
Performance Audits
|
October
1995
|
| AUS 810
|
Special
Purpose Reports on the Effectiveness of Control Procedures
|
July
2002
|
| AUS 902
|
Review
of Financial Reports
|
July
2002
|
| AUS 904
|
Engagements
to Perform Agreed-upon Procedures
|
July
2002
|
5.70
Proposed section 307A of the Corporations Act, which is
inserted by item 40, requires audits of a financial report for a financial
year and audits or reviews of a financial report for a half-year to be
conducted in accordance with auditing standards.
5.71 Items 41 and 42 amend sections 308 (Auditor's
report on annual financial report) and 309 (Auditor's report on half-year
financial report) by inserting proposed subsections 308(3A) and 309(5A). The
proposed subsections require an auditor to include in their report any
statements or disclosures required by the auditing standards.
5.72 Item 45 inserts a requirement dealing with
the audit of financial statements of financial services licensees (see proposed
section 989CA).
Transitional arrangements
5.73 Proposed section 1454 of the Corporations Act
(inserted by item 2 of Schedule 12) provides that proposed sections 307A and
989CA apply in respect of a financial year that begins on or after 1 July
2004.
5.74
Items 35 and 36 amend section 246 of the ASIC Act, which
lists the people who are not liable to an action or other proceeding for
damages in relation to an act done in good faith in performance of any function
conferred by the corporations legislation.
5.75 The Bill extends the protection to the
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following:
• members of staff, or consultants, of the AASB and
AUASB (proposed paragraphs 246(i) and (j)); and
• officers or employees of an Agency (within the
meaning of the Public Service Act 1999) or an authority of the
Commonwealth whose services are made available to the FRC or Companies Auditors
and Liquidators Disciplinary Board (CALDB) (proposed paragraph 246(k)); and
• a person engaged by an Agency (within the meaning
of the Public Service Act 1999) or an authority of the Commonwealth, to
provide services to the FRC in connection with the performance or exercise of
the FRC's functions or powers (proposed paragraph 246(1)(l)). This provision
is intended to facilitate the FRC in the performance of its functions by
providing protection to persons acting on behalf of the FRC.
5.76 In addition, the Bill provides that the
following are taken to be appointments for the purposes of the ASIC Act:
• members of the CALDB;
• members of the FRC or committees or advisory groups
established by the FRC;
• members of the AASB and AUASB or committees,
advisory panels or consultative groups established by those bodies (proposed
subsection 246(2)).
5.77
The Bill will update and enhance the qualification
requirements applying to accountants who seek registration as company
auditors.
5.78 The amendments to the Corporations Act contained
in Part 2 of Schedule 1 of the Bill:
• provide that the practical experience requirements
for registration may be satisfied by completion of all the components of a
competency standard in auditing;
• revise the education requirements for registration
to include completion of a specialist course in auditing;
• make an auditor's continued registration subject to
compliance with any conditions that may be imposed by ASIC in accordance with
the regulations;
• replace the requirement for auditors to lodge a
triennial statement with a new requirement to lodge an annual statement;
• revise the matters that may be referred to the
CALDB; and
• permit Commonwealth, State and Territory
Auditors-General to delegate to senior members of their staff responsibility
for Corporations Act audits.
5.79
Items 50 to 53 amend section 1280 (Registration of
auditors), which sets out the educational and practical experience requirements
for registration as a company auditor.
5.80 Proposed paragraph 1280(2)(b) provides two ways
in which the requirements can be met:
• by satisfying all the components of an auditing
competency standard that has been approved by ASIC under section 1280A (for
further details, see the comments on proposed section 1280A below); or
• by having the practical experience in auditing that
is prescribed in the regulations. Regulation 9.2.04 (Practical experience in
auditing) currently provides that the prescribed practical experience in
auditing is work in auditing under the direction of a registered company
auditor for a period of not less than three years and at least one
continuous year during the five years immediately before the date of the
application spent supervising audits of companies.
5.81
In addition to the practical experience requirements,
persons seeking registration as a company auditor will be required to meet
certain educational requirements and have completed a specialist course in
auditing.
5.82 Proposed subsection 1280(2A), which is based on
existing subparagraph 1280(2)(a)(ii), continues to require applicants for
registration to have a degree, diploma or certificate from a university or
another institution. As at present, the course must include study in
accountancy (including auditing) of not less than three years' duration and
commercial law (including company law) of not less than two years' duration.
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The universities and other institutions at which the degree, diploma or
certificate may be obtained, and the courses in auditing which may be
undertaken, are to be prescribed in the regulations.
• The universities and other institutions to be
prescribed are expected to be based on those prescribed for the purposes of the
existing subparagraph 1280(2)(a)(ii) (see regulations 9.2.02 and 9.2.03),
subject to amendments to reflect changes in the names and/or status of any of
the bodies.
5.83 In addition, applicants will be required to have
completed a specialist course in auditing.
• These courses will be prescribed in the regulations
and are expected to be those courses that are conducted by, or on behalf of,
the professional accounting bodies.
5.84 Existing subparagraph 1280(2)(a)(i), which
provides that membership of The Institute of Chartered Accountants in Australia
(ICAA), CPA Australia (CPAA) or any other accounting body prescribed in
the regulations satisfies the educational pre-requisites for registration, will
be omitted. The original reason for having this provision was to deal with the
situation in which a member of the ICAA or CPAA obtained his or her
qualifications through the satisfactory completion of the body's own
examinations. As a university degree or equivalent has been a pre-requisite
for membership of both the ICAA and the CPAA for more than 20 years, few,
if any, applications for registration are now received from individuals who are
not graduates.
5.85 Proposed subsection 1280(2B) provides that an
applicant satisfies the educational requirements where, in ASIC's opinion, they
have qualifications or experience equivalent to that specified in subsection
1280(2A). This provision, which is equivalent to the existing subparagraph
1280(2)(a)(iii), would, for example, enable ASIC to process applications from
persons who are members of an overseas accounting body or who have a degree
from an overseas university. In either case, it would be necessary for ASIC to
consider whether the course of study undertaken by the person to obtain the
membership or their degree is equivalent to the requirements set out in
subsection 1280(2A).
5.86
Item 54 inserts proposed section 1280A, which sets out the
method of approving a competency standard to be used for the purposes of
proposed paragraph 1280(2)(b), the manner in which the standard may be
amended and the circumstances in which the approval may be revoked. The
proposed section also sets out the basic content requirements for a competency
standard.
5.87 Any person may make application for the approval
of a competency standard (proposed subsection 1280A(1)). However, an
application for either the variation of a competency standard or the revocation
of an approval may only be made by the person who sought the original approval
for the standard (proposed subsections 1280A(2) and (4)). All approvals of new
standards, approvals of variations or revocations of approvals made by ASIC
must be in writing.
5.88 While it is envisaged that the three main
professional accounting bodies will be the groups most likely to seek approval
of a competency standard, the provisions have been framed to allow other
professional associations, individual accounting firms or groups of accounting
firms to seek approval of their own competency standards. However, whether
such associations or firms seek such an approval will be a matter for each
association or firm to decide, as a competency standard approved on the
application of another body will be available for use by any person seeking
registration as a company auditor (see the note to proposed subsection
1280A(1)).
5.89 Proposed subsection 1280A(3) provides that ASIC
must not approve a competency standard, or a variation to a standard, unless it
is satisfied that the standard:
• requires a person's performance against each
component of the standard to be verified by a person who is a registered
company auditor and who has sufficient knowledge of the person's work to be
able to give that verification;
• is not inconsistent with the Corporations Act or
any other Commonwealth law under which ASIC has regulatory responsibilities;
• adequately addresses the level of practical
experience needed for registration as a company auditor; and
• is harmonised as much as possible with other
approved competency standards.
5.90 Proposed subsection 1280A(4) provides, in part,
that ASIC may revoke the approval of a competency standard where it is no
longer satisfied that the standard complies with the requirements of subsection
1280A(3).
5.91 An example of the matters that might be included
in a competency standard may be viewed on the ICAA's website (www.ic
aa.org.au
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under technical resources/auditing/draft audit competency guidelines).
Transitional arrangements: registration using auditing competency standard
5.92 Proposed section 1456 of the Corporations Act
(inserted by item 2 of Schedule 12) provides that applications for
registration as a company auditor that are made prior to 1 July 2004 will
be processed in accordance with the requirements in force at the time the
application was lodged.
5.93 It should be noted that, while the legislation
is silent about whether a competency standard may have regard to audit work and
other experience gained prior to the commencement of the new requirements, any
application made shortly after the commencement of the new requirements and
based on such prior experience should be extensively documented to allay any
concerns the regulator might have about the authenticity of the claims made in
support of the application.
5.94
Item 59 inserts new Division 2A of Part 9.2, which gives
ASIC the ability to impose conditions on the registration of an auditor (see
proposed section 1289A). The purpose of this amendment is to provide ASIC
with enhanced post-registration supervision of registered auditors (for
example, where a person is not a member of a professional accounting body it
might impose conditions such as a requirement to undertake continuing
professional development and to participate in a quality assurance program).
5.95 Key features of ASIC's power to impose
conditions on registration include:
• the conditions may only be of a kind specified in
the regulations; and
• where it is proposed that a condition be imposed by
ASIC after a person has been registered, the condition must not be imposed
unless ASIC has first given the person the opportunity to appear before, or be
represented at, a private hearing held by ASIC and to make submissions in
relation to the matter (however, it should be noted that the requirement for a
hearing does not apply where the condition is being imposed at the request of
the registered auditor). A decision by ASIC concerning the imposition of a
condition may be the subject of an appeal to the Administrative Appeals
Tribunal in accordance with Part 9.4A of the Corporations Act.
Transitional arrangements
5.96 Proposed section 1458 of the Corporations Act
(inserted by item 2 of Schedule 12) makes it clear that ASIC may impose a
condition on a person's registration as an auditor, even if the registration
took place prior to 1 July 2004. However, where ASIC seeks to impose a
condition in such circumstances, the auditor is entitled to a hearing in
accordance with proposed subsection 1289A(4). In addition, any decision taken
by ASIC following such a hearing could be the subject of a review by the
Administrative Appeals Tribunal.
5.97
Although the triennial statement that each registered
company auditor has to lodge with ASIC under section 1288 of the Corporations
Act is intended to allow ASIC to monitor the registered company auditor's audit
activities, the Audit Review Working Party noted that there are widely held
views that the statement fails to achieve this objective. Perceived
deficiencies of the statement include that it does not provide up to date
information for surveillance purposes, that it requires the disclosure of
information that has already been provided to ASIC, and that the particulars of
audits conducted during the period give no indication of the size or complexity
of those audits. The Working Party concluded that many of these concerns could
be overcome by the adoption of an annual reporting requirement and the
provision of revised information to ASIC. The Ramsay report endorsed the move
to an annual statement.
5.98 Item 56 inserts proposed section 1287A, which
replaces the existing requirement for auditors to lodge a triennial statement
with a new requirement for the lodgment of an annual statement. Under the
proposed amendment, every person who is a registered company auditor at the end
of a calendar year is required to lodge a statement by 31 January in the
following calendar year (proposed subsection 1287A(1)), although an application
may be made to ASIC for an extension of the period in which the statement has
to be lodged (proposed subsection 1287A(2)).
5.99 The content of the annual statement will be
prescribed in the regulations. It is envisaged that the information to be
prescribed will include:
• the auditor's personal particulars (serving the
purpose of confirming or updating ASIC's records);
• details of the nature and complexity of major audit
work undertaken by the auditor; and
• details concerning compliance with any conditions
that may be imposed on the auditor's registration.
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5.100 Items 50, 57, 58 and 64 contain technical
amendments to sections 1274 (Registers), 1288 (Triennial statements by
registered auditors and liquidators) and 1298 (Effect of suspension) associated
with the introduction of a requirement for auditors to lodge an annual
statement. The items amend:
• subparagraph 1274(2)(a)(ii) to include an annual
statement lodged by an auditor in the list of documents that may be searched by
the public;
• subsections 1288(3) and (4) to omit references to
registered company auditor (when amended, section 1288 will require only
liquidators to lodge a triennial statement); and
• section 1298 to provide that, where a person's
registration as an auditor is suspended, the person is still required to lodge
an annual statement.
Transitional arrangements
5.101 Proposed section 1457 of the Corporations Act
(inserted by item 2 of Schedule 12) provides that the annual statement
requirements for auditors will apply from the calendar year ending on
31 December 2004. This means that all registered company auditors will be
required to lodge an annual statement for 2004 by no later than 31 January
2005.
5.102 The information to be included in the first
annual statement will cover the period from either the end of the period
covered by the last triennial statement or the date of the person's
registration, whichever is the later.
5.103
Items 60 to 63 amend subsection 1292(1), which sets out the
matters in respect of which the Companies Auditors and Liquidators Disciplinary
Board (CALDB) may cancel or suspend a person's registration as an auditor. As
a result of the amendments made elsewhere in this Part of the Bill, the matters
that may be referred to the CALDB have been revised to include:
• failing to lodge an annual statement in accordance
with proposed section 1287A (this replaces the existing matter concerning the
failure by an auditor to lodge a triennial statement);
• failing to comply with a condition of the person's
registration; and
• ceasing to have the practical experience necessary
for carrying out audits, as demonstrated by a failure to perform any audit
work, or any significant audit work, during a continuous period of five years.
The first year for the purpose of this requirement will be the calendar year
commencing on 1 January 2005 (see proposed section 1459, inserted by item
2 of Schedule 12).
5.104 For the purpose of deciding whether the audit
work performed by a person is significant, proposed subsection 1292(1A)
provides that regard is to be had to the following matters:
• the nature of the audit;
• the extent to which the person was involved in the
audit; and
• the level of responsibility the person assumed in
relation to the audit.
5.105
Item 55 will amend section 1281 (Auditor-General taken to
be registered as auditor) to provide that where an auditor-general delegates to
a person the function of conducting an audit, or the power to conduct an audit,
that person is also taken to be a registered company auditor under Part 9.2.
With the increasing number of government business enterprises being formed or
reconstituted as Corporations Act companies, Auditors-General are experiencing
a significant increase in the number of audit reports they have to sign. By
allowing Auditors-General to delegate responsibility for signing Corporations
Act audits to senior staff, the amendment will facilitate Auditors-General in
the performance of their functions.
5.106
The text in this part of the explanatory memorandum is
divided into the following key topics:
• independence requirements for auditors;
• rotation of auditors; and
• non-audit services.
• Current section 324 of the Corporations Act
contains provisions relating to:
• the appointment of individuals and firms as an
auditor of a company;
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• the effect of appointing a firm as auditor
including the reconstitution of a firm;
• the requirements for appointment of an individual
and a firm as auditor; and
• auditor independence requirements in relation to an
individual auditor and an audit firm.
5.107 In light of the CLERP 9 proposals which
significantly expand the auditor independence requirements and the need to
include authorised audit companies in the legislative framework, the matters
dealt with in current section 324 are contained in three separate
Divisions of Schedule 1, Part 3:
• Division 1 - Entities that may be appointed as an
auditor for a company or registered scheme.
- Division 1 broadly replicates the effect of
existing provisions in section 324 which recognise the status of an
individual and a firm for appointment as an auditor of a company as well as
provisions relating to the effect of the appointment of a firm as an auditor,
including the reconstitution of an audit firm. Division 1 now also
extends those provisions to authorised audit companies.
• Division 2 - Registration requirements
- Division 2 replicates the effect of the provisions
in section 324 relating to registration requirements for appointment of an
individual and a firm as auditor of a company. Division 2 extends these
requirements to an authorised audit company. Division 2 also replicates the
effect of the current exception in section 324 from the registration
requirement for a proprietary company which applies in certain circumstances.
• Division 3 - Auditor independence
- These provisions are considered in detail below (as
well as the auditor's independence declaration which is contained in proposed
section 307C).
5.108 Current sections 327 and 328, which deal with
the appointment and nomination of auditors, have been broadly replicated in
5.109 Division 4 deals with the issue of the
deliberate disqualification of an auditor and broadly replicates the effect of
existing subsection 324(16).
5.110 New requirements in relation to auditor
rotation for listed companies are included in Division 5.
5.111 Division 6, Subdivision A. The impact of
an auditor ceasing to hold office as a result of a breach of the registration
and independence requirements is outlined in section 327B.
5.112 Current sections dealing with the appointment
of registered scheme auditors (section 331AA and 331AB) are broadly replicated
in Division 7.
5.113
Items 65 - 86 of the Bill amend section 9 of the
Corporations Act by inserting a number of key definitions relevant to the
independence requirements. In particular, the following definitions should be
noted:
• associated entity (see also item 87):
- this definition is based on the concepts contained
in the definition of related entity in Professional Statement F.1 and
the Ramsay report;
• audit;
• audit company;
• audit-critical employee;
• engage in audit activity;
• immediate family member:
- the definition is based on the corresponding
definition in Professional Statement F.1 and means:
: the person's spouse or de facto spouse; or
: a person who is wholly or partly dependent on the
person for financial support.
• investment in a company;
• investment in a registered scheme;
• lead and review auditors;
• professional employee;
• professional members of the audit team (see also
proposed section 324AE):
- the definition has drawn on the definition of the
audit engagement team in the Ramsay report, Professional Statement F.1, and the
SEC's rule on auditor independence in the US. The approach in the draft Bill
is designed to cover the people in an audit firm or audit company who are most
directly in a position to influence the audit.
• senior manager.
5.114
Auditor independence is fundamental to the credibility and
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reliability of auditors' reports. Division 3 implements recommendations of the
Ramsay report as refined in CLERP 9. In addition, the Bill implements a
number of recommendations, and the overall policy direction, of the HIH Royal
Commission Report (the HIHRC report).
5.115 The Bill looks to promote the following
functions of an independent audit in relation to capital market efficiency:
• adding value to financial statements by improving
their reliability;
• adding value to capital markets by enhancing the
credibility of financial statements;
• enhancing the effectiveness of capital markets in
allocating valuable resources by improving the decisions of users of financial
statements; and
• assisting to lower the cost of capital to those
using audited financial statements by reducing information risk.
5.116 The HIHRC report noted that an independent
audit also contributes to capital market efficiency by enhancing the
consistency and comparability of reported financial information in Australia.
5.117 The Bill establishes a framework for auditor
independence comprising a general standard of independence, an annual
declaration that the auditor has maintained independence, restrictions on
employment and financial relationships, cooling off periods, auditor rotation,
and non-audit services.
5.118
´The general framework for the liability of auditors
that has been adopted in the Bill in relation to the auditor independence
requirements is as follows:
• In each of the key provisions establishing auditor
independence, an individual auditor, a member of an audit firm, an audit
company, and a director of an audit company are subject to both:
- a fault based offence; and
- a strict liability offence.
• Under the fault based offences, the prosecution has
to prove each of the elements that constitute the offence. The fault based
offences carry a higher criminal penalty than the strict liability offences.
• The strict liability offence is coupled with a
defence which applies where the relevant person (the defendant) had reasonable
grounds to believe that the individual auditor, audit firm or audit company (as
the case may be) had in place a quality control system that provided reasonable
assurance (taking into account the size and nature of the audit practice) that
the auditor had complied with the independence requirements.
5.119 The strict liability defence is designed to
encourage a "culture of compliance" by auditors.
5.120 This general framework has also been applied in
provisions, outside the auditor independence requirements, in Schedule 1 Part
3. These provisions generally provide a defence to strict liability where the
person (the defendant):
• did not know of the circumstances that constitute
the contravention; or
• knows of those circumstances but takes all
reasonable steps to correct the contravention as soon as possible after the
person becomes aware of those circumstances.
5.121
Proposed sections 324CA to 324CD establish a general
requirement for auditor independence in the Corporations Act which is based on
the proposals in CLERP 9 and the Ramsay report.
5.122 Proposed subsection 324CA(1) provides that an
individual auditor (sole proprietor) or audit company contravenes this
subsection if:
• The individual auditor or audit company engages in
audit activity in relation to an audited body at a particular time; and
• A conflict of interest situation (see section
324CD) exists in relation to the audited body at that time; and
• At that time the individual auditor or audit
company is aware that the conflict of interest situation exists but does not
take reasonable steps to ensure that the conflict of interest situation ceases
to exist.
5.123 A contravention of subsection 324CA(1) is a
"fault based" offence within the liability framework. The prosecution would be
required to prove each of the separate elements of the offence to secure a
conviction. The maximum penalty for the offence if 25 penalty units and/or 6
months imprisonment or both.
5.124 The general standard of independence is not met
where a conflict of interest situation exists as defined in
subsection 324CD(1):
• The auditor, or a professional member of the audit
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team, is not capable of exercising objective and impartial judgment in relation
to the conduct of the audit of the audited body; or
• A reasonable person, with full knowledge of all
relevant facts and circumstances, would conclude that the auditor, or a
professional member of the audit team, is not capable of exercising objective
and impartial judgment in relation to the conduct of the audit of the audited
body.
5.125 The test in section 324CD(1) reflects the
general standard of independence as proposed in the CLERP 9 paper. The CLERP 9
test, with one relatively minor modification, adopted the Ramsay report
recommendation which in turn closely followed the general independence standard
adopted in the SEC auditor independence rules.
5.126 Subsection 324CA(2) provides for a strict
liability offence in relation to an individual auditor or audit company
coupled with a defence based on the person having reasonable grounds to believe
that the individual auditor or audit company would have had adequate quality
control systems in place.
5.127 Subsection 324CA(6) provides that the
obligations in section 324CA are in addition to, and do not derogate from, any
obligation imposed by another provision in the Corporations legislation or a
code of professional conduct.
5.128 Proposed section 324CB sets out the general
requirement for auditor independence in relation to a member of an audit firm.
The provision contains the same liability framework as applied to an individual
auditor and an audit company in section 324CA but applies the contraventions to
a member of the audit firm.
5.129 Proposed section 324CC sets out the general
requirement for auditor independence in relation to a director of an audit
company. The provision contains the same liability framework as applied to an
individual auditor and an audit company in section 324CA but applies the
contraventions to a director of the audit company.
