Peter Costello

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Government Releases Exposure Draft Legislation on Audit Reform & Corporate Disclosure

NO.087

GOVERNMENT RELEASES EXPOSURE DRAFT LEGISLATION ON AUDIT REFORM & CORPORATE DISCLOSURE

Today I am releasing the Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) Bill and accompanying commentary for public consultation.

The draft Bill continues the work of the Government’s Corporate Law Economic Reform Program, to modernise business regulation and foster a strong and vibrant economy, progressing the principles of market freedom, investor protection and quality disclosure of relevant information to the market.

The underlying objective of the draft Bill is to improve the operation of the market by promoting transparency, accountability and shareholder rights. The Bill takes a balanced approach to corporate regulation, containing measures to enhance auditor independence, achieve better disclosure outcomes and improve enforcement arrangements for corporate misbehaviour, whilst still fostering innovation and wealth creation. The Bill will significantly improve the overall regulatory framework for auditors.

Key features of the draft Bill are outlined in the attached document.

The draft Bill generally implements the reforms proposed in the CLERP 9 policy proposal paper and also reflects the outcome of consultations undertaken since the paper’s release.

In addition, the draft Bill incorporates recommendations of the Ramsay Report (Independence of Australian Company Auditors), the report of the HIH Royal Commission, and takes account of relevant recommendations of the report of the Joint Committee of Public Accounts and Audit (Report 391 Review of Independent Auditing by Registered Company Auditors).

Substantial effort has gone into producing this legislation and I would like to take this opportunity to thank the Business Regulation Advisory Group for providing valuable input into the development of the legislation.

I also wish to acknowledge the extensive work of my former Parliamentary Secretary, Senator the Hon. Ian Campbell, in advancing the project to this stage. Senator Campbell’s active involvement has ensured that the overall CLERP program has delivered significant and lasting reforms to Australia’s business regulation.

The Government is seeking comments from business and the community to ensure that the reforms are effective and achieve optimum outcomes for shareholders and investors. The Bill is intended to be introduced into Parliament in December with commencement from 1 July 2004.

Comments on the draft Bill should be sent by 10 November 2003 to:

The General Manager
Corporations and Financial Services Division
Department of the Treasury
Langton Crescent
PARKES ACT 2600

Copies of the Bill and commentary are available at http://www.treasurer.gov.au or from the Treasury Website at http://www.treasury.gov.au.

CANBERRA
8 October 2003

Contact:
David Alexander
Treasurer's Office
02 6277 7340


KEY REFORMS

Audit oversight arrangements

  • The Financial Reporting Council’s (FRC) role will be expanded to include oversight of the audit standard setting arrangements. The Auditing and Assurance Standards Board (AUASB) will be reconstituted with a Government appointed Chairman under the oversight of the FRC, similar to the Australian Accounting Standards Board. Auditing standards made by the AUASB will be given legislative backing.
    • CLERP 9 originally proposed that only ‘core’ auditing standards be given legislative backing. However, given the views of stakeholders and ASIC that it is not possible to identify a selection of auditing standards that encompass the key issues that are applicable to Corporations Act audits, all standards will have legal backing.
  • The FRC will also have an oversight and monitoring function in relation to auditor independence. This role will include advising the Minister on the nature and overall adequacy of the systems and processes used by:
    • auditors to ensure compliance with independence requirements; and
    • professional accounting bodies for planning and performing quality assurance reviews of audit work.

Auditor independence

  • The Bill contains a range of measures to enhance auditor independence including:
    • Introduction of a general standard of independence and a requirement that auditors provide directors with an annual declaration that they have maintained their independence.
    • Restrictions on specific employment and financial relationships between auditors and their clients.
    • Restrictions on particular persons joining the audited body as an officer. In this respect the Bill will implement the recommendations of the HIH Royal Commission report:
      • A waiting period of 4 years will apply to partners of an audit firm or directors of an audit company directly involved in the audit of the audited body.
      • A waiting period of 2 years will apply to partners of an audit firm or directors of an audit client not directly involved in the audit of the audited body.
      • A waiting period of 4 years will apply to a professional member of an audit team in relation to the audit of the audited body.
    • Mandatory auditor rotation after 5 consecutive years with a 2 year cooling off period before a person who has played a ‘significant role’ in the audit can be reassigned to that audited body.
      • In light of concerns surrounding the impact of this requirement on smaller audit firms and those operating in rural and regional areas, the original CLERP 9 proposal has been modified to allow ASIC to extend the period after which rotation is required to up to 7 consecutive years.
    • 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 the service. In addition, the annual directors’ report of each listed company must include a statement by directors that they are satisfied that the provision of non-audit services does not compromise independence.
      • CLERP 9 originally proposed that disclosure regarding non-audit services be made in relation to 9 specified categories of non-audit services. This requirement has been changed to reflect the recommendations of the HIH Royal Commission report.
    • A requirement that the lead engagement auditor (or a suitably qualified representative) attend the AGM of a listed client when the auditor’s report on the financial statements is tabled and answer questions relevant to the audit.