5.130
Current section 324 of the Corporations Act specifies
limited restrictions on employment and financial relationships. CLERP 9
proposed that the current restrictions be significantly expanded in line with
the recommendations in the Ramsay report, in addition to the introduction of
the proposed general standard of auditor independence. The new independence
requirements have also been applied to authorised audit companies and
registered schemes.
5.131 The specific independence requirements are
contained in:
• proposed section 324CE: an individual
auditor.
• proposed section 324CF: an audit firm.
• proposed section 324CG: an audit company.
5.132 Each of these sections contains a table for the
purpose of identifying the specific auditor independence requirements applying
to each of the persons or entities listed in the table. The impermissible
relationships are determined by applying the relevant relationships set out in
proposed subsection 324CH(1) to the persons or entities listed in each of
the tables in sections 324CE, 324CF and 324CG.
5.133
Proposed subsection 324CE(1) provides that an individual
auditor contravenes this subsection if:
• The individual auditor engages in audit activity at
a particular time; and
• A relevant item of the table in subsection 324CH
applies at that time to a person or entity covered by subsection 324CE(5);
and
• The individual auditor is or becomes aware of those
circumstances; and
• The auditor does not, as soon as possible after
becoming aware of those circumstances, take all reasonable steps to ensure that
the audit activity in those circumstances is not engaged in.
5.134 The prosecution is required to prove each of
the elements of this offence to secure a conviction.
5.135 Proposed subsection 324CE(2) establishes a
strict liability offence in circumstances where an individual auditor engages
in audit activity at a particular time and a relevant item of the table applies
at that time to a person or entity covered by subsection 324CE(5). Proposed
subsection 324CE(4) provides a defence where the auditor has reasonable
grounds to believe that there was a quality control system in place that
provided reasonable assurance (taking into account the size and nature of the
audit practice of the individual auditor) that the auditor and the auditor's
employees complied with the requirements of Subdivision B.
5.136 The following information about the particular
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items in the table in proposed subsection 324CE(1) should be noted:
• Item 2: a service company or trust or other entity
acting for, or on behalf of, the individual auditor.
5.137 The purpose of this item is to subject a
service company or trust arrangement to the independence requirements to
prevent these structures being used to avoid the provisions.
• Item 5: a person who is a non-audit services
provider and who does not satisfy the maximum hours test in proposed
subsection 324CE(6).
5.138 This requirement implements a CLERP 9
proposal based on a recommendation in the Ramsay report that such a person
should not have certain investments in the audited body because of the threat
posed to the independence of the auditor. The purpose of the maximum hours
test in proposed subsection 324CE(6) is to exclude such a person from the
restriction where the number of hours for which non-audit services are provided
during the relevant period does not exceed 10 hours. The period of 10 hours
has been adopted from the corresponding restriction in the US SEC auditor
independence rules. A similar restriction applies to an immediate family
member of a non-audit services provider under item 6 of the table.
• Item 9: a person who is a former professional
employee of the auditor and who does not satisfy the independence test in
proposed subsection 324CE(7).
5.139 This item is based on a recommendation in the
Ramsay report to address the threat to auditor independence when a former
professional employee of an auditor becomes an officer or audit critical
employee of an audited body. The independence test in proposed
subsection 324CE(7) will exclude former professional employees from the
restriction where they no longer influence the operations and financial
policies of the audit practice and have no financial arrangements in relation
to the accounting and audit practice other than arrangements relating to
payments of a fixed pre-determined dollar amount which are not dependent on the
revenues, profits or earnings of the auditor. The person is also prevented
from having a financial arrangement with the auditor to receive a commission or
similar payment in certain circumstances.
5.140 In applying subsection 324CE(7) any rights that
the person has against the auditor by way of an indemnity for, or contribution
in relation to, liabilities incurred by the person when the person was an
employee of the auditor are to be disregarded.
• Item 10 is similar to item 9 but applies the
requirement to an individual who is a former owner of the individual auditor's
practice.
• Items 9 and 10 only apply to a person who ceases to
be a professional employee of the individual or who ceases to own the business
of the individual auditor after the proposed commencement of these provisions
on 1 July 2004.
5.141
Similar processes and requirements apply to members of an
audit firm (see proposed sections 324CF and 324CH) and an audit company
and directors of an audit company (see proposed sections 324CG and 324CH).
5.142
Proposed subsection 324CH(1) contains a table which
lists the impermissible relationships that are relevant for the purposes of the
specific employment and financial independence requirements contained in
proposed sections 324CE, 324CF and 324CG.
5.143 The relationships listed in the table are based
on the proposals in CLERP 9 and the Ramsay report.
5.144 Items 1 to 9 relate to the employment
relationships identified in the Ramsay report which threaten an auditor's
independence. Items 10 to 19 list the financial relationships which the Ramsay
report recommended should be dealt with in the Corporations Act. The Ramsay
report referred to the specific employment and financial restrictions as "a
list of what can be regarded as core circumstances which, if they exist,
necessarily mean that the auditor is not independent".
5.145 The Ramsay report recommendations in relation
to employment and financial relationships drew on the current requirements in
the Corporations Act, the auditor independence rules formulated by the
International Federation of Accountants (IFAC) and relevant SEC auditor
independence rules in the US. The IFAC rules have been adopted in Australia by
the Institute of Chartered Accountants in Australia and CPA Australia and are
contained in Professional Statement F.1.
5.146 The following background commentary on each of
the items is noted:
• Items 1 to 6:
5.147 These items are based on the Ramsay report
recommendation relating to the restrictions on the employment by the audited
body of a current auditor or employee of the auditor. The restrictions are
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based on existing subsections 324(1) and (2) of the Corporations Act. Drawing
on corresponding requirements in the IFAC and SEC rules, the Ramsay report
recommended that the existing requirements should be extended beyond current
partners of an audit firm to cover the professional employees of the audit firm
and should also extend to an immediate family member of the audit engagement
team.
5.148 The recommendations in the Ramsay report have
been implemented and expanded (as a result of the application of the
requirements in sections 324CE, 324CF and 324CG to the table of relationships
in section 324CH):
5.149 The requirements have been applied to an
individual auditor, an audit firm and an audit company.
5.150 In this context, the term `a professional
employee' of the auditor referred to in the Ramsay report is applied to a
professional member of an audit team (this definition should not be
confused with another new definition in section 9 of professional
employee which is used in the case of a former professional employee of an
auditor joining an audited body).
5.151 The service company or trust arrangement has
been expressly covered.
5.152 In addition to the existing case of an
officer of the audited body , items 2, 3, 4 , 5, and 6 also refer to an
audit critical employee (which is defined in section 9 of the
Corporations Act). The objective is to cover employees who are in a position
to affect the conduct or efficacy of the audit but who would not be caught by
the definition of officer in section 9. An audit critical
employee is limited to an employee who is able, because of the
position in which the person is employed, to exercise significant influence
over:
.1 A material aspect of the contents of the financial
report being audited; or
.2 The conduct or efficacy of the audit.
• Item 7 is based on the existing
paragraph 324(2)(h) of the Corporations Act with the following changes:
5.153 The relationship is applied to an individual
auditor and to an audit company, in addition to an audit firm as reflected in
the current provision.
5.154 In line with the CLERP 9 proposal, the
restriction applies to any consultancy and is not limited, as in the current
provision, to a consultancy on accounting or auditing matters.
5.155 Consistent with the approach adopted in items 2
to 6, the scope of the restriction has been extended beyond an officer of
the audited body to also cover an audit-critical employee of an
audited body.
• Item 9 implements the recommendation in the Ramsay
report in relation to employment by an audit firm (also applying to an
individual auditor and to an audit company) of a former employee of an audited
body. The restriction will apply, in addition to the period to which the audit
relates, to:
- the 12 months immediately preceding the beginning
of the period to which the audit relates; and
- the period during which the audit is being
conducted or the audit report is being prepared.
• Items 10 to 14 implement the recommendations in the
Ramsay report relating to investments in audited bodies. The Ramsay report
noted that these financial relationships are prohibited under the IFAC and SEC
rules.
• Item 15 is based on the current paragraphs
324(1)(e) and 324(2)(f) of the Corporations Act. In accordance with the Ramsay
report recommendation the current prohibition has been extended to include an
entity that the client controls. The prohibition does not apply to:
- a debt owed under a housing loan (see proposed
subsection 324CH(5)); or
- a loan which would be prohibited under item 18 but
for the exception in proposed subsection 324CH(7) (which relates to loans
made in the ordinary course of business etc).
• Items 16 to 19 implement the recommendations in the
Ramsay report relating to :
- loans to and from audited bodies; and
- loan guarantees involving the auditor and audited
body.
5.156 For purposes of item 16 loans by immediate
family members in ordinary business dealings with the audited body are to be
disregarded.
5.157 Proposed subsections 324CH(7) and (8)
provide for exceptions in relation to loans and guarantees made in the ordinary
course of business etc. under items 18 and 19 respectively.
5.158 CLERP 9 endorsed the Ramsay report
recommendation that the restrictions on employment relationships should not
apply to small proprietary companies as defined in section 45A. This has been
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implemented in relation to each of the employment relationships contained in
items 1 to 9 of the table.
5.159
Proposed section 324CI requires a two year cooling off
period before a member of an audit firm or a director of an audit company can
become, or continue to be an officer of an audited body where:
• At any time before the person ceases to be a member
of the firm or director of the audit company, the audit firm or audit company
has engaged in an audit of an audited body; and
• The member or the director was a professional
member of the audit team for the audit
5.160 Proposed subsection 1462(11) provides that
section 324CI applies only if the relevant departure time for the purposes of
that section occurs on or after the proposed commencement date of 1 July
2004.
5.161 Proposed paragraph 324CI(1)(e) contains a small
proprietary company carve out.
5.162 It is noted that proposed paragraph 300(1)(ca)
(item 89) provides that the director's report must include the name of each
officer of the company, registered scheme or disclosing entity who was a
partner in an audit firm or director of an audit company that is an auditor of
the company, registered scheme or disclosing entity and whether the officer was
a member or director when the audit firm or audit company undertook an audit of
the company, disclosing entity or registered scheme.
5.163
Proposed section 324CJ requires a two year cooling off
period before a professional employee of the audit company can become, or
continue to be an officer of an audited body where:
• At any time before the person ceases to be a
professional employee of the audit company, the company has engaged in an audit
of an audited body; and
• The person was a lead auditor or review auditor for
the audit.
5.164
Proposed section 324CK implements a recommendation of
the HIHRC that the Corporations Act contain a prohibition on any more than one
former partner of an audit firm, at any time, being a director of or taking a
senior management position with the audited body.
5.165 Proposed section 324CK also extends the
prohibition to a director of an audit company.
5.166 The prohibition applies where an audit firm or
audit company is an auditor of an audited body for a financial year and the
person has at any time been a member of the audit firm or a director of the
audit company.
5.167 The prohibition will operate prospectively and
will apply to a person who:
• Is, or who becomes, on or after 1 July 2004 a
member of the firm or a director of the audit company; and
• Becomes an officer of the audited body concerned on
or after 1 July 2004.
5.168 Proposed paragraph 324CK(e) contains a small
proprietary company carve out.
5.169
Subsection 307C applies to an individual auditor and
requires the auditor to give to the directors of a company, registered scheme
or disclosing entity either an unqualified declaration or a qualified
declaration that there have been no contraventions of the auditor independence
requirements of the Corporations legislation or any applicable code of
professional conduct. Where a qualified declaration is given to the directors,
the individual auditor is required to set out details of the contraventions in
the declaration.
5.170 Similar requirements apply to an audit firm or
an audit company under proposed subsection 307C where the lead auditor for the
audit must give the unqualified or qualified declaration.
5.171 Failure to give the declaration is a strict
liability offence. While the person giving the declaration is not excused from
giving a declaration on the ground that doing so might incriminate the
individual, subsection 307C(7) provide use and derivative use indemnity
safeguards.
5.172 Proposed paragraph 298(1)(c) (item 88) provides
that the annual directors' report must include a copy of the auditor's
independence declaration made under proposed section 307C. Proposed
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subsection 306(2) (item 92) contains similar provisions in relation to the
directors' half-year report.
5.173
Proposed section 1462 (item 2, Schedule 12) lists the
transitional arrangements for the auditor independence requirements contained
in Schedule 1.
5.174
Division 4 of Schedule 1, Part 3 (proposed
section 324CL) is based on current subsections 324(4),
(5) and (6).
5.175
Proposed subsections 324CM(1) and (2) replicate the effect
of the current subsection 324(16) in relation to an individual auditor and
an audit firm.
5.176 A similar requirement is imposed on a director
of an audit company under proposed subsection 324CM (3).
5.177
Division 5 sets out the framework for auditor rotation in
circumstances where either an individual auditor, an audit firm or authorised
audit company has been appointed as auditor of a listed company or registered
scheme. The provisions in this Division implement recommendations of both
CLERP 9 and the Ramsay report.
5.178 The provisions rely on the concept of an
auditor having `played a significant role' in the audit which is defined in
section 9 of the Corporations Act (see item 82 of Schedule 1, Part 3).
Generally the persons to whom the rotation obligations apply are the lead and
review auditors. Where an individual plays a significant role in the audit of
a listed company for five successive financial years, the individual cannot
play a significant role in the audit of that company for at least another two
successive financial years (see proposed section 324DA).
5.179 Proposed subsection 324DA(2) further
provides that a person may not play a significant role as auditor for more than
five out of any seven successive financial years. This approach recognises
that auditors may not necessarily audit a body in consecutive years however the
relationship between the auditor and the audited body can still give rise to a
threat to independence. In these circumstances rotation should still be
required. In addition this approach prevents an auditor from avoiding the
rotation obligation specified in proposed section 324DA, for example, in
circumstances where an auditor plays a significant role for four successive
years, resigns from the audit for only one year and then resumes a significant
role for another four successive years.
5.180 ASIC will be able to provide relief from the
rotation requirements in certain circumstances (see below).
5.181
Proposed section 324DB provides that an individual who
does not comply with the rotation requirements of the Act contravenes the Act.
5.182
Proposed section 324DC operates in circumstances where
an audit firm is appointed as a listed company's or listed scheme's auditor.
The section recognises that individuals will act on behalf of the firm and
therefore places the rotation obligation on both the lead and review auditors
(see proposed section 324AF for the definition of the lead and review
auditors).
5.183 Liability for a breach of the rotation
obligations is directed at members of a firm. Where an individual plays a
significant role in an audit of a listed company or scheme, and is not eligible
to do so due to the rotation requirements, a member of the firm will commit an
offence where:
• the member becomes aware that the individual is not
eligible to play that role; and
• the member fails to take the necessary steps as
soon as possible to ensure that either:
- the audit firm resigns as auditor of the company
or
- the individual ceases to act on behalf of the audit
firm as a lead or review auditor.
5.184 Proposed subsection 324DC(2)provides that a
member of an audit firm will commit a strict liability offence where an
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individual acts as lead or review auditor when the individual is not eligible
to play a significant role in the audit of the company for that financial year.
Proposed subsection 324DC(4) provides a defence where the member of the firm
has reasonable grounds to believe that the audit firm had in place at that
time, a quality control system that provided reasonable assurance (taking into
account the size and nature of the audit practice of the audit firm) that the
audit firm and its employees complied with the requirements of Division 5.
5.185
Proposed section 324DD contains the same liability
framework in relation to a contravention of the rotation requirements by an
audit company or a director of the audit company.
5.186
The Bill recognises that in some circumstances, the
rotation obligations could place a burden on particular audit firms or listed
companies. To this end, the Bill provides ASIC with a power to provide relief
from the rotation requirements.
5.187 Proposed section 342A gives ASIC the power
to extend the period before rotation of an auditor is required. Where an
auditor has performed an audit for five successive years, paragraph 342A(1)(a)
allows the period before rotation will be required to be extended to six or
seven years. After this time, the auditor must not undertake the audit of that
listed company for the next two years.
5.188 Paragraph 342A(1)(b) provides for ASIC relief
in cases where an audit has not been undertaken in consecutive years. In these
circumstances, ASIC can extend the period before rotation will be required from
any five out of seven successive years to any six out of seven successive
years. These provisions would apply for example, where an auditor conducts
four successive audits, resigns from the audit for one year and returns to the
audit in year six and further seeks to perform the audit in year seven. Under
subsection 324DA(2), the auditor would not be able to perform the audit in year
seven unless relief had been provided under paragraph 342A(1)(b).
5.189 ASIC will only be able to extend the period in
response to a written application by the individual auditor or the audit firm
or authorised audit company for whom the auditor works. Proposed
subsection 342A(6) requires ASIC to be satisfied that to refuse the
extension would cause an unreasonable burden on the auditor, the audit firm or
authorised audit company, or the listed company subject to the audit. Proposed
subsection 342A(7) requires ASIC, when considering whether an unreasonable
burden would be placed on any of these parties, to take into account the nature
of the listed company being audited and the degree of specialist knowledge an
auditor might need to undertake an effective audit. ASIC will also be able to
take into account the availability of alternative auditors capable of providing
a satisfactory level of audit services to the relevant companies. This might
for example be an issue in the case of auditors operating in rural or remote
areas, or in the case of small audit firms where the number of available audit
partners able to conduct the audit is limited.
5.190 ASIC's use of the relief power will be
monitored to ensure it is achieving its intended objectives.
5.191
Proposed section 342B requires an auditor who remains
significantly involved in the preparation of an audit pursuant to an ASIC order
under proposed section 342A to give the listed company, or the responsible
entity of the listed scheme, written notice that the ASIC order has been
provided. This notice should be provided to the company as soon as
practicable, if the company's auditor for the relevant financial year has
already been appointed. If the auditor has not been appointed, the notice must
be forwarded before the appointment is made. Where an auditor remains
significantly involved in the audit pursuant to an ASIC order under proposed
section 342A, the company should advise shareholders of the details in its
annual financial or directors' report.
5.192
Schedule 12 of the Bill contains the transitional
arrangements applying to the rotation obligations.
5.193 Proposed section 1463 provides that the auditor
rotation provisions are to apply to the audit of financial years that commence
on or after 1 July 2006. This will give publicly listed companies and audit
firms sufficient time to implement the rotation requirements under the Act.
5.194 It should be noted that rotation will remain a
requirement under Professional Standard F.1 with which auditors, not just those
of listed companies, should comply.
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5.195
The Bill requires the board of directors of a listed
company to provide a statement in the annual report that identifies all
non-audit services provided by the audit firm and the fees applicable to each
item of non-audit service (see item 91, subsection 300(11B)). In
addition, the report must include a statement by the directors that they are
satisfied that the provision of non-audit services is compatible with the
general standard of independence and an explanation of why those non-audit
services do not compromise audit independence (see item 91, subsection
300(11B)). Where a company has an audit committee, this statement must be made
in accordance with advice provided by that committee (see item 91,
subsection 300(11D)).
5.196 The Bill does not contain a definition of
non-audit services. Consistent with the terms of the Ramsay report, it is
intended that non-audit services will encompass any services provided by the
auditor which are not included in the terms of the audit engagement.
5.197 The provisions of the Bill implement
recommendations of the HIH Royal Commission.
5.198
Currently Australian accounting standards require
disclosure of the aggregate amount of fees paid to the auditor for the audit
and related services and for non-audit services. This requirement applies to
all entities required to prepare financial reports in accordance with
accounting standards. The Bill does not relieve entities from the requirements
of the accounting standards.
5.199
Companies must comply with the requirements in the Bill in
relation to directors' reports that relate to financial years beginning on or
after 1 July 2004 (see Schedule 12, proposed section 1460).
5.200
The Corporations Act currently does not allow a company to
be registered as a company auditor. Schedule 1, Part 4 of the Bill establishes
a framework for incorporation of audit firms.
5.201 Allowing auditors to incorporate will address
some of the concerns relating to the professional liability of auditors.
Incorporation will also provide accounting firms with an additional option in
terms of how they structure their operations.
5.202
Proposed section 1299A provides that a company may apply to
ASIC for registration as an authorised audit company. An application must be
in writing as prescribed and must contain such information as is prescribed.
5.203
Proposed section 1299B provides that a company is only
eligible to be registered as an authorised audit company if:
• each of the directors of the company is a
registered company auditor and is not disqualified from managing a corporation
under Part 2D.6; and
• each share in the company is held and beneficially
owned by a person who is an individual or the legal representative of an
individual; and
• a majority of the votes that may be cast at a
general meeting of the company attach to shares in the company that are held
and beneficially owned by individuals who are registered company auditors;
and
• ASIC is satisfied that the company has adequate and
appropriate professional indemnity insurance; and
• the company is not an externally administered body
corporate.
5.204
Proposed section 1299C sets out the requirements relating
to ASIC's granting or refusal of the application and the requirements in
relation to the registration of the company as an authorised audit company.
5.205
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Proposed section 1299D provides that the company's
registration as an authorised audit company is subject to the provisions of
Part 9.2A, any conditions or restrictions specified in the regulations and any
other conditions or restrictions determined by ASIC.
5.206
Proposed section 1299E requires ASIC to keep a Register of
Authorised Audit Companies and sets out the matters that ASIC must enter in the
Register in relation to each authorised audit company.
5.207
Proposed subsection 1299F(1) provides that an authorised
audit company must notify ASIC if a condition or restriction to which the
company's registration is subject is contravened.
5.208 An authorised audit company is also required
under proposed subsection 1299F(3) to notify ASIC if a change occurs in the
details of a matter that is required to be entered in the Register of
Authorised Audit Companies.
5.209
Proposed section 1299G requires an authorised audit company
to lodge at the end of a calendar year, on or before the next 31 January, an
annual statement with ASIC.
5.210
Proposed section 1299H provides that ASIC may cancel a
company's registration as an authorised audit company if the company requests
ASIC to cancel the registration. ASIC's decision to cancel the company's
registration comes into effect as soon as practicable on the making of the
decision.
5.211 Proposed section 1299I provides that ASIC may
cancel or suspend a company's registration as an authorised audit company if
the company ceases to be eligible to be registered as an authorised audit
company or the company fails to meet conditions or observe restrictions imposed
on the company's registration as an authorised audit company.
5.212 Proposed section 1299J requires ASIC to give a
company a written notice setting out ASIC's decision to cancel or suspend the
company's registration within 14 days after the decision. ASIC is also
required to publish written notice of the decision in the Gazette.
5.213 Proposed subsection 1299K(1) provides that
subject to subsection (2) and to sections 41 and 44A of the Administrative
Appeals Tribunal Act 1975 a decision by ASIC to cancel or suspend a
company's registration as an authorised audit company comes into effect at the
end of the day on which the company is given notice of the decision under
paragraph 1299J(1)(a).
5.214 Proposed subsection 1299K(2) provides that ASIC
may, in order to enable an application to be made to the Tribunal for review of
the decision to cancel or suspend the registration, determine that the decision
is not to come into effect until a specified time or the happening of a
specified event.
5.215
Proposed section 1299L provides that a company whose
registration is suspended is, except for the purposes of subsection 1299E(4),
sections 1299F and 1299G and Division 2, taken not to be registered as an
authorised audit company so long as the registration is suspended.
5.216
Proposed section 1299M provides that if a company's
registration as an authorised audit company is cancelled, each appointment of
the company as auditor for a company or registered scheme that is in force on
the day on which the cancellation takes effect is terminated at the end of that
day.
5.217
Proposed section 324AD provides that a report or notice
that purports to be made or given by an audit company appointed as auditor of a
company or registered scheme must be signed by a director of the audit company
or the lead auditor or review auditor for the audit both in the company's name
and in his or her own name. Proposed section 324AD recognises that under a
corporate structure it may not be practicable or desirable for all the former
partners of a large accounting firm to be appointed as directors of the audit
company.
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5.218
The amendments contained in this Part of the Bill are
designed to facilitate shareholder participation at Annual General Meetings
(AGMs) and improve auditor accountability by:
• allowing shareholders to ask questions of the
company auditor, in writing before the AGM as well as orally at the AGM; and
• requiring company auditors to attend the AGM.
5.219 Since the Company Law Review Act 1998
came into effect, members of a company have been entitled to ask questions of
the auditor concerning the conduct of the audit and the contents of the audit
report. This however only applies in relation to shareholders who attend the
AGM and in circumstances where the auditor is in attendance at the meeting.
5.220 The Bill extends these provisions by requiring
the auditor of a listed company (or their representative) to attend the AGM,
and by providing an alternative mechanism by which all members - not just those
in attendance - can ask questions of the auditor. For unlisted companies,
there is no change to auditor attendance requirements brought about by this
Bill. Auditors of unlisted companies will not be compelled to attend the AGM,
but if they do attend, members of the company will be entitled to ask them
questions.
5.221 CLERP 9 recommended that shareholders be able
to submit questions by e-mail and that questions be posted on the company web
site. The provisions in the Bill are medium neutral and will allow questions
to be submitted by members in writing in all forms. Companies will be required
to make the questions available to members attending the AGM. Companies may
choose to post the questions on their website, however this will not be a
requirement of the legislation.
5.222 By facilitating shareholder participation in
this way, these provisions will strengthen the accountability of auditors to
shareholders. The direct questioning of auditors will improve the ability of
shareholders to assess both the quality of the audit, and the performance of
the company management.
5.223
Item 115 in Schedule 1 of the Bill inserts proposed section
250PA which allows a member of a listed company to submit questions to the
auditor about the contents of the audit report or the conduct of the audit.
Questions must be submitted no later than 5 business days before the AGM.
5.224 Proposed subsection 250PA(3) requires the
company to forward all questions it has received to the auditor as soon as
practicable, so as to give the auditor maximum time to consider the issues
raised.
5.225 The auditor is required to prepare a list of
questions submitted and, following any filtering, provide that list to the
company far enough in advance of the AGM so as to allow the company to make it
available to members attending the AGM. Proposed subsection 250PA(4) assigns
responsibility for this to an individual auditor, while proposed subsection
250PA(6) assigns responsibility for this to the lead auditor acting on behalf
of an audit firm or company. The offence of not providing the list to the
company shall be one of strict liability.
5.226 The auditor is permitted to filter questions on
the basis of relevance to the audit report or conduct of the audit. It is
considered appropriate that the auditor determine relevance rather than the
company. The company could however, express an opinion to the auditor
regarding the relevance of individual questions. The auditor may also exclude
questions that are the same in substance as other questions, and questions that
were not passed to the auditor in reasonable time for the auditor to assess
their suitability for inclusion in the list (see proposed subsection 250PA(8)).
5.227 Proposed subsection 250PA(9) requires the
company to make the list of questions provided by the auditor reasonably
available to members attending the AGM. This may not necessarily require that
printed copies be distributed to each attending member, although this would
satisfy the requirement in most cases. The list could be made available by
other means.
5.228 The main purpose of making the list available
at the AGM is to highlight to shareholders where there may be areas of concern
with the conduct of the audit and the audit report, and to prompt members
attending the AGM of possible issues that could be raised with the auditor.
5.229 Item 117 in Schedule 1 of the Bill extends
subsection 250T(1) to give the auditor or their representative a reasonable
opportunity to answer written questions submitted under proposed section 250PA
(see proposed paragraph 250T(1)(b)). Members already have a reasonable
opportunity to ask the auditor questions at the AGM relevant to the conduct of
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the audit or the audit report under existing section 250T(1), which becomes
section 250T(1)(a).
5.230
There is no requirement in the Bill for the auditors to
provide answers to written questions either at the AGM or following the
meeting. Such a requirement would raise the issue as to whether the extra
burden on auditors would lead to more useful information being disclosed. In
addition, to require written questions to be answered would effectively elevate
their status above questions asked orally at the AGM. As noted above, however,
auditors will be given a reasonable opportunity to answer written questions at
the AGM if they choose to do so.
5.231
Item 116 in Schedule 1 of the Bill inserts proposed section
250RA which requires the auditor of a listed company to attend the AGM of that
company where the audit report is to be considered. The auditor can arrange to
be represented by a member of the audit team who is suitably qualified, and is
in a position to answer questions about the audit (see paragraph 250RA(1)(b)).
Where an auditor is an audit firm or company, the lead auditor would normally
be expected to attend the AGM. However, the Bill is not prescriptive on this
matter and any suitable member of the audit team may attend.
5.232 In the case of audit firms and companies, the
responsibility to ensure attendance at the AGM lies with the lead auditor (see
proposed subsection 250RA(3)). Where the auditor is not represented at the AGM
it will be an offence of strict liability.
5.233 Schedule 12 of the Bill inserts proposed
section 1464 which contains the transitional arrangements to the auditor
attendance at AGM provisions. The provisions will apply to AGMs at which
financial reports for financial years that commence on or after 1 July
2004 are considered.
5.234
Both auditors and their representatives will have qualified
privilege in relation to answering questions at the AGM (see Schedule 1, item
122, proposed subsections 1289(3) and (4)). This is explained further under
Part 6 below.
5.235
Proposed section 990L (item 121) will replace the existing
section 990L in relation to qualified privilege of auditors of financial
services licensees. The proposed section extends the qualified privilege
provisions from individual auditors to registered company auditors acting on
behalf of audit companies
5.236 Proposed section 1289 (item 122) will replace
the existing section 1289 in relation to qualified privilege of auditors. The
proposed section extends the qualified privilege provisions from individual
auditors to registered company auditors acting on behalf of audit companies.
5.237 As the auditors of listed companies will be
required to attend company AGMs under proposed section 250RA, proposed
subsection 1289(3) makes it clear that qualified privilege is extended to apply
to answers to questions asked before (as provided by proposed section 250PA) or
during a company AGM. Proposed subsection 1289(4) will also extend qualified
privilege to a person representing the auditor at the AGM.
5.238 Qualified privilege also applies to auditors in
respect of disclosures made in response to requests for information given to
the auditor by the Financial Reporting Council. This provision is set out in
relation to individual auditors, audit firms and companies in respect of
financial services licensees and listed companies at proposed paragraphs
990L(1)(d), 990L(2)(d), 1289(1)(d) and 1289(2)(d).
5.239 A note indicating that qualified privilege
applies in relation to responses to requests from the Financial Reporting
Council has also been inserted into proposed subsection 225A(5) of the
ASIC Act, which provides for the chair of the FRC to make such requests, by
item 17 in Schedule 1 of the Bill.
5.240
The provisions in this part put in place requirements
relating to the reporting of suspected contraventions of the law to ASIC.
Under current subsection 311(1) of the Corporations Act, a registered company
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auditor conducting an audit must notify ASIC in writing as soon as possible if
the auditor has reasonable grounds to suspect that a contravention of the Act
has occurred, and believes that the contravention has not been or will not be
adequately dealt with by comment in the auditor's report or by bringing it to
the attention of company directors.
5.241 As a result of the discretion of auditors to
deal with any breaches in their report or by raising them with directors, there
are concerns that the provision has not been used as effectively as it could
have otherwise been.
5.242 The amendments to sections 311 (and 601HG which
contains similar requirements to section 311) balance the need to ensure the
profession is able to conduct its business in a flexible way, but at the same
time recognise the important role that auditors play as the principal external
check on the veracity of companies' financial statements. As such, auditors
are in a unique position to determine whether there has been a contravention of
the law. The provisions harness the role of auditors by encouraging the timely
disclosure of possible breaches of the law.
5.243
Item 123 replaces the existing section 311. Proposed
subsection 311(1) provides that an individual auditor who conducts an audit
(which includes a review of a half-year financial report) must notify ASIC in
writing where the auditor has reasonable grounds to suspect a significant
contravention of the Corporations Act. The auditor must do so as soon as
practicable but in any case within 28 days. Subsections 311(2) and (3) contain
similar requirements in relation to audit companies and lead auditors.
5.244 The effect of these subsections is that, in the
case of a breach which is not significant, where the auditor believes that the
matter could be adequately dealt with by comment in the auditor's report or by
raising it with directors, the auditor need not report the matter to ASIC. If,
however, the auditor does not believe that a breach would be adequately dealt
with in this way, it must be reported.
5.245 In determining whether a breach is significant,
the auditor should consider the penalty applying in the event of a
contravention and the affect of the contravention on, or the adequacy of
information available about, the financial standing of the company (subsection
311(4)). Issues which could be considered in determining whether a
contravention is significant include:
• insolvent trading by the company;
• a breach of accounting standards or the true and
fair view requirement ;
• a breach of Division 2 Part 2 of the ASIC Act;
• suspected dishonest or misleading and deceptive
conduct; and
• a breach that may cause a significant loss to any
person or class of persons.
5.246 The auditor must also report circumstances
which amount to an attempt:
• in relation to the audit, by any person to unduly
influence, coerce, manipulate or mislead a person involved in the conduct of
the audit; or
• by any person, to otherwise interfere with the
proper conduct of the audit.
5.247 A person is taken to be `involved in the
conduct of the audit' where they are the auditor, the lead or review auditor, a
professional member of the audit team or any other person involved in the
conduct of the audit (subsection 311(6)).
5.248 To enhance compliance with proposed subsections
311(1), (2) and (3) and subsections 601HG(4), (4A) and (4B), the maximum
penalty for breaching these requirements has been increased to 50 penalty units
and/or 12 months imprisonment. In light of the increased penalty and comments
received from industry, the application of strict liability to these provisions
has been removed.
5.249 Corresponding amendments to section 601HG are
contained in item 124. Item 127 amends existing subsection 990K(2) by
adding a requirement that an auditor must give a report to ASIC in relation to
any matter that, in the opinion of the auditor, constitutes an attempt to
unduly influence, coerce, manipulate or mislead the auditor in the conduct of
the audit (paragraph 990K(2)(c)).
5.250
The commencement date for the amended provisions in
sections 311, 601HG and 990K is 1 July 2004.
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5.251
The Companies Auditors and Liquidators Disciplinary Board
(CALDB) is a disciplinary body which receives and reviews applications made to
it by ASIC or APRA in respect of the conduct of either registered company
auditors or liquidators. Under the existing structure of the CALDB, there are
concerns about its operational capacity and its perceived independence from the
accounting profession. Schedule 1, Part 8 of the Bill amends the current
provisions governing the CALDB (see Part 11 of the ASIC Act) to address these
concerns. In addition, the amendments facilitate the exchange of information
between the CALDB and the professional accounting bodies for the purpose of
assisting in the performance of their disciplinary functions.
5.252 The amendments will result in a change to the
existing structure of the Board. The CALDB is currently comprised of three
members, including the Chairperson, a member selected by the Minister from a
Panel of five nominees put forward by the ICAA and a member selected by the
Minister from a Panel of five nominees put forward by CPA Australia (the CPAA).
It is the Board itself that currently hears matters coming before the CALDB.
5.253 As a result of the amendments contained in the
Bill, the new Board of the CALDB will consist of fourteen people instead of
three. The overall Board may meet to determine procedural issues and to
conduct the business of the Board. However, the Board itself will no longer
conduct hearings. Instead, up to two Panels will sit under the Board and will
be constituted to hear matters. Members of each Panel will be chosen from the
overall membership of the Board.
5.254 Currently, accountants form the majority of the
Board of the CALDB. The importance of retaining accounting expertise on the
Board to assist in the determination of particular disciplinary matters is
recognised. At the same time, to enhance the perceived independence of the
Board, its composition will be changed to allow for a majority of
non-accountants to hear matters coming before each Panel.
5.255 This expanded membership will allow two Panels
of the Board to sit at any given time and thereby hear and determine matters
more expeditiously.
5.256 A Panel will normally consist of five persons
including: the Chairperson or Deputy Chairperson (who must have legal
qualifications), one member from each of the prescribed professional accounting
bodies (the CPAA and ICAA), and two members from the business community. On
certain occasions (such as in the case of purely administrative matters) the
Chairperson may consider it more cost efficient and appropriate to constitute a
Panel with three members. A three person Panel would consist of the
Chairperson or Deputy Chairperson, one accounting member and one business member.
5.257
Currently, the practical effect of section 203 of the ASIC
Act is that the majority of the Board are accountants. Items 135 to 137 amend
section 203 to provide for a reconstitution of the membership of the CALDB.
These amendments provide for additional members to be appointed to the Board
who are not members of the professional accounting bodies.
5.258 The Minister will be responsible for appointing
six representatives from the business community who must have qualifications,
knowledge or experience in business or commerce, the administration of
companies, financial markets, financial products and services, economics or
law.
5.259 The number of accountants appointed to the
Board will also be increased. Three members must be chosen from seven nominees
put forward by the ICAA, along with three members chosen from seven nominees
put forward by the CPAA. The business and accounting appointees must be
resident in Australia.
5.260 The overall Board membership will also consist
of a Chairperson, and a new position will be created for a Deputy Chairperson.
The appointment of a Deputy Chairperson will allow the CALDB to hold more than
one hearing simultaneously. The Deputy Chairperson must be a legal
practitioner enrolled to practice in a Supreme Court of a State or Territory,
or a court of higher jurisdiction, for not less than five years.
5.261 Due to the revised constitution of the CALDB
and the appointment of additional members, it will no longer be necessary to
appoint deputy members generally. Therefore, item 145 repeals section 209 and
item 153 repeals subsection 212(1).
5.262
Items 138 to 143 provide for the terms of appointment of
the Chairperson, Deputy Chairperson and members, including the basis on which:
they are appointed, they may resign, or their appointment may be terminated.
5.263
Item 144 replaces existing section 208 of the ASIC Act with
proposed sections 208 and 208A. These sections provide for acting
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arrangements where there is a vacancy in the position of the Chairperson or
Deputy Chairperson.
5.264 Proposed section 208 provides that during
either the Chairperson's absence or a vacancy in the office of Chairperson or
when for any reason the Chairperson cannot perform their functions, the Deputy
Chairperson would normally fill the Chairperson's position. If the Deputy
Chairperson is unavailable when a replacement is required, the Minister may
appoint another eligible person to act as Chairperson.
5.265 Proposed section 208A provides that the
Minister may appoint a person who is eligible for appointment as Deputy
Chairperson to act in that position:
• during the absence of the Deputy Chairperson;
• during a vacancy in the office; or
• when the Deputy Chairperson is acting as
Chairperson under proposed subsection 208(1).
5.266
Items 146 and 147amend existing section 210 to provide for
the conduct of meetings involving the overall Board of the CALDB. Item 146
inserts subsection 210(1A) which precludes any of the rules in section 210 from
applying to a meeting of a constituted Panel. Item 147 amends subsection
210(3) to provide that at a meeting of the Board, the Chairperson plus five
other members will comprise a quorum.
5.267
Item 148 inserts into the ASIC Act proposed section 210A,
which sets out how a Panel is to be constituted to deal with an application
made to the CALDB under section 1292 or 1295 of the Corporations Act.
5.268 Proposed subsection 210A(2) provides that the
Chairperson is to determine in writing which members are to form a particular
Panel. The provision gives the Chairperson flexibility as to the convening of
a Panel. In some circumstances the Chairperson may wish to convene the Panel
relatively quickly, such as in routine matters. In other circumstances, the
Chairperson may wish to give further consideration to a Panel's composition to
ensure that any conflicts of interest are avoided. It is also recognised that
to ensure the availability of the part-time members, it may be necessary to
constitute a Panel as close as possible to the date of the hearing.
5.269 Pursuant to subsections 210A(3), (4) and (5),
while the Chairperson has discretion as to how they constitute a panel,
wherever possible, the Chairperson should constitute a five member panel
comprised of:
• the Chairperson or Deputy Chairperson;
• one member of the ICAA;
• one member of the CPAA; and
• two members of the business community.
5.270 Constituting a five person Panel may not be
practicable or appropriate in certain circumstances, particularly in the case
of more routine matters such as where a respondent has failed to lodge an
annual statement, or in the case of similar matters of an administrative
nature. In such circumstances, the Chairperson may choose to constitute a
three person panel comprised of:
• the Chairperson or Deputy Chairperson;
• one member of the ICAA or the CPAA; and
• one member of the business community.
5.271 Where, after a hearing has commenced, a member
of the Panel becomes permanently unavailable, the matter must be reheard by a
new Panel determined by the Chairperson unless the parties consent to the
matter continuing (proposed subsections 210A(6) and (7)). If the Panel is
reconstituted, it is to consist of the original members of the Panel, plus a
replacement member. To avoid duplication of proceedings, the reconstituted
panel may have regard to any record of the previous Panel's proceedings
(proposed subsection 210A(8)).
5.272 Since the members will be part-time, it is
recognised that on occasions a Panel member may be temporarily unavailable to
attend a meeting of a Panel. To provide for a Panel meeting to proceed where
these circumstances arise, proposed subsections 210B(2) and (3) provide for a
quorum of the Panel.
5.273 The quorum for a five person Panel is three
persons, comprising the Chairperson or Deputy Chairperson, one member from
either the ICAA or the CPAA, and one member from the business community. The
quorum for a three person panel is two persons, comprising the Chairperson or
Deputy Chairperson and the accounting member. The quorum provisions are not
intended to be used to allow a panel to continue operating where a panel member
becomes permanently unavailable. In these circumstances, the Panel should be
reconstituted or the consent of the parties should be obtained, pursuant to
proposed subsection 210A(7).
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5.274
Items 149 to 152 amend existing section 211 to require the
Chairperson, Deputy Chairperson and other members to disclose any interest in a
matter that is to be considered by the Board of the CALDB or by a Panel of the
CALDB. The disclosure shall be recorded in the minutes and the relevant member
may not normally be present during deliberation of the matter, or take part in
any decision by the CALDB or by a Panel on the matter.
5.275
Items 154 and 155 amend current section 213 to provide that
information given to a Panel is to be treated with the same confidentiality as
if it were provided to the CALDB. However, to aid the accounting bodies in
their disciplinary activities, disclosure of relevant information will be
authorised where it is to assist a professional accounting body or other
prescribed professional body to perform its disciplinary function. This will
also allow scope for the CALDB to share information with other disciplinary
bodies (for instance, a legal professional body or an insolvency body) as
appropriate.
5.276
Items 157 to 163 amend existing section 216. The changes
reflect the distinction made in the Bill between the Board itself and the
Panels convened to hear particular matters.
5.277 Where the Board decides to take disciplinary
action against an individual, under subsection 1296(1) of the Corporations Act,
a notice setting out the decision must be lodged with ASIC and published in the
Gazette. Item 177 provides that, where relevant, the notice should also
identify the company or firm to which the individual belongs.
5.278
Items 164 to 175 make technical amendments to existing
sections 217 to 221 and 223 of the ASIC Act so as to refer to the Panel
Chairperson or Panel where appropriate (rather than to the Chairperson or
Disciplinary Board).
5.279 Item 176 corrects cross-referencing anomalies
in existing section 1292 of the Corporations Act.
5.280 Item 178 amends existing subsection 1317B(2) of
the Corporations Act to include APRA as a party whose interests may be affected
by a decision of the CALDB. This reflects that APRA is a party that may make
an application to the CALDB under section 1292 of the Corporations Act.
5.281
Proposed subsection 287(5) of the ASIC Act (see item 1 of
Schedule 12) provides that the relevant changes to the CALDB made by the
amendments contained in Schedule 1 of the Bill apply to applications made to
the CALDB on or after 1 July 2004.
5.282 Proposed subsection 287(4) of the ASIC Act (see
item 1 of Schedule 12) allows for a deputy member who is involved in a matter
which begins before 1 July 2004 and extends beyond that date -- to
retain their position until the matter has concluded. This transitional
provision has been included because the Bill generally abolishes the positions
of deputy members.
5.283
Schedule 2 of the Bill contains the following amendments:
| Part 1
|
CEO
and CFO declarations in relation to listed entity's financial report
|
| Part 2
|
Content
of directors' report for listed public companies
|
| Part 3
|
Financial
Reporting Panel
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|
5.284
The Corporations Act requires directors to declare whether,
in their opinion, the financial statements and notes are in accordance with the
Act (including the accounting standards) and with the requirement that the
financial statements and notes give a true and fair view of the company's
financial position. However, the Act is silent on what inquiries, or other
action, should be taken by the directors prior to making their declaration.
5.285 In practice, many Chief Executive Officers
(CEOs) of listed companies are executive members of the board and must sign off
on the accounts as directors. In addition, companies will often require the
CEO and/or Chief Financial Officer (CFO) to sign off to the board as a matter
of best practice.
5.286 In the United States, the Sarbanes-Oxley Act,
which was enacted by the US Congress largely in response to a number of major
corporate and accounting scandals, introduced a requirement under which the CEO
and CFO of an issuer have to certify that periodic financial statements filed
with the Securities and Exchange Commission (SEC) fairly present the operations
and financial condition of the issuer.
5.287 The JCPAA's Report 391 (Review of
Independent Auditing by Registered Company Auditors) recommended that the
Corporations Act be amended to require the CEO and CFO of a company to sign a
statutory declaration that the company's financial reports comply with the
Corporations Act and are materially truthful and complete. The report further
recommended that the declaration be attached to the company's financial reports
when they are lodged with Australian Securities and Investments Commission
(ASIC) and provided to the company's members and the market operator pursuant
to the Corporations Act.
5.288 Following consideration of overseas
developments, the JCPAA's recommendation and comments in a number of public
submissions on CLERP 9 recommending the adoption of a CEO/CFO sign off
requirement, the Corporations Act will be amended to require CEOs/CFOs to
certify to the directors of a listed entity that:
• the annual financial statements are in accordance
with the Corporations Act and accounting standards; and
• the statements present a true and fair view.
5.289 The sign-off requirement will not derogate in
any way from the directors' responsibilities in relation to the financial report.
5.290
Item 1 amends subsection 295(4) by adding a requirement for
directors of a listed entity to state, in the declaration they are required to
make pursuant to subsection 295(4), that they have been given a declaration by
the CEO and CFO in relation to the entity's financial statements.
5.291
Item 2 inserts section 295A which sets out the requirements
for the declaration that is to be made by the CEO and CFO.
5.292 The directors of a listed entity are not to
make the directors' declaration under subsection 295(4) until they receive
declarations from both the CEO and CFO saying whether, in the opinion of the
person making each declaration:
• the financial records of the entity for the
financial year have been properly maintained in accordance with
section 286;
• the financial statements, and the notes referred to
in paragraph 295(3)(b), for the financial year comply with the accounting
standards; and
• the financial statements and notes for the
financial year give a true and fair view (proposed subsections 295A(1) and
(2)).
5.293 Proposed paragraph 295A(2)(d) provides that the
regulations may prescribe additional matters that need to be covered in the
declarations by the CEO and CFO. This requirement is intended to add long-term
flexibility to the provision. There is no current intention to prescribe any
matters.
5.294 Each declaration made by a CEO and CFO must be
in writing, specify the date on which it was made, the capacity in which the
person is making the declaration and be signed by the person making it. Where
a person performs the duties of both CEO and CFO, they are only required to
make one declaration (proposed subsection 295A(3)).
5.295 To facilitate the drafting of proposed section
295A, the terms `chief executive function' and `chief financial officer
function' have been developed (see proposed subsections 295A(4) and (6)).
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5.296 Where no one person performs either the chief
executive function or the chief financial officer function, but a number of
people together perform one or both of those functions, each of those people is
required to make a declaration (proposed subsections 295A(5) and (7)).
5.297 Proposed subsection 295A(8) is designed to
ensure that the declarations made by the CEO and CFO do not derogate from the
primary responsibility of directors to ensure that the financial statements
comply with the Corporations Act.
5.298
Proposed subsection 1465(1) of the Corporations Act (see
item 2 of Schedule 12) provides that the amendments in Part 1 of
Schedule 2 apply in respect of financial years that commence on or after
1 July 2004.
5.299
Recommendation 13 of the HIH Royal Commission (HIHRC)
proposed, among other things, that the Corporations Act be amended to require
the inclusion of an operating and financial review as part of an annual report
and that the disclosures be the subject of audit.
5.300 In Australia, discussion and analysis-type
disclosures are contained in the Australian Stock Exchange (ASX) Listing Rules
and accounting standard AASB 1039 Concise Financial Reports.
5.301 The only Corporations Act provision currently
dealing with the preparation of information similar to that normally contained
in a discussion and analysis-type commentary is subsection 299(1), which
requires the inclusion of a range of general information (including a review of
operations, details of any significant changes in the entity's state of affairs
and the entity's principal activities and any significant changes in the nature
of those activities) in the annual directors' report.
5.302 The Bill requires the preparation of an
operating and financial review. However, as such disclosures are usually of a
descriptive nature and reflect directors' views about the past, present and
future performance of a company or group of companies, they not do readily lend
themselves to audit. Accordingly, the Bill will not require that the review be
subject to audit.
5.303
Proposed section 299A, which is included in the
Corporations Act by item 6, sets out the requirements for the operating and
financial review.
5.304 Proposed subsection 299A(1) provides that the
directors' report must contain information that members of a company would
reasonably require to make an informed assessment of:
• the operations of the entity;
• the financial position of the entity; and
• the entity's business strategies and its prospects
for future financial years.
5.305 The preparation of an operating and financial
review is increasingly being accepted in the world's capital markets as an
integral part of good corporate governance and high quality financial
reporting. As such, it is a means of providing users of financial statements
with an analysis of a company's business as seen through the eyes of the
directors.
5.306 The content requirements for the review have
been expressed in broad terms. The purpose of this is:
• to enable directors to make their own assessment of
the information needs of members of the company and tailor their disclosures
accordingly; and
• to provide flexibility in form and content of the
disclosures as the information needs of shareholders, and the wider capital
market, evolve over time.
5.307 It is expected that, in considering the issues
to be addressed in their review, directors will have regard to best practice
guidance such as that prepared and published by the Group of 100 Inc (G100).
As noted earlier, use of the G100 guidance material is already supported
by the ASX for the purpose of complying with listing rule 4.10.17. The G100
guidance may be used for the purpose of satisfying the legislative
requirements.
5.308 On the basis of the G100 guidance material, the
issues that could be discussed and analysed in the report include:
• corporate overview and strategy;
• review of operations;
• investments for future performance; and
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• review of financial condition.
5.309 While the requirements for the operating and
financial review are in addition to the existing directors' report disclosure
requirements, it is envisaged that, in practice, the existing requirements will
be addressed as part of the review rather than being presented as a separate
report.
5.310 Proposed subsection 299A(2) provides that the
requirements are applicable to:
• an individual company or disclosing entity that is
a listed public company when consolidated financial statements are not
required; and
• the consolidated entity if consolidated financial
statements are required.
5.311 Proposed subsection 299A(3) provides that
information about the entity's business strategies for the future and its
prospects for future financial years may be omitted from the report if the
material would result in unreasonable prejudice to the company or disclosing
entity. However, where material is omitted from the report, that fact must be
disclosed. This provision is based on subsection 299(3), which permits certain
information to be omitted from the annual directors' report.
5.312
Items 3 to 5 and 7 to 9 make technical amendments to
sections 285, 298, 300 and 314 of the Corporations Act by inserting
cross-references to proposed section 299A (items 3 and 4) and existing section
300A (items 3, 5 and 7 to 9).
5.313
Proposed subsection 1465(2) of the Corporations Act (see
item 2 of Schedule 12) provides that the amendments in Part 2 of
Schedule 2 apply in respect of financial years that commence on or after
1 July 2004.
5.314
Currently where there is a dispute between ASIC and
companies on the application of accounting standards and the true and fair view
requirement contained in the Corporations Act, ASIC must initiate legal
proceedings in order to resolve the matter. The Bill establishes a Financial
Reporting Panel (FRP) to resolve disputes between ASIC and companies concerning
accounting treatments in financial reports. The FRP represents a less
expensive method of resolving these disputes and allows matters to be heard by
persons with particular expertise. This will overcome concerns about the
unfamiliarity of courts with subject matter concerning the application of
accounting standards and the true and fair view.
5.315 The FRP's hearings are intended to be
expeditious and informal and the parties will not require legal representation.
Following a hearing, if the FRP considers it warranted, it will encourage
companies to voluntarily restate their financial reports in a manner that is
considered consistent with the accounting standards and the true and fair view.
Such consensual agreements with companies would overcome existing concerns with
judicial proceedings, which can be costly and slow, resulting in the market
being misinformed about a company's financial situation for prolonged
periods.
5.316 The FRP's findings will not be binding on
either ASIC or the company and the dispute may ultimately be pursued in the
Court. ASIC in its enforcement role would be able to institute legal
proceedings against the company at any time. Where a company does not accept
an FRP determination and ASIC subsequently initiates court proceedings, the
Court may have regard to the findings of the FRP.
5.317
Schedule 2, Part 3 of the Bill relates to the Financial
Reporting Panel. Item 10 amends paragraph 1(1)(d) of the ASIC Act to
include the FRP in the list of bodies established under the ASIC Act. Item 11
inserts a new Part, `Part 13 - Financial Reporting Panel' into the
ASIC Act after existing Part 12. Proposed Division 1 of Part 13 deals
with general issues regarding the FRP. Proposed section 239AA establishes the
Financial Reporting Panel.
5.318 The FRP will consist of at least five members
who may be part-time or full-time, and who will be appointed by the Minister
(see proposed subsections 239AB(1) to (3)). Although it is envisaged that the
FRP would comprise around 30 part-time experts, there is no maximum limit
placed on the amount of members who may be appointed. This is to ensure that
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there is a wide enough pool from which to draw a panel of three members without
any conflicts of interest to hear a particular matter. To allow for
flexibility in appointments, provision has been made for the appointment of
full-time members. The members must have experience or knowledge in
accounting, auditing, business, the administration of companies, or law
(proposed subsection 239AB(4)). The Chairperson, appointed by the Minister, is
to be a member of the FRP (proposed section 239AC).
5.319 Proposed sections 239AE to 239AL provide for
terms of appointment of the Chairperson and members, resignation and
termination, remuneration, leave of absence and acting arrangements for the
Chairperson.
5.320 By 31 October each year, the FRP must prepare a
report describing its operations for that financial year and give a copy to the
Minister. The Minister must table the report (proposed section 239AM).
5.321
Proposed Division 2 of Part 13 sets out how the FRP's
business will be conducted. A Panel which is constituted to hear a particular
matter will consist of a Chairperson, Deputy Chairperson and a third member.
The Chairperson may give directions as to which members are to sit on a Panel
(see proposed subsections 239BA(1) to (3)). If a member chosen for a
particular Panel is no longer available (such as where a conflict of interest
has arisen or where the member is unable to attend the hearing), before the
proceedings are determined, the Chairperson may revoke their original
directions and reconstitute the Panel by giving new directions (proposed
subsection 239BA(4)).
5.322
The members of a Panel which is to be constituted for a
particular matter must disclose any conflicts of interest to the Chairperson
and the parties involved. A member with a conflict of interest must not take
part in the Panel's hearings or deliberations except with the Chairperson's
consent. Such consent may only be given if the interest is immaterial or
indirect and it will not prevent the member from acting impartially (proposed
subsections 239BB(1) and (2)).
5.323
The confidentiality requirements contained in section 127
of the ASIC Act will apply to the FRP (proposed section 239BC).
5.324
Proposed Division 3 of Part 13 has effect as if a reference
to the FRP refers to the Panel as constituted for a particular matter.
Further, references to the Chairperson or Deputy Chairperson refer to the
persons holding those positions on a Panel as constituted for the particular
matter (proposed subsection 239CA(1)).
5.325
Proposed section 239CB allows a Panel to conduct
proceedings to exercise the FRP's functions and powers. The proceedings must
be conducted in private unless a company that is a party to the proceedings
elects for the hearing to take place in public (proposed subsections 239CC(1)
and (2)). If the company has chosen public proceedings, the Panel may require
part of those proceedings to be private in order to protect another person's
interests or the confidentiality of certain evidence. The Panel may give
directions as to the persons who will be entitled to be present at private
proceedings (see proposed subsections 239CC(3) to (5)). ASIC is entitled to
have a representative at the proceedings (proposed subsection 239CC(7)).
5.326 To preserve confidentiality or the public
interest, or to avoid unfair prejudice to a person's reputation, the Panel may
choose to prevent or restrict the publication of evidence or documents given to
the Panel (see proposed section 239CD).
5.327 Pursuant to proposed subsections 239CE(1) and
(2), a person may be summoned to appear at proceedings to give evidence and
produce documents referred to in the summons. For the purposes of giving
evidence a person may be required to take an oath or make an affirmation
(proposed subsection 239CE(3)). A failure to comply with the requirements of
proposed subsections 239CE(3) and (5) is an offence under proposed
section 239CJ (). Proposed section 239CL further provides that where a
person fails to comply with the provisions of proposed section 239CE, the Panel
may certify the failure to the Court and the Court may order the person to
comply with matters specified in the Court order. The FRP may pay witness
expenses (proposed subsection 239CE(6)).
5.328 As a means of promoting the informal and
expeditious nature of Panel proceedings, it is intended that parties to
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proceedings not be legally represented. However, legal representation will be
possible where leave is granted by the Panel (proposed section 239CG). The
provisions of proposed section 239CG are not meant to preclude an employee
of a party who holds legal qualifications from attending the proceedings as a
general representative.
5.329 In Panel proceedings, two members will form a
quorum (proposed section 239CF). Proposed sections 239CI and 239CK provide
protections for Panel members, as well as prohibiting a person from acting in
contempt of the Panel. A breach of section 239CK will be punishable by up to
50 penalty units and/or imprisonment for 1 year.
5.330 As a way of ensuring that the FRP is able to
achieve consistency in the conduct of Panel proceedings, it will be able to
determine the procedural rules to be followed in proceedings (proposed
subsection 239CH(1)). The Panel is to observe the rules of procedural fairness
to the extent that they are not inconsistent with the provisions of the Act or
the regulations (see proposed subsection 239CH(4)).
5.331
Item 14 inserts proposed new Division 9, dealing with the
reference of a financial report to the FRP, at the end of Part 2M.3. Under the
Corporations Act, a company's financial report must comply with accounting
standards (existing section 296) and the financial statements and notes
must present a true and fair view of the company's financial position (existing
section 297). Existing sections 304 and 305 replicate these requirements
in relation to half-yearly reports. Where a company's financial report does
not comply with these provisions and ASIC wishes to refer the financial report
to the FRP under section 323EC, ASIC must follow the notification and referral
procedures set out in sections 323ED and 323EF.
5.332 Before the referral, ASIC must notify the
company in writing of its intention to refer the matter, identify and explain
how the report fails to comply with the relevant financial reporting
requirement(s), and outline the changes necessary to achieve compliance. ASIC
must also include a statement setting out the effect of section 323EC, which
provides that ASIC may refer a financial report to the FRP in certain
instances. (See proposed section 323ED).
5.333 Within 14 days of receiving this notice,
the company must respond and indicate what action, if any, it proposes to take
(proposed subsection 323EE(1)). A breach of this provision is a strict
liability offence (subsection 323EE(1A) and is punishable by up to 25 penalty
units. Generally, the information contained in the company's response cannot
be used in evidence against the company if the matter later proceeds to court
(proposed subsection 323EE(2)).
5.334 Following receipt of the company's response,
ASIC has 14 days in which to refer the matter to the FRP for its consideration
(proposed paragraph 323EF(1)(d)).
5.335
If ASIC has informed a company that the financial report
does not comply with the financial reporting requirements, the company may,
with ASIC's consent, refer the matter to the FRP (pursuant to section 323EG).
The legislation does not prescribe a mechanism for ASIC to notify the company.
This will provide some flexibility as to how companies may be notified by ASIC.
The requirement for ASIC's consent is intended to ensure that a referral by a
company is not made at a point in time when ASIC is merely at an information
gathering stage. It should be noted that a decision by ASIC to refuse consent
is not reviewable by the Administrative Appeals Tribunal. The company may be
charged a fee for making a referral to the FRP. The Corporations (Fees)
Amendment Bill 2003 specifies that a referral of a matter to the FRP is a
chargeable matter under section 4 of the
Corporations (Fees) Act 2001.
5.336 Under section 323EH(1), the company must apply
to ASIC in writing to obtain ASIC's consent to a referral. The application
must identify the financial reporting requirements which are being disputed
with ASIC and outline how the company's report complies with the relevant
requirements (subsection 323EH(2)).
5.337 If ASIC consents to a referral to the FRP, ASIC
must give the company a statement containing ASIC's reasons for believing that
the financial report does not comply with each of the relevant financial
reporting requirements (section 323EH(3)). It is contemplated that ASIC's
consent to the company's referral would be evidenced by this statement.
5.338
All referrals must be in the prescribed form. A referral
to the FRP by ASIC must comply with section 323EF while a company's referral
must comply with section 323EI. A copy of the referral must be provided to the
other party on the day on which the referral is made (subsections 323EF(3) and
323EI(3) respectively). Within seven days after a financial report is referred
to the FRP, the FRP must notify ASIC and the company of the cut-off date by
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which written submissions must be made (section 323EJ(1)). The cut-off date
must be at least 14 days after the date of the notice (proposed section
323EJ(2)). It is intended that, wherever possible, the Panel will resolve the
matter on the basis of the written submissions.
5.339
The Panel must prepare a report that states whether the
financial report complies with the relevant reporting requirement(s) (section
323EK(1)). If ASIC has referred the matter and the financial report does not
comply, the Panel must indicate what changes are necessary in order for the
financial report to comply with the reporting requirements in the Corporations
Act. This is mandated because where the regulator has referred the matter, it
is essential that the company be informed of the specific changes necessary to
achieve compliance. If the company has referred the matter and the report does
not comply, the Panel may choose to indicate the changes necessary to bring
about compliance. The Panel's report must not include any confidential
commercial information obtained in the Panel proceedings (proposed
subsection 323EK(1C)).
5.340 The Panel's report must be provided to ASIC and
to the company within 60 days from when the matter was referred to the FRP. If
the Panel gives notice to ASIC and the company within 60 days of the referral,
the Panel may provide its report within 90 days (proposed subsection 323EK(3)).
In the case of publicly listed companies, the Panel must also give a copy of
its report to the relevant market operator (proposed paragraph 323EK(2)(c)).
5.341 Where the company is publicly listed, once the
Panel's report is lodged with the market operator, the market operator must
take reasonable steps to make the information available to the market (proposed
subsection 323EK(5)). This will ensure that users of the market are informed
of the Panel's findings regarding the company's application of accounting
standards in its financial report. In addition, ASIC must take reasonable
steps to publicise the report and the company's response to the Panel's
findings (proposed subsection 323EK(4)). If the company amends its financial
report, there is provision for it to re-lodge the documents under existing
section 322 of the Corporations Act.
5.342 In the case of unlisted companies, the Panel's
report will only be given to ASIC and the company (proposed subsection
323EK(2)(a) and (b)). Once ASIC has received the Panel's report, it must take
reasonable steps to publicise the report, along with information concerning
whether the company has made any recommended changes to its financial report
(proposed subsection 323EK(4)).
5.343 ASIC's obligation in relation to publicising
the report may involve the relevant information being made available on the
internet (proposed subsection 323EK(4)).
5.344
In the event that ASIC refers the matter to the Court for
its consideration, the Court or a tribunal of fact may have regard to the
Panel's report in determining whether a company's financial report complied
with the relevant financial reporting requirements (proposed section 323EM).
5.345
The commencement date for these provisions is 1 July 2004.
However, proposed subsection 1465(3) of the Corporations Act (see item 2 of
Schedule 12) provides that the amendments in Part 3 of
Schedule 2 apply to all financial reports (including financial reports for
periods that started before 1 July 2004).
5.346
The Bill will amend the ASIC Act, the Corporations Act and
the
Trade Practices Act 1974 (Trade Practices Act) to ensure that
proportionate liability applies to claims for damages for economic loss or
property damage arising from misleading or deceptive conduct.
5.347 Professionals in every jurisdiction in
Australia are currently facing difficulty in obtaining affordable professional
indemnity insurance. It is essential that professionals be able to access this
insurance to ensure that consumers can recover damages suffered in the event of
negligently provided professional services.
5.348 The introduction of proportionate liability is
one of the key measures on which all governments in Australia have agreed in
order to improve the availability and affordability of professional indemnity
insurance.
5.349 Proportionate liability involves a defendant
being liable only for that portion of the damage for which the defendant is
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judged to be responsible. Under proportionate liability, a plaintiff can only
recover from a particular defendant that proportion of the loss for which the
defendant is responsible.
5.350 One of the major criticisms of the current
system of joint and several liability is that it leads to plaintiffs targeting
"deep pocket" defendants, such as professional service providers and public
authorities. This leads to increased liability insurance premiums for these
potential defendants. Proportionate liability ensures that professionals, such
as auditors, who hold professional indemnity insurance do not bear a
disproportionate burden of claims where their co-defendants are uninsured.
5.351 Commonwealth, State and Territory governments
have agreed to introduce proportionate liability for economic loss and property
damage so that it operates, as far as possible, on a nationally consistent
basis. The Commonwealth has agreed to amend the ASIC Act, the Corporations Act
and the Trade Practices Act to ensure that proportionate liability for economic
loss or property damage applies in both State and Federal jurisdictions.
5.352 The Commonwealth, State and Territory
Governments have endorsed the following key features of a model of
proportionate liability:
• in applying proportionate liability to a claim, a
Court will be able to have regard to the comparative responsibility of any
wrongdoer who is not a party to the proceedings;
• a defendant to a claim to which proportionate
liability can apply, will be obliged to notify the plaintiff in writing, at the
earliest possible time, of the identity and alleged role of any other person(s)
of whom the defendant is aware, who could be held liable for the plaintiff's
loss or any part of it;
• where a defendant fails to discharge the disclosure
obligation proposed, the Court will have a discretion to order that the
defendant pay any or all of the plaintiff's costs, on an indemnity basis or
otherwise; and
• intentional torts and claims involving fraud will
be excluded from the application of proportionate liability, and the law
governing vicarious liability, the liability of partners in a partnership and
the liability of a principal for acts of an agent within the scope of the
agent's commission, will not be affected.
5.353 Under the agreed model, the law governing
contributory negligence in the States and Territories will also not be
affected. To ensure that the Commonwealth provisions on proportionate
liability operate consistently with the State and Territory proportionate
liability systems, the Bill includes provisions to ensure that a plaintiff's
contributory negligence is taken into account in apportioning liability for the
loss or damage (see proposed subsection 12GF(1B) of the ASIC Act, proposed
subsection 1041I(1B) of the Corporations Act and proposed subsection 82(1B) of
the Trade Practices Act).
5.354 Schedule 3 of the Bill implements the agreed
model in relation to the relevant Commonwealth legislation by making
corresponding amendments to the ASIC Act, the Corporations Act and the Trade
Practices Act.
5.355 The Bill applies the proportionate liability
regime to claims for damages for economic loss or property damage in respect of
a contravention of the misleading and deceptive conduct provisions contained in
the ASIC Act (subsection 12GF(1)), the Corporations Act (subsection 1041I(1))
and the Trade Practices Act (section 52)
(see items 1 to 6).
5.356
The new rules for determining the proportionate liability
of concurrent wrongdoers will only apply to apportionable claims. An
apportionable claim is a claim is made under section 12GF for
economic loss or damage to property caused by conduct that was done in a
contravention of section 12DA.
5.357 Proposed subsection 12GP(2) provides that there
is a single apportionable claim in proceedings in respect of the same loss or
damage even if the claim for the loss or damage is based on more than one cause
of action.
5.358 Proposed subsection 12GP(3) defines the term
`concurrent wrongdoer'. A concurrent wrongdoer, in relation to a claim, is a
person who is one of two or more persons whose acts or omissions, independently
of each other or jointly, caused the damage or loss that is subject to the
claim.
5.359 Proposed subsection 12GP(4) provides that for
the purposes of this Subdivision, apportionable claims are limited to those
claims specified in subsection (1).
5.360 Proposed subsection 12GP(5) provides that for
the purposes of this Subdivision, it does not matter that a concurrent
wrongdoer is insolvent, is being wound up or has ceased to exist or died.
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5.361
Proposed section 12GQ makes it clear that certain
concurrent wrongdoers in proceedings involving an apportionable claim will not
have their liability limited by the new apportionment provisions. The
concurrent wrongdoers who will be excluded are:
• concurrent wrongdoers who intended to cause the
economic loss or damage to property that is the subject of the claim; and
• concurrent wrongdoers who fraudulently caused the
economic loss or damage to property that is the subject of the claim.
5.362 Proposed section 12GQ will ensure that such
excluded concurrent wrongdoers will have their liability determined in
accordance with any relevant legal rules (apart from those in proposed
Subdivision GA. However, the liability of any other non-excluded concurrent
wrongdoer will continue to be limited by the apportionment provisions.
5.363
Proposed subsection 12GR(1) provides that the liability of
a defendant who is a concurrent wrongdoer in proceedings involving an
apportionable claim is to be limited to an amount reflecting that proportion of
the damage or loss claimed that the court considers just having regard to the
extent of the defendant's responsibility for the damage or loss.
5.364 Proposed subsection 12GR(2) provides that if
proceedings involve both an apportionable claim and some other claim, then only
the apportionable claim is to be determined in accordance with the proposed
Subdivision GA. Existing law will continue to apply to the non-apportionable
claim.
5.365 Proposed subsection 12GR(3) provides that in
apportioning responsibility between defendants in the proceedings:
• the court is to exclude that proportion of the loss
attributable to a plaintiff's contributory negligence under any relevant law;
and
• the court may have regard to the comparative
responsibility of any concurrent wrongdoer who is not a party to the
proceedings.
5.366 Proposed subsection 12GR(4) provides that the
section applies in proceedings involving an apportionable claim whether or not
all concurrent wrongdoers are parties to the proceedings.
5.367 Proposed subsection 12GR(5) provides that a
reference in this Subdivision to a defendant in proceedings includes any person
joined as a defendant or other party in the proceedings (except as a plaintiff)
whether joined under this Subdivision, under rules of court or otherwise.
5.368
Proposed section 12GS provides that where a defendant who
has reasonable grounds to believe that a particular person may be a concurrent
wrongdoer in relation to the claim, fails to give the plaintiff, as soon as
practicable, written notice about the identity of the person, then the court
may order the defendant to pay all of the costs in the proceedings which the
plaintiff has unnecessarily incurred. The costs order may be made on an
indemnity basis or on some other basis.
5.369
Proposed section 12GT provides that a defendant against
whom judgment is given under this Subdivision cannot be required to contribute
to any damages or contribution recovered from another wrongdoer in respect of
the apportionable claim and cannot be required to indemnify any such wrongdoer.
5.370
Proposed section 12GU enables a plaintiff to bring an
action against a concurrent wrongdoer even though the plaintiff has previously
brought an action against another concurrent wrongdoer in respect of the same
damage or loss. However, in such subsequent proceedings the plaintiff cannot
recover damages that would result in the plaintiff receiving compensation
greater than the loss or damage actually sustained by the plaintiff.
5.371
Proposed section 12GV enables the court to join any one or
more persons as defendants in proceedings involving an apportionable claim,
unless a person was a party to any previously concluded proceedings in respect
of the apportionable claim.
5.372
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Proposed section 12GW provides that certain matters are not
affected by the proposed Subdivision. In particular:
• a person can still be held vicariously liable for a
proportion of any apportionable claim;
• a partner can still be held severally liable with
another partner for the proportion of an apportionable claim for which the
other partner is liable; and
• any other statutory provisions imposing several
liability will not be affected.
5.373
Items 3 and 4 replicate the amendments described above in
the context of the Corporations Act. Items 5 and 6 replicate the amendments
described above in the context of the Trade Practices Act.
5.374
Proposed section 1466 provides that the proportionate
liability provisions contained in Schedule 3 apply to causes of action that
arise on or after the day on which the Schedule commences.
5.375
Schedule 4 of the Bill contains amendments to the
enforcement provisions in the Corporations Act. Within the Schedule the
amendments are grouped as follows:
| Part
1
|
Revision
of criminal penalties
|
| Part
2
|
Protection
for employees reporting breaches to ASIC
|
| Part 3
|
Disqualification
of directors
|
| Part 4
|
Civil
penalty provisions
|
| Part 5
|
Other
amendments
|
5.376
Schedule 4, Part 1 of the Bill contains changes to the
penalties attaching to breaches of section 1308 and 1309 of the Corporations
Act.
5.377 Under subsection 1308(2), it is an offence to
knowingly provide false or misleading information. The penalty for a
contravention of this provision is 100 penalty units and/or 2 years'
imprisonment.
5.378 Similarly, subsection 1309(1) prohibits an
officer of a corporation from giving or making available false or misleading
information to key corporate officers, auditors, and financial market
operators. Section 1309 has a penalty of 100 penalty units and/or 2 years'
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imprisonment for intentional conduct and 50 penalty units and/or 1 year
imprisonment for a negligent breach.
5.379 The penalties attaching to these provisions
have been increased as a means of reflecting the importance of the obligations
that they contain. In addition, the penalties have been amended to bring them
into line with penalties for similar obligations contained in section 1041E
(false information affecting the decision of others to acquire or dispose of
financial products, or affecting the market price), section 1041G (engaging in
dishonest conduct in relation to a financial service or product) and section
728(3) (the provision of misleading statements in an offer document that is
materially adverse to an investor).
5.380 The penalty attaching to a breach of section
1308(2) and 1309(1) has been increased to 200 penalty units and/or 5 years'
imprisonment. The penalty attaching to a breach of subsection 1309(2) has been
increased to 100 penalty units and/or 2 years' imprisonment.
5.381
Item 1 inserts a proposed new Part into the Corporations
Act, `Part 9.4AAA - Protection for whistleblowers', after Part 9.4. The
provisions in this Part establish a framework which is designed to encourage
employees, officers and subcontractors engaged by a company to report suspected
breaches of the corporations law to either ASIC or internally within the
company. The provisions will prohibit employers from victimising employees,
officers or subcontractors when they report a suspected breach in good faith
and on reasonable grounds. Further, the provisions provide the relevant
employee, officer or subcontractor with qualified privilege in relation to a
protected disclosure of information.
5.382
A disclosure of information regarding a suspected breach of
the corporations legislation will be protected if the conditions outlined in
proposed section 1317AA are met. This provision applies to a person who:
• is an officer of a company;
• is an employee of a company;
• has a contract for services with the company; or
• is an employee of a person who has a contract for
services with the company.
5.383 Where a person who falls within one of these
categories has reasonable grounds to suspect that a company, a company officer
or employee has breached a provision of the corporations legislation and
discloses this in good faith, that disclosure will be subject to the
protections outlined in section 1317AB. The disclosure may be made to ASIC or
an auditor, director, secretary or senior manager of a company, or to a person
authorised by the company to receive such disclosures (proposed paragraph
1317AA(1)(b)). Before disclosing the information however, the person must
provide their name and the disclosure cannot therefore be made anonymously
(proposed paragraph 1317AA(1)(c)).
5.384 It should be noted that any protected
information provided to ASIC will attract the application of the
confidentiality requirements contained in existing section 127 of the ASIC
Act.
5.385 The protections which will be afforded to a
person reporting a breach include protection against:
• criminal and civil liability;
• the enforcement of contractual remedies;
• liability for defamation; and
• termination of contract.
5.386 Importantly, proposed section 1317AB does not
protect a person from liability for any illegal act or wrongdoing in which they
have been involved. While that person could not be subjected to victimisation
(proposed section 1317AC), nor to criminal or civil liability for actually
making the disclosure, a person who had previously broken the law could still
be the subject of a prosecution or civil proceedings in relation to that
matter.
5.387 A person who knowingly provides false or
misleading information to ASIC may be guilty of an offence, pursuant to
Division 137 of the Criminal Code Act 1995.
5.388 The Bill also prohibits any actual or
threatened detriment being levelled against a person because of their
disclosure (proposed subsections 1317AC(1) and (2)). The type of detriment
contemplated would include the termination of employment, a reduction in a
person's terms and conditions of employment, demotion, or unfair or unequal
treatment in the workplace. Where such detriment has occurred, it would be
open to a Court to order a suitable remedy to address the detriment suffered.
5.389 Where a person contravenes either proposed
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subsection 1317AC(1), (2) or (3) they will commit an offence and may be
subjected to a penalty of up to 25 penalty units and/or 6 months imprisonment.
Also, where damage is suffered by the victim as a result of the contravention,
compensation may be available under proposed section 1317AD.
5.390 The protection provided under Part 9.4AAA
extends to disclosures regarding suspected breaches of the current and previous
provisions of the Corporations Act, ASIC Act and regulations made pursuant to
these Acts. The application of the Criminal Code will also extend the
protection afforded under the Part to disclosures made in relation to attempts,
incitement or conspiracy to breach the law (proposed subsection 1317AA(2)).
5.391 It should be noted that the application of Part
9.4AAA relies on the disclosure being made in good faith. This differs to
requirements currently contained in section 89 of the Corporations Act which
provide qualified privilege in circumstances where there is an `absence of
malice' in making the disclosure. The use of `good faith' is intended to raise
the threshold for obtaining qualified privilege. This is considered
appropriate given the need to discourage malicious or unfounded disclosures
being made and ensure the integrity of these provisions of the Bill. Where a
person has a malicious or secondary purpose in making a disclosure, it is
considered that the good faith requirement would not be met.
5.392
The proposed provisions in Part 9.4AAA of the Corporations
Act will commence on the day after Royal Assent.
5.393
The Cole Royal Commission into the Building and
Construction Industry made a number of recommendations concerning fraudulent
phoenix company activity. In particular it recommended that the periods of
disqualification for directors contained in Part 2D.6 of the Corporations Act
be increased.
5.394 Section 206D of the Corporations Act currently
gives the Court power to disqualify persons from managing corporations for
insolvency and non-payment of debts for a maximum period of 10 years. Item 5
of Schedule 4 increases the maximum period of disqualification in section 206D
from 10 to 20 years.
5.395
Section 206B of the Act provides for an automatic five year
disqualification period from managing corporations for persons convicted of an
offence specified in that provision. In addition to the amendments above, the
Bill inserts proposed section 206BA which will allow Courts to disqualify
persons for up to a further 15 years on application by ASIC (Item 4). The
additional potential disqualification period will apply only to
disqualifications under section 206B that occur after 1 July 2004, being the
proposed section 206BA commences operation (Schedule 12, Item 2).
5.396 ASIC must apply for an extended
disqualification period prior to expiration of the first year of the automatic
disqualification.
5.397
Item 6 proposes to clarify the required content of ASIC's
register of banned and disqualified directors.
5.398
The amendments to the Corporations Act contained in this
Part of the Bill will:
• amend the maximum pecuniary penalty payable by a
body corporate in relation to a contravention of a financial services civil
penalty provision;
• clarify that an application for a compensation
order can be made in relation to contraventions of the civil penalty provisions
regardless of whether a declaration of contravention has been made;
• encompass references to compensation orders in
relation to financial services civil penalty provisions in existing references
to compensation orders relating to corporation/scheme civil penalty provisions;
and
• make a technical amendment.
5.399
The maximum pecuniary penalty payable in relation to a
contravention of a financial services civil penalty provision is currently
$200,000 (for individuals and bodies corporate)(section 1317G). While the
maximum for an individual will remain $200,000, the maximum for a body
corporate will be altered to $1 million (items 12 and 13).
5.400
Amendments to sections 1317H, 1317HA and 1317J will ensure
that persons and bodies corporate can apply for a compensation order in
relation to contraventions of the civil penalty provisions, and such
compensation orders to be made, regardless of whether a declaration of
contravention in relation to those civil penalty provisions has been made
(items 14, 15, 16 and 17). Applicants for a compensation order under sections
1317H and 1317HA will still have to prove a contravention and that damage
resulted from it.
5.401
The existing reference to a `compensation order' in the
definition of a `civil penalty order' (in section 9) will be amended to include
a compensation order with respect to a contravention of a financial services
civil penalty provision (item 8). The existing reference is to a compensation
order with respect to a contravention of a corporations/scheme civil penalty
provision only.
5.402 To reflect the amended reference to a
`compensation order' and definition of a `civil penalty order', items 9, 10, 11
and 18 amend:
• the list of circumstances in which a company shall
not indemnity an officer (paragraph 199A(2)(b) and subsection 199A(3)(note 1));
and
• the circumstances in which a court may relieve a
person from liability (paragraph 1044A(2)(a) and subsection 1317S(1)).
5.403 The purpose of these amendments is to ensure
that the Corporations Act is clear and internally consistent. They do not
indicate a change of policy.
5.404
A technical amendment to correct an erroneous
cross-reference in the definition of a `civil penalty order' in section 9 will
be made (item 7).
5.405
Proposed subsection 1467(3) of the Corporations Act (see
item 2 of Schedule 12) provides that the amendments in Part 4 of
Schedule 4 apply in relation to a contravention of a financial services
civil penalty provision that occurs on or after the commencement day.
5.406
This Part of the Bill deals with the penalties that will be
applicable to breaches of sections 308 and 309 of the Corporations Act.
5.407 At present, a contravention of subsection
308(1) is an offence of strict liability which attracts a penalty of 50 penalty
units, imprisonment for 1 year or both (see table item 104 in
Schedule 3 of the Corporations Act). No penalty is currently specified in
Schedule 3 of the Act for contraventions of any of the other requirements
in sections 308 or 309.
5.408 To clarify the situation, contraventions of the
requirements in each section will attract a penalty of 50 penalty units while
contraventions of all requirements except those in subsections 308(2) and
309(2) will be offences of strict liability.
5.409 Items 19 and 20 amend section 308 to provide
that subsections 308(1), (3), (3A) and (4) are offences of strict liability
(proposed subsection 308(5)) while item 21 makes the necessary amendments in
respect of subsections 309(1), (3), (4), (5), (5A) and (6) (see proposed
subsection 309(7)).
5.410 The penalties of 50 penalty units will be
imposed by proposed table items 104 and 104A in Schedule 3 of the Corporations
Act (see items 47 and 48 in Schedule 1 of the Bill).
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5.411
Schedule 5 of the Bill contains amendments to:
• sections 300 and 300A of the Corporations Act
regarding the disclosure of director and executive remuneration; and
• Division 2, Part 2D.2 governing the payment of
termination benefits to directors.
5.412 These amendments are designed to strengthen the
current provisions of the Corporations Act and address concerns surrounding
disclosure of payments made to directors and executives.
5.413 The Bill recognises that it is generally the
function of members to approve the remuneration of directors and the function
of directors to determine the remuneration of executives. In performing their
function, boards need to be accountable for their decisions and shareholders
need to be in a position to exercise their rights in an active and informed
way. The provisions of the Bill are designed to achieve these objectives by
promoting transparency and improving the accountability of those parties who
determine remuneration.
5.414 The Bill builds on measures proposed in the
Corporations Amendment Bill 2002 (CAB), which was released for
consultation at the end of 2002. The CAB sought to clarify the current
disclosure requirements in sections 300 and 300A of the Corporations Act.
These provisions have been incorporated into the CLERP 9 Bill and are being
advanced as part of the broader changes proposed by the Government to the
disclosure requirements (see items 9 and 11).
5.415 The amendments in this Bill seek to enhance the
existing regulatory framework by:
• extending the application of the disclosure
requirements beyond the listed company to include the corporate group;
• allowing the specific disclosures that must be made
to be prescribed in regulations;
• giving shareholders greater capacity to hold
directors accountable for their decisions regarding remuneration; and
• providing shareholders with greater say in relation
to directors' termination payments.
5.416 As part of implementing the HIHRC
recommendations, the Bill will rationalise definitions of `officer' and
`executive officer'. A new definition will be inserted into the Corporations
Act - `senior manager' - which effectively covers paragraph (b) of the current
section 9 definition of `officer' (see Schedule 1, item 86 and Schedule
9). The term `senior manager' will be applied to the section 300A disclosure
requirements.
5.417 The Bill also makes technical amendments to the
definition of `remuneration' in section 9 of the Corporations Act, to reflect
anticipated changes in the accounting standards on which the definition is
based. The Bill removes the reference to the accounting standard dealing with
related party transactions and instead refers to an accounting standard dealing
with directors' remuneration.
5.418 The reference to directors' remuneration
reflects the definition of remuneration in the Act, which is based on
remuneration of an officer or employee, if had it been received by a director,
would be remuneration for the purposes of an accounting standard.
5.419
Currently section 300A requires disclosure of the
remuneration of directors and executives of a listed company. The disclosures
that are required by section 300A are part of the broader financial reporting
framework in Part 2M.3 of the Corporations Act. Other obligations in this
Part require reporting on a consolidated basis. For example, subsection 299(2)
requires listed companies to prepare their annual directors' report on a
consolidated basis if they are required to prepare consolidated financial
statements.
5.420 The Bill amends section 300A of the
Corporations Act to require disclosure of the remuneration of directors and
senior managers in relation to both the listed company and consolidated entity
(items 11 and 12, proposed paragraphs 300A(1)(a) and 300A(1)(c)). The intent
of these provisions is to provide a better picture of remuneration practices
across the corporate group and to prevent corporate structures being used as a
way of circumventing the reporting requirements.
5.421 The effect of the amendments will be to retain
the current requirement for the disclosure of remuneration in relation to the
five most highly remunerated senior managers and all the directors of the
listed company. The provisions extend the disclosure requirements to the top
five senior managers in the consolidated entity, where they differ from those
in the listed company (item 12, proposed paragraph 300A(1)(c)(iii)).
5.422 In some circumstances the requirements may lead
to the disclosure of the remuneration of up to 10 senior managers. In other
circumstances it may be less, for example where one or more of the senior
managers is within the top five in the listed company and also in the top five
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within the corporate group. In these circumstances the disclosure of that
person's remuneration need only be made once (item 12, paragraph 300A(1)(c)).
In determining this person's remuneration, all sources of their remuneration
from within the group must be taken into account (item 14, proposed subsection
300A(4)).
5.423
The Bill provides that the details of remuneration to be
disclosed will be prescribed in regulations (item 12, proposed paragraph
300A(1)(c)). This will provide greater flexibility in tailoring the disclosure
requirements.
5.424 In making disclosures about director and
executive remuneration companies should approach their obligation from the
starting point of providing shareholders with comprehensive disclosure.
Shareholders should be placed in a position where they can understand the
nature of the remuneration including any performance hurdles or contingencies
on which the payment is based.
5.425 This will ensure shareholders are informed
about the framework and main components of remuneration and understand the
relationship between performance and remuneration. In addition the disclosure
framework will limit the element of surprise in the event of a payment being
made especially where that payment accrued over a number of years.
5.426 In framing their disclosures, companies should
also have regard to the guidance in the ASX Corporate Governance Council's best
practice recommendations.
5.427 The Bill requires the remuneration disclosures
to be made in a clearly dedicated section of the annual directors' report (item
10, proposed subsection 300A(1)).
5.428
The Act will retain the current requirements in paragraphs
300A(1)(a) and 300A(1)(b) relating to the discussion of board policy and the
relationship between remuneration and company performance. The language of
paragraph 300A(1)(a) has, however, been modified to reflect amendments
originally proposed in the CAB and to extend the application of the provision
to corporate groups.
5.429 Disclosures under proposed paragraph 300A(1)(a)
and paragraph 300A(1)(b) should explain the basis on which remuneration
packages are structured and how this relates to corporate performance. To
assist in meeting this obligation, the regulations will require disclosure of
information such as performance hurdles to which the payment of options or long
term incentives of directors and executives are subject; why such performance
hurdles are appropriate and the methods used to determine whether performance
hurdles are met.
5.430 The provisions of the Bill also allow the
regulations to specify the disclosures that are to be made under proposed
paragraph 300A(1)(c). This section primarily relates to the quantitative
elements of remuneration, although disclosure of the basis on which an
individual's remuneration is determined will also be required. The regulations
will require disclosure of the nature and amount of each element of the
remuneration of the persons named in proposed paragraph 300A(1)(c) (item 12).
5.431 It is intended that the information to be
disclosed in relation to remuneration paid or payable will be the same as that
proposed to be disclosed under the accounting standards (see AASB ED 106
Director, Executive and Related Party Disclosures). The regulations may
build on these requirements in relation to the basis on which remuneration is
determined.
5.432 In the absence of an accounting standard, as a
minimum, the following information will need to be disclosed:
• primary benefits including cash and other incentive
and base remuneration;
• post-employment benefits, including retirement
benefits and contributions by, or changes in the liability of, the entity to
pension or superannuation plans and other arrangements to benefit employees
following cessation of employment;
• equity compensation; and
• other compensation benefits not disclosed under the
above categories.
5.433 Prior to the commencement of the Bill, the
progress of ED 106 will be monitored to determine how the actual regulations
will be framed. The AASB's work program indicates that the standard is
intended to be finalised in time for commencement of the provisions.
5.434
The Bill requires the chair of the AGM to allow reasonable
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opportunity for discussion by shareholders of the remuneration section of the
directors' report at the AGM (item 8, proposed section 250SA). In addition,
the directors must put, and allow shareholders to vote on, a non-binding
resolution as to whether the members adopt the remuneration report (item 7,
proposed subsection 250R(2)). The notice of meeting must inform members that
the resolution on the remuneration report will be voted upon (item 6, proposed
subsection 249L(2)).
5.435 While the resolution will not be binding, the
process provides an avenue for shareholders to collectively express their
opinion on the remuneration paid to directors and senior managers and the
board's policy on remuneration. This will facilitate more active involvement
by shareholders and improve the accountability of directors for decisions
regarding remuneration.
5.436 The Bill expressly provides that the vote is
advisory only and does not bind the directors or the company (item 7, proposed
subsection 250R(3)). The Bill is not intended to detract from the
responsibility of directors to determine executive remuneration.
5.437
Division 2, Part 2D.2 of the Corporations Act governs the
circumstances in which shareholder approval is required before a benefit may be
given to a person in connection with their retirement from `board or managerial
office'. `Board or managerial office' effectively applies the provisions to
company directors in all capacities in which they act within the company.
5.438 Subsection 200B(1) prevents a payment being
made in connection with retirement from board or managerial office unless
shareholder approval is first obtained. Sections 200F, 200G and 200H provide
exceptions to this rule. The Bill will modify the operation of two exemptions
contained in section 200F.
5.439 Currently subparagraphs 200F(a)(ii) and
(iii) allow a termination benefit to be paid to a director or former director
without shareholder approval where that payment is:
• a genuine payment by way of damages for breach of
contract; or
• given to that person under an agreement made before
the person became a holder of that office as a part of the consideration for
that person agreeing to hold the office.
5.440 The Bill will retain these exemptions but will
limit the scope of their operation (item 5, proposed subsection 200F(2)).
Where a payment is made pursuant to one of these exemptions, shareholder
approval will be required where the payment exceeds an amount calculated in
accordance with the formula specified in subsection 200F(3) of the Bill or
exceeds the value of one year's remuneration, which ever is the greatest. This
approach is designed to address concerns that the operation of the formula
would necessitate shareholder approval of relatively small payments in the
event that a person's employment is only for a limited period. This is a
result of the formula being based on average remuneration over the previous
three years. Payments that do not exceed either amount will not require
shareholder approval.
5.441 Remuneration for the purposes of this provision
is determined by reference to an office holder's entitlements during their most
recent 12 months in office. Where the office holder has been in office for
less than 12 months a reasonable estimate of their remuneration, had they been
in office for 12 months, must be made (item 5, proposed subsection 200F(4)).
5.442 It is envisaged that a reasonable estimate
would be equal to the office holders' actual and potential entitlements under
their current remuneration agreement over the 12 months from the beginning of
their time in office.
5.443 The provisions are intended to ensure that
payments made to directors upon their retirement from office are subject to
shareholder scrutiny where they may be large relative to the length of time in
office or overall remuneration practices of the company.
5.444 These requirements will apply prospectively and
will not impact on payments made under agreements existing at the time of
commencement of these provisions (Section 1468, Schedule 12).
5.445
Schedule 6 of the Bill contains amendments to the
Corporations Act provisions dealing with continuous disclosure. Within the
Schedule the amendments are grouped as follows:
5.446
The amendments to the Corporations Act contained in this
Part of the Bill will extend civil liability for contraventions of the
continuous disclosure provisions of the Corporations Act by disclosing entities
to any other persons involved in a contravention. They will enable ASIC to
seek a pecuniary penalty order against an individual involved in a
contravention by a disclosing entity, whereas previously such a penalty could
only be sought against the entity itself.
5.447 The amendments are intended to apply to
individuals with real involvement in a contravention of the continuous
disclosure provisions, including individuals who: aided, abetted, counselled or
procured the contravention; were knowingly concerned in, or party to, the
contravention; and conspired to effect the contravention. Involvement in a
contravention therefore requires some form of intentional participation and
actual knowledge of the essential elements of the contravention. Furthermore,
an individual involved in a contravention only faces a pecuniary penalty if the
contravention is serious (section 1317G).
5.448 Although participants in the decision-making
process or those who have the capacity to effect disclosure (such as directors,
executives and senior managers, for example) are most likely to possess such
intention and knowledge, the amendments are not necessarily limited to this
class of individuals. For instance, involvement in a contravention may extend
to staff or advisers that knowingly withhold from their superiors or clients,
respectively, relevant information that leads to a contravention of the
continuous disclosure provisions.
5.449 The amendments are not intended to apply to
individuals with less than real involvement in a contravention of the
continuous disclosure provisions. For example, individuals who pass on
information produced elsewhere in the disclosing entity, such as those
responsible for communication with the market operator in relation to listing
rule matters, would not be taken to be involved in a contravention of the
continuous disclosure provisions. Furthermore, relief from liability is
available if the individual acted honestly and in the circumstances ought
fairly to be excused (section 1317S).
5.450 The prospect of financial penalties being
imposed on individuals is expected to operate as a more credible and effective
deterrent than the prospect of financial penalties being imposed on a body
corporate alone.
5.451
Sections 674 (Continuous disclosure - listed
disclosing entity bound by a disclosure requirement in market listing rules)
and 675 (Continuous disclosure - other disclosing entities) will be
amended by inserting proposed subsections 674(2A) and 675(2A) (items 1 and 2).
The proposed subsections will extend civil liability for contraventions of the
continuous disclosure regime by disclosing entities to any other persons
involved in a contravention.
5.452 Section 1317E will be amended by broadening the
list of continuous disclosure civil penalty provisions to include the
provisions (subsections 674(2A) and 675(2A)) dealing with persons involved
in a contravention of the continuous disclosure regime (item 3).
5.453
Proposed subsection 1469(1) of the Corporations Act (see
item 2 of Schedule 12) provides that the amendments in Part 1 of
Schedule 6 apply in relation to a contravention of subsection 674(2) or
675(2) that occurs on or after the commencement day.
5.454
The amendments to the Corporations Act contained in this
Part of the Bill will provide a mechanism for ASIC to issue an infringement
notice containing a financial penalty to a disclosing entity for an alleged
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contravention of the continuous disclosure provisions of the Corporations Act.
5.456
The mechanism operates in the following way:
• If ASIC considers that an entity has contravened
the continuous disclosure regime, ASIC notifies the entity in writing of the
nature of the case against it.
• ASIC then holds a hearing, at which the entity is
permitted to give evidence and make submissions.
• If, following the hearing, ASIC forms an opinion
that a contravention has occurred, it may issue an infringement notice
notifying the entity of its opinion and indicating that the breach may be
addressed through compliance with the infringement notice.
• Compliance with the infringement notice entails
payment of the financial penalty and remedying any inadequate disclosure as
specified in the notice. The notice also states the effect of complying and
failing to comply with the infringement notice within a certain period of
time.
• The financial penalty, which must be specified in
the infringement notice, is either $33,000, $66,000 or $100,000, depending on
whether the entity is a listed or unlisted disclosing entity and whether the
entity had previously contravened the continuous disclosure provisions. If the
entity is listed, the financial penalty will depend on the entity's market
capitalisation.
- These penalties are substantially less than the $1
million maximum civil penalty for a contravention of the continuous disclosure
provisions by a body corporate (see Part 4 of Schedule 4 of the Commentary
above).
• Compliance with an infringement notice is not taken
as an admission by the entity of liability or a contravention of the
Corporations Act. Furthermore, if it complies, the entity is not subject to
existing or further civil or criminal proceedings in relation to the alleged
contravention, subject to certain exceptions.
• The use of publicity by ASIC in conjunction with
infringement notices is strictly limited to compliance with a notice. ASIC may
only publish a copy of the notice and/or an accurate summary of the notice if
such publicity includes express statements that compliance is not an admission
of guilt or liability on the part of the entity and that the entity is not
regarded as having contravened the provisions. ASIC may not publish that a
notice has been issued, or that an entity has failed to comply with a notice.
• If the entity fails to comply with the infringement
notice within the period of time specified in the infringement notice, ASIC
cannot enforce the infringement notice.
5.457 Instead, ASIC may bring civil proceedings
against the entity in relation to the same alleged contravention. If the court
is satisfied that the entity contravened the continuous disclosure provisions,
it must make a declaration of contravention (and, if ASIC has sought one, the
court has discretion to make an order to disclose information or publish
advertisements) against the entity. The court must also impose a pecuniary
penalty against the entity.
• It is intended that the proposed infringement
notice mechanism only be used in relation to less serious contraventions of the
continuous disclosure regime. However, if an entity fails to comply with an
infringement notice and a court subsequently determines that a contravention
has occurred, the maximum pecuniary penalty that the court can impose upon the
entity is $1 million.
• If an entity fails to comply with an infringement
notice and ASIC is unable to satisfy the burden of proof in subsequent civil
proceedings, ASIC cannot issue another infringement notice in relation to the
alleged contravention.
• ASIC has the power to both issue and withdraw an
infringement notice. Prior to compliance with the infringement notice, and
whether or not the entity makes representations seeking the withdrawal, ASIC
may withdraw an infringement notice if it considers it appropriate. In this
case, the entity may be subject to civil or criminal proceedings in relation to
the alleged contravention.
5.458 The mechanism supplements existing criminal and
civil court procedures. It remedies a significant gap in the current
enforcement framework by facilitating the imposition of a relatively small
financial penalty and requiring information disclosure in relation to
relatively minor contraventions of the continuous disclosure provisions of the
Corporations Act that would not otherwise be pursued through the courts. The
capacity to issue an infringement notice also allows ASIC to signal its views
concerning appropriate disclosure practices to listed entities more effectively
than through court action alone.
5.459 The process is not intended to amount to the
imposition of a financial penalty by ASIC. It is intended, instead, to provide
a mechanism through which an entity that in ASIC's opinion has contravened the
regime may forestall an application to the courts by ASIC for the imposition of
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a financial penalty and the disclosure of specified information in relation to
the contravention.
5.460 The proposed new mechanism strikes an
appropriate balance between enhancing ASIC's capacity to deal with relatively
minor contraventions of the continuous disclosure provisions and ensuring that
there are adequate procedural safeguards.
5.461 However, there may be concerns about a process
under which ASIC investigates an alleged contravention and then holds a hearing
to determine whether it should form an opinion that a contravention had
occurred (and that an infringement notice should be issued).
5.462 In this regard, it is relevant to note that
ASIC currently performs a similar role in relation to certain licences granted
under the Corporations Act and directors involved in multiple insolvent
companies. ASIC decisions to suspend or cancel a financial services licence
(which may have far more adverse implications for an entity than the imposition
of a financial penalty) are made as a result of an administrative process. The
division of responsibility within ASIC between investigation and hearings in
relation to determining whether an infringement notice should be issued will be
comparable to that adopted in relation to financial services.
5.463 The imposition of financial penalties through
administrative procedures is also common in overseas jurisdictions. For
example, the United Kingdom (UK) Listing Authority (UKLA) is able to impose
financial penalties on listed entities (as well as their directors) in relation
to contraventions of the UK listing rules, subject to the right of
reconsideration by an independent tribunal. Under the UK approach, the entity
(or person) being investigated bears the onus of referring the matter to a
hearing before the tribunal. If the entity (or person) chooses not to refer
the matter to the tribunal, or the tribunal finds in favour of the UKLA, then
the UKLA's action becomes enforceable. Under the proposed new mechanism,
however, ASIC cannot enforce the infringement notice if the entity elects not
to comply with it, but must decide whether or not to take court action in
relation to the same alleged contravention.
5.464 Furthermore, the financial penalty specified in
an infringement notice is substantially lower than the maximum financial
penalty that could be sought through civil court proceedings. If ASIC elected
to pursue a contravention using the infringement notice process, it would not
be able to commence or resume any other court action in relation to the matter
(aside from enforcing any penalty that was eventually imposed by the court).
Finally, compliance with an infringement notice would not be taken as a
contravention of the law by an entity for any other purpose.
5.465 The limitation on the size of the financial
penalty nominated in the notice and restrictions preventing ASIC from taking
other action in relation to conduct dealt with using this mechanism are
intended to ensure that it is not used for more serious contraventions as an
alternative to existing court processes.
5.466
Item 8 of the Bill will amend section 1317C to provide that
ASIC decisions in relation to the issuance and withdrawal of an infringement
notice are excluded from review by the Administrative Appeals Tribunal (AAT).
AAT merits review of these decisions is inappropriate because there is no
obligation on an entity to comply with the notice and non-compliance with the
notice leaves ASIC with the decision whether or not to initiate court
proceedings to enforce the continuous disclosure requirements.
5.467
Items 4 and 5 will amend section 9 of the Corporations Act
by inserting definitions of the following terms that are used outside proposed
Part 9.4AA of the Corporations Act:
• `compliance period' (for an infringement notice).
In practice, the phrase is defined in proposed section 1317DAH, which is
described below in paragraph 0.
• `infringement notice'. In practice, the phrase
means an infringement notice issued under proposed section 1317DAC, which is
described below in paragraphs 0-0.
5.468 Items 6 and 7 will amend subsections 674(2) and
675(2) by inserting in each a note stating that an infringement notice may be
issued for an alleged contravention of these subsections.
5.469 Item 9 will insert a new part, `Part 9.4AA
Infringement notices for alleged contraventions of continuous disclosure
provisions', after Part 9.4 of Chapter 9. Proposed Part 9.4AA contains
provisions providing a mechanism for ASIC to issue an infringement notice
containing a financial penalty to a disclosing entity for an alleged
contravention of the continuous disclosure provisions.
5.470 For the purposes of Part 9.4AA, proposed
subsection 1317DAA(1) includes definitions of:
• `compliance period' and `infringement notice'
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(which have the same practical meaning as the definitional amendments made by
Items 4 and 5);
• various proceedings relating, or relevant, to the
effect of an entity's compliance, or failure to comply, with an infringement
notice. These proceedings include:
- `compensation proceedings'. This phrase refers to
proceedings for compensation for loss or damages including in relation to:
- a contravention of a financial services civil
penalty provision; or
- conduct in relation to financial services that is
misleading and deceptive;
- `contravention proceedings'. This phrase refers to
proceedings in relation to a contravention of the operating or compensation
rules of a licensed market;
- `enforcement proceedings'. This phrase refers to
proceedings in relation to the enforcement of a licensed market's operating
rules against the entity;
- `penalty and disclosure proceedings'. This phrase
refers to proceedings to which the entity is liable if the entity elects not to
comply with the infringement notice; and
- `public interest proceedings'. This phrase refers
to proceedings that ASIC can bring on a person's behalf for the recovery of the
person's property or the recovery of damages for fraud, negligence, default,
breach of duty or any other misconduct.
5.471 Subsections 674(2) and 675(2) impose continuous
disclosure obligations on disclosing entities. If the disclosing entity is a
registered scheme, subsections 674(3) and 675(3) impose the same obligations on
the responsible entity for the registered scheme. For the purposes of
similarly applying Part 9.4AA to a disclosing entity that is a registered
scheme, proposed subsection 1317DAA(2) clarifies relevant references. For
example, references to:
• the disclosing entity are taken to be references to
the responsible entity for the registered scheme; and
• the disclosing entity's securities are taken to be
references to interests in the registered scheme.
5.472 Proposed section 1317DAB outlines the function
of Part 9.4AA:
• to provide a mechanism for ASIC to issue an
infringement notice to a disclosing entity for an alleged contravention of the
continuous disclosure provisions, as an alternative to civil court proceedings
(proposed subsection 1317DAB(1)).
5.473 This proposed section also provides that:
• ASIC is not obliged to issue an infringement
notice;
• the liability of an entity to court proceedings is
unaffected if an infringement notice is either not issued or withdrawn; and
• if an entity fails to comply with the infringement
notice (and ASIC commences court proceedings), a court can impose a higher
penalty than the infringement notice penalty (proposed subsection 1317DAB(2)).
5.474
Proposed section 1317DAC provides for ASIC to issue an
infringement notice to an entity that ASIC has reasonable grounds to believe
has contravened the continuous disclosure provisions (proposed subsection
1317DAC(1)).
5.475 An infringement notice can only be issued once
for the same alleged contravention. It must be served on the entity. It has
no effect if it either is issued more than 12 months after the contravention
allegedly occurred or relates to more than one alleged contravention (proposed
subsections 1317DAC(2), (3) and (5)).
5.476 ASIC is required to take into account the
relevant market operator's guidelines to the listing rules regarding continuous
disclosure and any other relevant matter in deciding whether to issue an
infringement notice to a listed disclosing entity (proposed subsection
1317DAC(4)). Guidelines to listing rules do not have the same status as
listing rules under the Corporations Act - they are not lodged with ASIC or
subject to possible disallowance by the Minister and are not enforceable by
statutory means. The proposed subsection makes it clear that, while ASIC is
required to take the guidelines into account, it is not bound by them.
5.477 Proposed section 1317DAD provides that before
ASIC makes a decision whether or not to issue an infringement notice to an
entity, the entity must be provided with a written statement containing ASIC's
basis for issuing an infringement notice for an alleged contravention. An
entity's representative must be given an opportunity to give evidence and make
submissions at a private hearing before ASIC in response to this statement
(proposed subsection 1317DAD(1)). The hearing before ASIC is conducted in
accordance with the ASIC Act, which, for example, requires ASIC to observe the
rules of natural justice and allows persons to be represented legally.
5.478 In addition to its obligation under proposed
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subsection 1317DAC(4) in relation to a listed disclosing entity, ASIC is
required to consult with the relevant market operator for the entity before
providing the entity with a written statement (proposed subsection 1317DAD(2)).
In cases where the entity is the market operator or is in competition with the
market operator, consultation is not required (proposed subsection 1317DAD(3)).
Providing that ASIC is not required to consult with the market operator in
these circumstances is intended to avoid conflicts of interest and is
consistent with ASIC making decisions and taking action in relation to a
self-listed market operator that would otherwise be taken by that market
operator (subsection 798C(4) of the Corporations Act).
5.479 The purpose of proposed subsections 1317DAD(1)
-- (3) is to allow ASIC to determine whether it should form an opinion that the
entity has contravened the continuous disclosure provisions. These provisions
recognise and reinforce the role of the market operator as front-line regulator
in relation to continuous disclosure by entities listed on its market, and do
not change the balance of responsibilities between the market operator as
front-line regulator and ASIC as statutory regulator. They seek to ensure a
consistent interpretation by the market operator and by ASIC of what
constitutes a contravention of the continuous disclosure provisions. Continued
cooperation between market operators and ASIC is needed to ensure the
effectiveness of the infringement notice mechanism.
5.480 Evidence given, and submissions made, by the
entity's representative at the private hearing before ASIC are inadmissible in
evidence in subsequent court proceedings against either the entity or its
representative, except criminal proceedings against the entity's representative
for giving false or misleading evidence or information (proposed subsection
1317DAD(4)). The purpose of the provision is to ensure that if ASIC decides to
issue an infringement notice with which the entity fails to comply, and ASIC
commences court proceedings, the entity is not unfairly disadvantaged in those
proceedings by the evidence and information that it has volunteered at the
hearing.
5.481 Proposed section 1317DAE lists various matters
that the infringement notice either must or may include. In addition to the
formal and administrative requirements in proposed paragraphs
1317DAE(1)(a)-(c), (h) and (m), the infringement notice must:
• inform the entity of the nature of ASIC's case
against it in relation to the alleged contravention (proposed paragraph
1317DAE(1)(e));
• specify the penalty payable (proposed paragraph
1317DAE(1)(g));
• explain the consequences for the entity if it
complies or fails to comply with the infringement notice within the compliance
period (proposed paragraph 1317DAE(1)(k));
• inform the entity that it may write to ASIC seeking
the withdrawal of the infringement notice (proposed paragraph 1317DAE(1)(l));
• inform the entity of the maximum pecuniary penalty
that a court may impose (if ASIC commences proceedings against the entity
following the entity's decision not to comply with the infringement notice)
(proposed paragraph 1317DAE(1)(f));
• this Bill proposes to amend the civil penalty
provisions to provide for a $1 million maximum civil penalty for a
contravention of the continuous disclosure provisions by a body corporate - see
Part 4 of Schedule 4 of the Commentary above; and
• inform the entity that compliance with the
infringement notice may result in ASIC publishing details of compliance with
the notice by publishing a copy of the notice in the Gazette and/or
issuing a statement about the compliance (proposed paragraph 1317DAE(1)(d)).
5.482 The infringement notice may also require the
entity to disclose specified information to either ASIC or the relevant market
operator (proposed paragraphs 1317DAE(1)(i) and (j)).
5.483
For an alleged contravention of subsection 674(2), the
penalty specified in the infringement notice is:
• $100,000 if the entity's market capitalisation on
the relevant day exceeds $1,000 million;
• $66,000 if the entity's market capitalisation on
the relevant day is between $100 million and $1,000 million; and
• $33,000 if the entity's market capitalisation on
the relevant day is less than $100 million or it is not possible to work out
its market capitalisation because a relevant financial report has not been
lodged with ASIC (see paragraphs 0 and 0 below) (proposed subsection 1317DAE(2)
and paragraph 1317DAE(6)(a)).
5.484 If the entity has at any time:
• been convicted of an offence based on,
• had a civil penalty order made against it in
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relation to a contravention of, or
• breached an enforceable undertaking given to ASIC
in relation to,
- subsection 674(2) or 675(2), then the penalty
specified in the infringement notice is $100,000 and $66,000 where the penalty
specified would otherwise have been $66,000 and $33,000, respectively (proposed
subsection 1317DAE(3)).
5.485 The relevant day on which an entity's market
capitalisation is calculated for the purposes of determining the financial
penalty is the last day of the financial year of the latest financial report
lodged by the entity with ASIC before the infringement notice is issued
(proposed paragraph 1317DAE(6)(b)).
5.486 An entity's market capitalisation on the
relevant day is calculated by the following method:
• For each of the entity's class of quoted security
(excluding options), the relevant day's closing price for securities in that
class is multiplied by the number of securities in that class on issue on the
relevant day (as specified in the financial report for the period ending on the
relevant day); and
• Adding up those amounts (proposed subsection
1317DAE(7)).
5.487 The continuous disclosure of relevant, material
price sensitive information by listed disclosing entities ensures an informed,
efficient market, reduces volatility and minimises the opportunity for insider
trading. The purpose of basing the financial penalty on an entity's market
capitalisation is because the potential damage that results from an
ill-informed market is proportional to both the amount of an entity's
securities that can be traded and the value of those securities. Furthermore,
ASIC has not been given discretion to set the financial penalty because
flexible penalties for infringement notices are inconsistent with Commonwealth
policy and could lead to legal problems.
5.488 For an alleged contravention of subsection
675(2), the penalty specified in the infringement notice is $33,000, or $66,000
if any of the three factors in paragraph 0 above apply to the entity (proposed
subsections 1317DAE(4) and (5)).
5.489
Proposed section 1317DAF explains the effect of an entity
complying with an infringement notice. Proposed subsections 1317DAF(1)-(3)
provide that proposed subsections 1317DAF(4)-(7) apply if:
• the compliance period has not ended, the
infringement notice is not withdrawn and the entity has not paid the
infringement notice penalty and (if required by the infringement notice)
disclosed specified information to either ASIC or the relevant market operator;
or
• the entity complies with the infringement notice -
ie, the entity, within the compliance period, pays the penalty specified in the
infringement notice and if required by the infringement notice discloses
specified information to either ASIC or the relevant market operator (in which
case ASIC must not withdraw the infringement notice).
5.490 If either of the two scenarios in paragraph 0
above are satisfied:
• the entity is not taken as having contravened the
Corporations Act for any other purpose (proposed subsection 1317DAF(4)); and
• new or existing proceedings in relation to the
alleged contravention cannot be commenced or continued by ASIC on its own
behalf against the entity, except for proceedings by ASIC to enforce an order
for the recovery of expenses of an investigation related to the alleged
contravention (proposed subsections 1317DAF(5) and (7)).
5.491 Compliance with an infringement notice brings
the process for enforcing the alleged contravention to an end after its
administrative phase (proposed subsections 1317DAF(4) and (5)). This reflects
the intention behind the infringement notice mechanism of providing a process
through which the entity may forestall court proceedings by ASIC in relation to
the alleged contravention.
5.492 Compliance with an infringement notice by the
entity does not, however, forestall civil proceedings brought by ASIC against
persons involved in an alleged contravention by the entity of the continuous
disclosure provisions. The reason behind this is that the infringement notice
is issued to the entity and not to its officers.
5.493 Despite the entity's compliance with the
infringement notice neither constituting an admission of contravention nor
making the entity liable to further civil or criminal proceedings instituted by
ASIC on its own behalf, the conduct that constituted the alleged contravention
may have resulted in adverse consequences for shareholders, other bodies
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corporate, market licensees and/or other persons. The purpose of proposed
subsection 1317DAF(6) is to allow these classes of persons to commence or
continue compensation proceedings, contravention proceedings, enforcement
proceedings and public interest proceedings to seek redress (see paragraph 0
above for explanation of these proceedings).
5.494 Individuals adversely affected by the entity's
conduct should have the right to compensation and redress in accordance with
the law whether or not an infringement notice has been issued or complied with,
or whether ASIC had commenced civil penalty or criminal proceedings in relation
to the alleged contravention. It would be inappropriate to deny such
individuals' rights of action because ASIC chose to enforce the continuous
disclosure obligations by issuing an infringement notice. Furthermore, the law
as it now stands involves the possibility of parallel compensation proceedings
where there is a contravention of the corporation/registered scheme or
financial services civil penalty provisions.
5.495 The exception in proposed subsection 1317DAF(6)
also extends to:
• proceedings to enforce orders, including
proceedings in respect of a breach of an enforcement order; and
• appeals against decisions or orders,
- (including costs orders, except in relation to
public interest proceedings) made in relation to compensation proceedings,
contravention proceedings, enforcement proceedings and public interest
proceedings.
5.496
Proposed section 1317DAG explains the effect of an entity
failing to comply with an infringement notice. It is structured in a similar
manner as proposed subsection 1317DAF and provides that proposed subsections
1317DAG(2)-(5) apply if an infringement notice is not withdrawn (proposed
subsection 1317DAG(1)).
5.497 As mentioned above, compliance with an
infringement notice involves payment of the specified penalty and the
disclosure of specified information (if required by the infringement notice).
The table in proposed subsection 1317DAG(2) outlines the proceedings brought by
ASIC to which the entity is liable for failing to comply with the infringement
notice. If, within the compliance period the entity fails to:
• pay the specified penalty, then the entity is
liable to proceedings for a declaration of contravention and a pecuniary
penalty order. (This Bill proposes to amend the civil penalty provisions to
provide for a $1 million maximum civil penalty for a contravention of the
continuous disclosure provisions by a body corporate - see Part 4 of
Schedule 4 of the Commentary above); and
• disclose the specified information, then the entity
is liable to proceedings for an order to disclose information or publish
advertisements.
5.498 The civil proceedings and other action (see
paragraph 0 below) brought by ASIC to which the entity is liable for failing to
comply with the infringement notice are limited because the infringement notice
mechanism is intended for use only in relation to relatively minor
contraventions.
5.499 If the entity does not comply with the
infringement notice and the notice is not withdrawn, new or existing
proceedings in relation to the alleged contravention cannot be commenced or
continued by ASIC on its own behalf against the entity, but can be commenced or
continued by other classes of persons (proposed subsections 1317DAG(3) and
(4)). This is for the same reason as proposed subsections 1317DAF(5) and (6)
(see paragraphs 0 and 0 above). Shareholders, other bodies corporate, market
licensees and/or other persons adversely affected by the conduct that
constituted the alleged contravention can commence or continue compensation
proceedings, contravention proceedings, enforcement proceedings and public
interest proceedings against the entity to seek redress (see paragraph 0 above
for explanation of these proceedings).
5.500 The exception in proposed subsection 1317DAG(4)
also extends to:
• proceedings to enforce orders, including:
- proceedings in respect of a breach of an
enforcement order;
- orders made in relation to proceedings to which the
entity is liable if it fails to comply with the infringement notice; and
• appeals against decisions or orders, including
those in relation to proceedings to which the entity is liable if it fails to
comply with the infringement notice.
- (including costs orders, except in relation to
public interest proceedings) made in relation to the compensation proceedings,
contravention proceedings, enforcement proceedings and public interest
proceedings.
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5.501 ASIC is also permitted to:
• make a determination denying the entity exemption
from the secondary sales provisions and access to concessionary arrangements in
relation to further issues of continuously quoted securities if the entity has
contravened the continuous disclosure provisions (or other relevant disclosure
provisions) in the previous 12 months;
• make an order for the recovery of expenses of an
investigation related to the alleged contravention;
• accept an enforceable undertaking; and
• bring proceedings to enforce the determinations,
orders or undertaking (proposed subsection 1317DAG(5)).
5.502
Once an infringement notice is issued, an entity has 28
days in which to comply with the notice (proposed section 1317DAH). The
compliance period may be extended by ASIC only once for up to 28 days by
written notice to the entity. A failure to notify the entity in writing does
not invalidate the extension. Reference to `compliance period' in the
Corporations Act includes the extended compliance period.
5.503
ASIC may withdraw an infringement notice by written notice
to the entity if it has not been complied with (proposed section 1317DAI). The
entity may write to ASIC seeking the withdrawal of the infringement notice and
ASIC may withdraw it regardless of whether the entity has sought its withdrawal
(proposed subsections 1317DAI(1), (3)-(5)). Evidence or information given by
the entity's representative in the course of seeking the withdrawal of the
notice is inadmissible in evidence in subsequent court proceedings against
either the entity or its representative, except criminal proceedings against
the entity's representative for giving false or misleading evidence or
information (proposed subsection 1317DAI(2)). This provision is equivalent to
proposed subsection 1317DAD(2) - see paragraph 0 above).
5.504 Proposed subsection 1317DAI(6) lists various
matters that the withdrawal notice must include. In addition to the formal and
administrative requirements in proposed paragraphs 1317DAI(6)(a)-(c), the
withdrawal notice must inform the entity that it is liable to civil and/or
criminal proceedings in relation to the alleged contravention (proposed
paragraphs 1317DAI(6)(d)-(e)). ASIC may withdraw the infringement notice with
the intention of not pursuing the alleged contravention, in which case ASIC
would not commence proceedings against the entity. Alternatively, the
rationale behind the withdrawal may be that ASIC considers that the alleged
contravention is more serious that ASIC initially believed and warrants
proceedings unavailable under the infringement notice mechanism.
5.505 As mentioned above, compliance with an
infringement notice involves payment of the specified penalty and possibly the
disclosure of specified information. If the infringement notice specifies both
a penalty and information required to be disclosed and ASIC withdraws the
notice following payment of the penalty but before the disclosure of the
information specified, ASIC must refund the penalty paid by the entity
(proposed subsection 1317DAI(7)).
5.506
If an entity complies with an infringement notice, proposed
section 1317DAJ allows ASIC to publish details of the entity's compliance
(proposed subsection 1317DAJ(1)). ASIC may only publish a copy of the notice
in the
Gazette and/or an accurate summary of the notice if such
publicity includes express statements that compliance is not an admission of
guilt or liability on the part of the entity and that the entity is not
regarded as having contravened the continuous disclosure provisions (proposed
subsections 1317DAJ(2) and (3)). The aim of these subsections is to induce
entities to comply with their continuous disclosure obligations. Publicity
will send a signal to the market that ASIC is taking prompt action to deal with
inadequate disclosure.
5.507 Proposed subsection 1317DAJ(4) restricts ASIC
to publishing details of an entity's compliance with an infringement notice and
provides that ASIC must not publish any other details in relation to the
infringement notice (including the issue of, or failure to comply with, such a
notice). The purpose of this provision is to ensure that no adverse
conclusions are drawn or so-called trials by media take place in relation to
the issue of a notice. However, this provision does not prevent ASIC from
publishing the use of infringement notices on an aggregate and anonymous basis
including, for example, the number of notices issued and the number resulting
in fines or civil penalty proceedings in a given period.
5.508
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Items 10 and 11 will amend section 1317P (Criminal
proceeding after civil proceedings) to prevent ASIC from commencing criminal
proceedings against an entity to which an infringement notice has been issued
and not withdrawn. Criminal proceedings will not be able to be commenced
against such an entity for conduct that constitutes a contravention of
subsection 674(2) or 675(2), regardless of whether:
• a declaration of contravention or a pecuniary
penalty order has been made against the entity (in proceedings following an
entity's failure to comply with the infringement notice); or
• a compensation order has been made against the
entity (in proceedings following an entity's compliance or failure to comply
with the infringement notice).
5.509 The reason for limiting an entity's liability
to civil proceedings is because the infringement notice mechanism is
intended:
• for use only in relation to relatively minor
contraventions; and
• to bring the process for enforcing the alleged
contravention to an end upon compliance with the infringement notice.
5.510
Proposed subsection 1469(2) of the Corporations Act (see
item 2 of Schedule 12) provides that the amendments in Part 2 of
Schedule 6 apply in relation to a failure by a disclosing entity to comply
with subsection 674(2) or 675(2) that occurs on or after the commencement day.
5.511
Schedule 7 of the Bill contains amendments to the
Corporations Act provisions dealing with disclosure rules. Within the Schedule
the amendments are grouped as follows:
| Part
1
|
Presentation
of disclosure documents
|
| Part
2
|
Product
Disclosure Statements for continuously quoted securities
|
| Part
3
|
Exemptions
from disclosure requirements
|
5.512
Disclosure documents (defined in section 9 as
prospectuses, profile statements and offer information statements) contained in
Chapter 6D are integral elements of the fundraising provisions, as they provide
investors and their advisers with appropriate information to make an informed
investment decision. While the content of a disclosure document (such as a
prospectus) is important, the effectiveness of this document as an information
source can be impaired if that information is presented in a manner that
ambiguous, vague or unclear.
5.513 Section 715A provides that the content of
a disclosure document must be presented in a clear, concise and effective way.
This amendment is intended to improve the effectiveness of documents such as
prospectuses as a useful information source for investors and is consistent
with requirements for a Product Disclosure Statement (PDS) under
subsection 1013C(3). It is intended to improve the comprehensibility and
readability of disclosure documents.
5.514 That said, this requirement sits alongside and
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does not detract from the content requirements for the relevant disclosure
document, such as for a prospectus under sections 710 and 711. The intention
is not to alter compliance with the content requirements, by:
• limiting the amount of information provided; or
• reducing the quality of information contained in a
prospectus; or
• forcing material, such as technical terms, to be
oversimplified.
5.515 There may be concerns that the parameters of
clear, concise and effective could be subjective. Given that each disclosure
document is different, determining if a document is clear, concise and
effective will necessarily be decided on a case by case basis. This amendment
is intended to improve how the content of a disclosure document is presented
and its meaning is conveyed. It is also expected that industry understanding
of this concept will develop as this phrase is increasingly applied in practice
under both Chapter 7 and now in Chapter 6D of the Corporations Act.
5.516
A breach of this requirement is not an offence. Instead,
if ASIC is satisfied the requirement for clear, concise and effective
presentation has not been met, ASIC will be able to issue a stop order. It is
also intended that the stop order provisions in subsections 739(2) to (4),
which relate to hearings and interim orders will also apply.
5.517 It is noted that under ASIC Policy Statement
152: Lodgment of disclosure documents, ASIC will attempt to resolve prima
facie disclosure concerns it is aware of with the issuer after lodgment.
5.518 Section 719(1A) provides the opportunity
for a person to lodge a replacement document if they become aware the
information in the document may not be presented in a clear, concise and
effective manner. The consequences of lodging a replacement document is found
in subsections 719(4) or (5).
5.519
Under section 1470, this amendment only applies to
disclosure documents for an offer of securities lodged with ASIC after the
commencement of the legislation.
5.520
The amendments to the Corporations Act contained in this
Part of the Bill will:
• permit issuers of managed investment products that
are continuously quoted securities to issue shorter, or transaction specific,
Product Disclosure Statements (PDS); and
• allow ASIC to deny access to these arrangements in
relation to issuers that have contravened relevant provisions of the
Corporations Act in the past 12 months.
5.521 As a consequence of the commencement of the
Financial Services Reform Act 2001, the disclosure framework governing
securities and debentures is found in Chapter 6D of the Corporations Act, and
the analogous regime regulating managed investment products is found in Part
7.9. Chapter 6D refers to prospectuses and Part 7.9 refers to PDS.
5.522 Chapter 6D provides concessionary arrangements
in relation to further issues of continuously quoted securities by listed
disclosing entities. Section 713 of the Corporations Act provides that
these securities can be issued to retail investors through a transaction
specific prospectus (rather than a full prospectus of the type that would
ordinarily be required under section 710 of the Act). It requires that
the prospectus address a modified range of matters and requires that it refer
to other information that has been disclosed by the entity, including under the
continuous disclosure provisions. Subsection 713(6) allows ASIC to deny a
disclosing entity access to these arrangements if the entity has contravened
the continuous disclosure provisions (or other relevant disclosure provisions)
in the previous 12 months.
5.523 Part 7.9 (section 1013F) simply provides
that in determining what information needs to be contained in a PDS, an
issuer's status as a disclosing entity is one of the factors that a responsible
person may take into account. No distinction is made between a PDS for
continuously quoted (CQ) securities or non-continuously quoted (NCQ) securities
and no further guidance is provided. Furthermore, there is no provision
similar to subsection 713(6).
5.524 The purpose of these amendments therefore is to
align, in terms of practical operation, the framework of disclosure in Part 7.9
of the Corporations Act with the framework in Chapter 6D as they apply to CQ
securities. The amendments are modelled largely on section 713 in Chapter 6D,
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but do not replicate that section. The reason for not replicating section 713
is that the content rules for prospectuses differ from those for PDS in Part 7.9.
5.525
Items 4, 5 and 6 will amend sections 111AQA, 1013D and
1013E, respectively, to clarify that a disclosing entity's continuous
disclosure obligations are relevant in deciding what information should be
included in a PDS for either CQ or NCQ securities. These items reflect the
amendments made by items 7 and 8.
5.526 Items 7 and 8 will create a distinction between
a PDS for a CQ security and a NCQ security, and provide for differential
treatment of CQ and NCQ securities for the purpose of limiting the extent to
which information is required to be included in a PDS.
5.527 Section 1013F (General limitations on
extent to which information is required to be included) provides that an
issuer's status as a disclosing entity is one of the factors that a reasonable
person may take into account in determining what information needs to be
contained in a PDS. This provision currently makes no distinction between a
PDS for a CQ or a NCQ security. Item 7 will amend section 1013F to
provide that this factor now only applies to a PDS for a CQ security.
5.528 Item 8 will insert section 1013FA, which
provides that information contained in an issuer's recent financial reports and
continuous disclosure notices is not required to be included in a PDS for a CQ
security (proposed subsection 1013FA(1) and paragraph 1013FA(2)(a)). Proposed
paragraph 1013FA(2)(b), modelled on subsections 713(3) and (4) in Chapter 6D,
requires the PDS to inform investors of the issuer's reporting and disclosure
obligations, and their right to obtain a free copy of the documents containing
information excluded from the PDS.
5.529 Proposed subsections 1013FA(3) and (4),
modelled on subsection 713(6) in Chapter 6D, will allow ASIC to deny
access to the arrangements in subsection 1013FA(2) if the issuer of the CQ
securities or a person responsible for the PDS contravened relevant provisions
of the Corporations Act in the past 12 months.
5.530
Proposed subsection 1470(2) of the Corporations Act (see
item 2 of Schedule 12) provides that the amendments in Part 2 of
Schedule 7 apply to a Product Disclosure Statement that is required to be
given on or after the commencement day.
5.531
Section 708A is an exemption from the on-sale
provision in subsection 707(3). These amendments are intended to improve
the practical operation of the placement market and the secondary sale
provisions in the Corporations Act.
5.532 The basis of the proposed amendments is that no
further disclosure is required where investors have the benefit of information
that is comparable to that otherwise available in a prospectus. Information
can be made available to investors through:
• a notice to the market that the issuing entity has
provided a full release of information to the market; or
• a prospectus for a retail issue that is more or
less contemporaneous with an institutional placement.
5.533
A notice under subsection 708A(5) is available if the
placement is:
• part of a class of securities that is listed; and
• subject to the continuous disclosure requirements
of sections 674 and 675 without exemption for at least 12 months prior to the
issue.
5.534 This provides the market with a body of
information about those securities that are being on-sold.
5.535 No on-sale can occur until a notice that
complies with subsection 708A(6) is provided to the relevant market
operator. This notice is a one-off and contains current information as at the
date when it is lodged with the market operator.
5.536 The issuer, rather than the on-seller, is
tasked with providing the notice given it did not provide disclosure through a
prospectus when making the placement and is best placed to provide the relevant
information to the market. The issuer of the securities has up to five days
after the placement to provide the notice to the relevant market operator,
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allowing the issuer flexibility on when to disclose information to the market.
5.537 Given the responsibility for the notice rests
with the issuer, the proposed subsection 727(5) makes it clear that an
on-seller relying on a notice that actually does not comply with
subsection 708A(6) is not in breach of the law.
5.538 The notice:
• verifies to the market that the issuer has compiled
with its continuous disclosure and reporting obligations; and
• provides the market with information that is
excluded from continuous disclosure to ensure investors receive prospectus-like
disclosure.
5.539 The additional information in the notice is
beyond that required under continuous disclosure. The information required
under continuous disclosure is not a complete substitute for the information
provided in a prospectus. Principally, continuous disclosure does not include
certain confidential information that must be included in a prospectus, which
may be critical in making an investment decision. This ensures that investors
are provided with material information to make an informed investment
decision.
5.540 This requirement is not intended to force
companies to respond to rumours but rather to inform investors and the market
through providing information of a kind that would otherwise be found in a
prospectus. The proposed content of the subsection 708A(6) notice is
consistent with special prospectus content rules in section 713.
5.541 To provide certainty to the market, an issuer
cannot withdraw the notice. Instead, the issuer has an obligation to correct
the notice under subsection 708A(9). This is not intended to be an update of
all the information in the notice as at the time a defect is discovered but
merely a correction of the defect in the original notice and no more.
5.542
The proposed subsection 708A(10) recognises that
investors may also receive relevant information through a prospectus that while
not issued pursuant to the placement, contains current information that relates
to the same class of securities as the placement.
5.543 The proposed subsection 708A(11) grants
similar relief to securities placed with underwriters or a person nominated by
the underwriter in an underwriting agreement.
5.544
This provision does not reduce the primary anti-avoidance
intent of subsection 707(3). Under paragraph 708A(1)(b), a prospectus
must accompany the issue of securities where the issuer has the purpose of
those securities being on-sold. It is not considered that merely an intention
to list securities amounts to a purpose of securities being on-sold. Further,
subject to the exemption in section 708A, the anti-avoidance provisions of
subsections 707(3) and (4) continue to operate.
5.545
This amendment will not inhibit ASIC's ability to provide
relief under its existing exemption and modification powers, such as section
741.
5.546 As this is an exemption from the disclosure
provisions, the relief will not apply if ASIC has issued a determination under
subsection 708A(2) that the issuer has contravened relevant provisions of the
Corporations Act in the 12 months prior to the placement.
5.547 ASIC's determination powers under subsection
713(6) and 1013FA(3) also incorporate breaches of the proposed relief from the
secondary sale provisions. The determination powers are intended to prevent
issuers accessing relief where there have been breaches of the law and provides
an incentive from a reputation standpoint to ensure the notice is correct.
5.548
The amendment to subsection 283AA(1) ensures that even
due to the section 708A exemption from disclosure, a body offering
debentures must meet the requirements of Chapter 2L of the Act and enter into a
trust deed and appoint a trustee.
5.549
Section 1012DA is an exception from the on-sale
provision in subsection 1012C(6). Section 1012DA and associated
provisions mirror the relief proposed in section 708A and its associated
provisions, taking into account the different disclosure regime for PDS under
Part 7.9 compared with the prospectus regime under Chapter 6D. For example,
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the obligation applies to regulated persons.
5.550
There is an obligation to correct a defect in a notice
under subsections 708A(9) and 1012DA(9). Failure to do so within a reasonable
time will incur a penalty of 25 penalty units or 6 months imprisonment or
both.
5.551 Given the similarity of the subsection 708A(5)
and 1012DA(5) notice to a continuous disclosure notice, the liability
provisions for continuous disclosure under sections 1308 and 1309 will apply.
Reliance on existing provisions of the Corporations Act reduces uncertainty
through not introducing a new offence regime. The use of section 1308 and 1309
ensures there are remedies for a notice that is false or misleading. For
avoidance of doubt, subsections 1308(9) and 1309(9) will make it clear that
sections 1308 and 1309 are available where information is left out of a notice.
5.552
Under section
1470:
• The amendment to subsection 283AA(1) applies to an
offer of debentures that is made on or after commencement of the legislation.
• Section 708A applies to an offer of securities
for sale that is made on or after the commencement of the legislation.
5.553 Section 1012DA applies to a recommendation
and sale situation that occurs on or after commencement of the legislation.
5.554
Schedule 8 of the Bill contains amendments that are
intended to facilitate the exercise by members of companies of shareholder
rights to be informed, to participate and to vote in general meetings. It
contains proposed amendments to the Corporations Act that are designed to:
• encourage shorter, more comprehensible notices of
meetings;
• facilitate distribution of notices of meeting and
annual reports by electronic means;
• improve access to general meetings by facilitating
voting by proxy; and
• require disclosure by directors of listed companies
of other directorships held.
5.555
Section 249L contains rules about the content of notices of
general meetings. It is proposed to include a new subsection 249L(3) to also
require that notices are worded and presented in a clear, concise and effective
manner (Item 5).
5.556 It would be open to ASIC or affected persons to
pursue a remedy for an alleged breach of the new requirement under section
1324. That section permits a court to make orders, including injunctions and
orders to pay damages, in relation to breaches of the Corporations Act.
Section 1322 would operate so that a deficiency in the notice would not
ordinarily result in the invalidity of a meeting or any proceeding at a meeting
unless substantial injustice was caused that could not be remedied by an
alternative order.
5.557 Proposed new section 249LA (Item 6) would
permit regulations to be made that identify certain kinds of information that
need not be included in a notice of meeting if conditions are met. Regulations
under the proposed new section might, for example, permit some types of
information to be incorporated in the notice `by reference'. Such regulations
could expressly allow notices of meeting to exclude complex descriptions of a
possible transaction for which member approval is sought, on condition that the
full details are clearly referred to and made readily available to members who
wish to examine them.
5.558
Section 249J of the Corporations Act contains requirements
for distribution of notices of general meetings to members and directors.
Subsection 249J(3) already permits members to request notices are sent to them
by fax or e-mail.
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5.559 It is proposed to amend section 249J by
including a new subsection 249J(3A) (Item 3). Under the new subsection,
companies would be able to offer members the option of accessing notices by a
wider range of electronic facilities. Members would be able to nominate an
electronic `notification' and also an electronic `access means', which a
company could use to distribute notices as an alternative to traditional forms
of distribution. Under this facility, companies would be able to distribute a
notice of meeting by, example, sending a short e-mail to a member advising that
a notice of general meeting is available for viewing or download from the
company website. Item 2 adds appropriate new paragraphs to subsection
249J(3), which deals with how notice of a meeting is given to a member.
5.560 A proposed new subsection 249J(5) (Item 4) will
include a replaceable rule stating that a notice given under the new facility
is taken to be given on the business day after the notice is made available.
This is consistent with the current rule for fax or e-mail distributions in
subsection 249J(4), which may also be replaced by an alternative rule in the
company's own constitution (Item 1 includes the new subsection 249J(5) in
the table of replaceable rules in section 141).
5.561 Subsection 1322(2) deals with the consequences
of non-receipt of a notice by a person, and provides that ordinarily it would
not result in the invalidity of meeting proceedings. Proposed new subsection
1322(3AA) contains an equivalent rule in relation to the new distribution
facility (Item 17).
5.562
Section 314 requires companies and certain other entities,
to send annual reports to members. It is proposed to include new subsections
314(4) and (5), which will permit members to receive distribution of annual
reports in the same manner as proposed in relation to notices of meetings for
companies (Item 16). If the facility is offered, members would be able to
nominate an electronic `notification means' (for example, e-mail) by which they
would be advised a report is available, and an electronic `access means' (for
example access
via website) by which they would access the report
following notification.
5.563 The availability of the new facility will not
affect the rules regarding full or concise reports.
5.564
Proposed new subsection 249X(1A) will permit a member to
appoint an individual or a body corporate as a proxy (Item 7).
5.565 Under proposed new paragraph 250D(1)(d), a body
corporate appointed as a proxy for a member will be able to nominate an
individual to exercise its powers at meetings (Item 14).
5.566
Proposed new subsection 250A(1A) will permit regulations to
prescribe authentication mechanisms for authentication of proxy appointments
other than signature (Item 9). A consequential amendment to subsection 250A(1)
will be made to recognise other authentication methods (Item 8).
5.567
It is proposed to replace subsections 250B(3), which deals
with the receipt of proxy documents, with a revised subsection that will permit
companies to offer a facility for electronic submission of proxy appointment
forms and related appointment authorities (Item 11). An appointment authority
is a document such as a power of attorney by which a member has authorised
another person to appoint a proxy on the member's behalf. Consequential
amendments to paragraph 250B(1)(b) will be made to recognise other
authentication methods (Items 10 and 11).
5.568 Subsection 250BA(1), dealing with the
requirements for listed companies to specify how proxy documents are to be
submitted, is proposed to be replaced to recognise the availability of the new
facility (Item 13).
5.569
Subsection 300(11) includes special rules for listed
companies regarding the inclusion of information in annual reports. It is
proposed to include a new paragraph 300(11)(e) that will require, in respect of
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each director of a listed company, details of directorships of other listed
companies held by the director in the three years before the end of the
financial year to which the report relates (Item 15).
5.570
It is proposed the new rules would apply as follows (see
Schedule 12, Item 2):
| New
rule
|
Application
|
| Notices
of meeting
|
Three
months after new rule commences
|
| Proxy
appointments
|
Appointments
made on or after new rule commences
|
| Distribution
of reports
|
Financial
years starting on or after new rule commences
|
| Disclosure
of directorships
|
Financial
years starting on or after new rule commences
|
5.571
Recommendation 2 of the HIHRC report identified some
anomalies in the Corporations Act and the ASIC Act that has led to doubt about
the application of provisions as they affect certain persons. The proposed
amendments in Schedule 9 of the Bill are designed to clarify the classes of
personnel who have duties and obligations under the Act. The amendments will
ensure clear and consistent use of various terms by:
• correcting current anomalies in relation to the
definition of `officer';
• removing the definition of `executive officer' and
replacing it with `senior manager' (`senior managers' will be a sub-class of
`officer');
• removing the definition of `examinable officer';
and
• making consequential changes as required to clearly
specify the persons that are to be covered by particular provisions.
5.572
There are two overlapping definitions of the term `officer'
found in sections 9 and 82A of the Corporations Act respectively.
Schedule 9 of the Bill will address the potentially confusing operation of
these provisions by repealing the section 82A definition of `officer' (see Item
11) and leaving the section 9 definition. Item 43 removes an express reference
to section 82A from section 530A of the Corporations Act (which relates to
officers helping liquidators).
5.573 Definitions of `officer' for specific purposes
appearing other than in section 9 are to be removed where possible (Items 11,
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20, 25, 78 and 88; Item 31 contains a replacement definition for use in
subsection 448C(1)).
5.574 In cases where particular provisions of the
Corporations Act dealing with personnel are intended to extend to employees,
this will be expressly stated (see `Employees' discussion below).
5.575 The current section 9 definition of `officer'
applies to `corporations' (which includes `bodies corporate' - see section
57A). Existing section 82A (to be removed) applies its definition to `bodies
corporate' and `entities'. Section 64A defines the term `entity' to include
bodies corporate, partnerships, individuals, and trusts (including trustees).
An `entity' is also defined in section 9 for the sole purpose of Chapter 2E
(Related party transactions) to include also an `unincorporated body'.
5.576 As there are provisions in the Corporations Act
that regulate officers of `entities' other than corporations, it is desirable
to include a specific definition of `officer of an entity' in the Act. Item 9
inserts a definition of `officer' into section 9 specifically for entities
other than individuals or corporations (such as partnerships and unincorporated
associations). As a consequence of including the definition, the term
`officer' has been substituted for `office holder' in some provisions in the
ASIC Act dealing with unincorporated associations (Items 4 and 6). However,
Item 10 substitutes `office holder' for `officer' of an unincorporated body
within the meaning of a `corporation' as set out in section 57A of the
Corporations Act to avoid the occurrence of circular references.
5.577 Due to changes to the definitions,
consequential amendments are proposed to ensure that the range of persons to
whom the particular provisions apply is maintained.
5.578
A large number of provisions of the Corporations Act and
ASIC Act impose duties and obligations on `officers'. The section 82A
definition of `officer' (to be removed) includes an `employee'. The existing
section 9 definition of `officer' generally covers persons who have a
degree of influence or potential influence over the general conduct of the
entity, through the office they hold or otherwise. Although some employees
fall within the section 9 definition, a large number would not.
5.579 The dual definitions sometimes give rise to
doubt about whether provisions that impose duties and obligations on an
`officer' apply to an ordinary employee or not. In many cases, it is not
appropriate to extend the provision to such persons. Removing section 82A
of the Corporations Act and leaving the section 9 definition of `officer' as
proposed will satisfactorily address those cases. There are, however, some
existing uses of the term `officer' in provisions that should apply to
employees. The following items will insert the term `employee' into those
provisions so there is no doubt that employees fall within their scope:
• Items 3 to 6; 12 to 19; 21; 22; 26 to 30; 32; 34 to
42; 45 to 50; 53 to 56; 61; 69 to 77; and 79 to 87.
5.580
The need for the term `executive officer' was based on the
section 82A definition of `officer', which included `employees'. `Executive
officer' distinguished between officers who took part in management of the
company and ordinary employees. Item 8 removes the definition of this term.
5.581 If uses of the term `executive officer' were
simply replaced with `officer', this could undesirably widen the scope of the
provisions. This is due to paragraphs (c) to (e) of the section 9
definition which identify certain persons such as receivers and liquidators as
`officers'.
5.582 Item 86 of Schedule 1, Part 3 of the Bill will
define a new sub-class of `officer' called a `senior manager'. The sections
that currently rely on `executive officer' will, under the proposed amendments,
use the new term `senior manager'.
5.583 The term `senior manager' is also utilised in
Schedule 1, Part 3 (Auditor appointment, registration, independence and
rotation requirements) and Schedule 5 (Remuneration of directors and
executives) of the Bill. The construction of `senior manager' allows the
definition to be applied in relation to partnerships, trusts and joint ventures
(as well as corporations) for the purposes of applying section 300A to related
entities of corporations. Amendments to section 300A are discussed further in
Chapter 5.
5.584 The following items replace the term `executive
officer' with `senior manager':
• Items 2; 51; 52; 59; 60; and 62 to 68.
5.585 The following items also include the term
`senior manager' rather than `officer' to avoid undesirable results from the
use of the wider term `officer':
• Items 12 to 19; and 29 to 31.
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5.586
The section 9 definition of `officer' does not include a
`provisional liquidator'. Certain sections of the Corporations Act currently
redefine `officer' to include a `provisional liquidator' for the purposes of
those sections. The following items preserve the intention that a `provisional
liquidator' be included within the ambit of the appropriate provisions:
• Items 1 (in relation to the ASIC Act); 23; 24; 57;
and 58.
5.587
The term `examinable officer' as defined in section 9 is
sufficiently covered by the section 9 definition of `officer' (apart from its
inclusion of a `provisional liquidator'), so separately defining this term will
be unnecessary. In the interests of simplification and clarity, Item 7 removes
the definition of `examinable officer' and Item 57 removes the only instance of
the term `examinable officer', found in section 596A, by amending it to refer
to `officer or provisional liquidator'.
5.588
Section 5 of the ASIC Act also contains a definition of
`officer', which has elements of both the section 9 and section 82A definition
contained in the Corporations Act. This is to be amended to achieve
consistency with the revised Corporations Act.
5.589 Item 1 substitutes a definition for `officer'
that explicitly directs interpretation of the term as it is defined in the
Corporations Act, but includes also a `provisional liquidator' to preserve the
intention that an `officer' in the ASIC Act include a `provisional liquidator'
(see `Provisional liquidator' above).
5.590 Items 2-6 reflect the consequential amendments
concerning `employees and `executive officers' required to achieve consistency
with the amendments set out above.
5.591 Note also that existing subsections 5(2) and
5(3) of the ASIC Act deal with interpretation of terms used in the ASIC Act.
5.592
Developments in the global financial services industry have
given rise to conglomerate firms - which may achieve cost efficiencies by
providing a full range of services, and using employees in different capacities
across the firm. In seeking these cost efficiencies, it was widely
acknowledged by the financial services industry that scope existed for
conflicts of interest to arise. Firms responded to these concerns by
developing policies and procedures (for example, the establishment of Chinese
Walls between different areas of their financial services business) for
managing these potential conflicts of interest.
5.593 International experience with conflicts of
interest - particularly that of the United States (US) in 2002 with respect to
analysts - led the Australian Government to consider its own regulatory
framework for managing conflicts of interest.
5.594 In August 2003 ASIC completed its Research
Report into Analyst Independence. The Report concluded that while ASIC did not
identify any actual contraventions of the Corporations Act 2001, there was in
its view, an unacceptable level of reliance, in some entities, on staff
integrity to avoid and manage conflicts of interest. This, together with
international experience, confirms a general unease in Australia about analyst
independence and the management of conflicts of interest when providing
financial services.
5.595 Under the current regulatory regime financial
services licensees are required to ensure that financial services covered by
their licence are provided `efficiently, honestly, and fairly'. While industry
has widely accepted that this would include managing conflicts of interest, the
duty was not express in its application to conflicts of interest.
5.596 It was considered that any new provision should
not be limited in application to analysts, but should also provide for
financial services licensees more generally, as the potential for conflicts of
interest to arise are not limited in application.
5.597 Consequently, under proposed paragraph
912A(1)(aa), financial services licensees will be subject to an additional
licensing obligation, which specifically requires them to have adequate
arrangements for managing conflicts of interest. This will include ensuring
that there is adequate disclosure of conflicts to investors, who can then
consider their impact before making investment decisions. It will require
internal policies and procedures for preventing and addressing potential
conflicts of interest that are robust and effective. The obligation will apply
to all conflicts of interest, other than those that occur wholly outside the
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financial services business of the licensee or its representative.
5.598 The additional licensing obligation will
supplement the existing general duty in paragraph 912A(1)(a) to provide
financial services `efficiently, honestly and fairly'. It will provide a
strong legislative basis for the Australian Securities and Investments
Commission (ASIC) to develop guidance and take enforcement action, while being
consistent with a principles-based approach. ASIC guidance on the management
of conflicts of interest will assist licensees to comply with their legal
obligations. ASIC's policy proposal in this regard was released for comment on
29 October 2003.
5.599
There are three main types of conflicts of interest:
• conflicts within the financial services business
(Category 1);
- examples are conflicts within one area of the
financial services business, such as dealing on behalf of various clients, or
across different areas of the business, such as between publishing research in
a client newsletter and market making;
• conflicts between something within the financial
services business and something outside the financial services business
(Category 2);
- examples are where outside factors give rise to
conflicts within the financial services business, such as a conflict of
interest between the financial services licensee lending (as principal) to a
particular enterprise and the financial services licensee underwriting a public
offer for the same enterprise. Alternatively, a conflict may arise where the
objectivity of research is compromised by the analyst's personal interests or
relationships;
• conflicts outside the financial services business
(Category 3);
- where a factor outside the financial services
business gives rise to a conflict with another factor outside the same
financial services business. Examples include where those conflicts might
arise between two non-financial services businesses of a merchant bank (for
example; corporate lending and dealing on the bank's own behalf). Such
conflicts are unrelated to the financial services business.
5.600 The purpose of proposed paragraph 912A(1)(aa)
is to specifically require licensees to have adequate arrangements for managing
Category 1 and Category 2 conflicts of interest. Licensees will not
be obliged under the Corporations Act to manage Category 3 conflicts
of interest, which occur wholly outside their financial services business.
They may have other obligations to manage such conflicts. The Corporations Act
already includes a definition of financial services (see Division 4 of Part 7.1).
5.601
Schedule 11 of the Bill contains a series of miscellaneous
amendments to provisions in the ASIC and Corporations Acts.
5.602
The
Corporations Legislation Amendment Act 2003 (Act
No 24 of 2003) which, among other things, replaced the requirement for
companies to lodge an annual return with ASIC with a range of less-burdensome
reporting requirements, came into operation on 1 July 2003.
5.603 Following enactment of the legislation, a
number of minor drafting and technical matters have been noted which require
correction or clarification. Items 4 to 7, 13 and 14 of the Schedule, which
are described below, make the necessary amendments to the Corporations Act.
• item 4 will replace the reference to `14 days' in
subsection 143(3) with a reference to `28 days'. This will reflect the
amendment of subsection 142(2) by the Corporations Legislation Amendment Act
in relation to the timeframe for notifying ASIC of a change of address of a
company's registered office.
• item 5 will amend paragraph 188(2)(a) to make it
clear that each director of a proprietary company which does not have a company
secretary contravenes subsection 188(2) if the company contravenes a provision
set out in subsection 188(1). Subsection 188(1) of the Act sets out the
responsibilities of company secretaries under the Act to update ASIC
information about the company.
• item 6 will replace the reference to `14 days' in
section 201L with a reference to `28 days'. In addition, item 7 will replace
the reference to `14 days' in Note 1 to section 204D with a reference to
`28 days'. These changes reflect the amendment of section 205B in relation to
the timeframe for notifying ASIC of changes relating to or details of office
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holders of a company.
• item 13 will replace the reference to an `extract
of particulars' in subsection 348D(4) with a reference to a `return of
particulars'. Subsection 348D(4) deals generally with the requirements for
responding to a return of particulars issued by ASIC.
• item 14 will replace the references to `the
Corporations Legislation Amendment Act 2002' appearing in section 1448
(including in the heading to the section) with references to `the
Corporations Legislation Amendment Act 2003'.
5.604
Subsections 295(4) and 303(4) of the Corporations Act,
which, respectively, set out the contents of the directors' declaration on the
annual and half-year financial statements, contain slightly different
requirements for the two declarations. These requirements will be brought into
line with each other.
5.605 Subsection 295(4) requires, among other things,
directors to make a declaration:
• that the financial statements, and the notes
required by the accounting standards, comply with the accounting standards
(paragraph 295(4)(a));
• that the financial statements and notes give a true
and fair view of a company's or, where consolidated financial statements are
required, the consolidated entity's financial position and performance
(paragraph 295(4)(b)); and
• whether, in the directors' opinion, the financial
statements and notes are in accordance with the Corporations Act, including:
- section 296 (which requires the financial report to
comply with the accounting standards); and
- section 297 (which requires the financial
statements and notes to give a true and fair view of a company's or, where
consolidated financial statements are required, the consolidated entity's
financial position and performance) (paragraph 295(4)(d)).
5.606 Although paragraphs 295(4)(a) and (b), which
require directors to make a specific declaration about compliance with sections
296 and 297, differ from paragraph 295(4)(d)[5]
-
, which requires directors to express their opinion about compliance with those
sections, the similarity of the requirements has been an ongoing source of
confusion for many companies and their professional advisers since the
legislation was amended in 1998.
5.607 Item 9 repeals paragraphs 295(4)(a) and
(b). In deciding to repeal these paragraphs, rather than paragraph 295(4)(d),
it was noted that paragraphs 295(4)(a) and (b) impose a higher compliance
burden on companies and their directors in that they must be satisfied that the
financial statements and notes meet the requirements of sections 296 and 297.
There may be circumstances in which directors cannot be totally certain that
these requirements have been satisfied, but would be able to legitimately form
an opinion that the financial statements and notes comply with the requirements
of the Corporations Act, including sections 296 and 297.
5.608 Items 10 and 11 amend subsection 303(4)
(directors' declaration on the half-year financial statements) to bring its
requirements into line with those in subsection 295(4).
5.609
During the preparation of drafting instructions, and the
drafting of provisions, to give effect to the CLERP 9 proposals, a number
of minor technical matters were noted in the ASIC and Corporations Acts which
require correction or clarification. Items 1 to 3, 8, and 12 contain the
necessary amendments to the Acts. The more significant changes are described
below.
• item 1 amends the definition of `international
accounting standards' in section 5 of the ASIC Act by inserting the formal name
of the body responsible for setting international accounting standards:
`International Accounting Standards Board'.
• item 3 amends section 111AO of the Corporations Act
to make it clear that the financial reporting and audit requirements in Chapter
2M apply only to disclosing entities incorporated or formed in Australia.
• item 8 amends section 285 of the Corporations Act
to correct the reference to disclosing entities that have to comply with the
Chapter 2M requirements.
• item 12 amends section 306 of the Corporations Act
by inserting requirements concerning the making and signing of the half-year
directors' report (proposed subsection 306(3)). The amendment brings the
making and signing requirements for the half-year report into line with those
for the annual directors' report.
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FOOTNOTES:
[1] In the Bill,
Schedules 8 and 9 are expressed to commence immediately after the commencement
of Schedule 5.
[2] In the Bill,
Schedule 11 is expressed to commence immediately after the commencement of
Schedules 1 and 2.
[3] The AuASB
currently exists as a board of the Australian Accounting Research Foundation,
an unincorporated body jointly controlled and funded by The Institute of
Chartered Accountants in Australia and CPA Australia.
[4] The excluded
provisions are section 12A (other functions and powers) and Division 2 of
Part 2 (unconscionable conduct and consumer protection in relation to
financial services) of the ASIC Act.
[5] Paragraph
295(4)(d) is the result of an amendment to the Company Law Review Bill moved by
Senator Andrew Murray see page 4013 of the Senate Hansard for 24 June 1998.