Proportionate liability and incorporation of audit firms

  • The Bill implements a proportionate liability regime in respect of economic loss or damage to property. This regime is part of a broader framework for professional liability reform being developed by the Commonwealth, States and Territory Treasury Ministers. The amendments are being advanced in consultation with the Ministerial Council on Corporations and the Standing Committee of Attorneys-General.
  • Key features of the liability model are:
    • 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 could 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.
  • The Bill also makes provision for audit firms to incorporate to address concern that the structure of audit firms as partnerships has the effect of making all partners liable for the actions of each of the other partners despite the fact that a partner may not have been involved in the wrongdoing which causes the loss.

CEO/CFO sign-off

  • The Bill requires Chief Executive and Chief Financial Officers of listed entities to make a written declaration to the board of directors that the annual financial statements are in accordance with the Corporations Act and accounting standards, the statements present a true and fair view of the entity’s financial position and the financial records of the entity have been kept in accordance with the Corporations Act. This requirement will not detract from the responsibilities of directors.
    • While CLERP 9 did not make any policy recommendations on this issue, there has been broad stakeholder support for such a requirement. The Joint Committee of Public Accounts and Audit and a number of submissions received on CLERP 9 supported the introduction of this measure.

Management discussion and analysis

  • In keeping with a recommendation of the HIH Royal Commission, the Bill will require the annual directors’ report to include an operating and financial review. The review will contain information that members of the company would reasonably require to make an informed assessment of the operations, financial position, and future strategies of the company.

Financial Reporting Panel

  • The Bill will establish a Financial Reporting Panel to resolve disputes on a non-binding basis between ASIC and companies on whether a company’s financial statements have been prepared in accordance with the accounting standards and represent a true and fair view.
    • While the original CLERP 9 paper did not make any policy recommendations on this issue, there has been substantial support from stakeholders for a dispute resolution body of this nature.

Protection for employees reporting breaches to ASIC

  • The Bill affords qualified privilege and protection from victimisation to company officers and others in relation to disclosures made to ASIC in good faith and on reasonable grounds regarding breaches or suspected breaches of the corporations legislation.

Registration of auditors

  • The Bill provides that persons can be registered as company auditors where:
    • they meet enhanced educational requirements, including completion of a specialist course in auditing; and
    • they satisfy the practical experience requirements contained in a competency standard on auditing.
  • Auditors will be required to lodge an annual statement, in place of the current triennial reporting requirement.
    • This change to the original CLERP 9 policy has been made in response to evidence that the triennial reporting requirement does not provide up to date information for surveillance purposes. The Ramsay report endorsed this proposal.
  • ASIC will be able to impose conditions on the registration of auditors.
    • CLERP 9 did not originally propose such a facility. This measure is designed to provide ASIC with greater flexibility in considering applications for registration and to enhance post-registration supervision.

Continuous disclosure and infringement notices

  • Civil liability for a breach of the Corporations Act continuous disclosure provisions will be extended to individuals involved in a contravention by a disclosing entity.
  • ASIC will be given a power to issue an infringement notice containing a financial penalty to a disclosing entity where ASIC has reasonable grounds to believe the entity has breached its continuous disclosure obligations.
    • The financial penalty specified in the notice will be $33,000, $66,000 or $100,000, depending on the entity’s market capitalisation and whether the entity had previously contravened the continuous disclosure provisions.
    • ASIC will not be able to issue an infringement notice unless it has held a hearing in relation to the matter at which the entity involved must be permitted to give evidence and make submissions.
    • It is intended that infringement notices only be used in relation to less serious contraventions of the continuous disclosure regime.
  • CLERP 9 originally proposed that ASIC have the power to issue infringement notices specifying payment of a fixed financial penalty in relation to contraventions of the continuous disclosure regime.

Remuneration disclosure

  • Details of directors’ and executives’ remuneration will need to be disclosed in a clearly marked section of the annual directors’ report. Shareholders will be able to comment on the content of the report and vote on a non-binding resolution to adopt the remuneration disclosures.
    • The vote will be advisory only and does not derogate from the responsibilities of directors to determine the remuneration of executives.
  • Consistent with the current provisions of the Corporations Act, directors and senior mangers will be required to disclosure information on their remuneration. The disclosure requirements will be extended to apply to the corporate group and in this respect disclosure of the top 5 senior managers in the group will also be required.
    • The term ‘senior manager’ does not represent a change in the persons to whom the provisions apply. It merely reflects a technical change to implement the recommendations of the HIH Royal Commission report.
  • The Bill also amends the shareholder approval requirements in relation to directors’ termination payments. It is proposed that the existing exemptions from the requirement to seek shareholder approval in respect of damages for breach of contract and agreements entered into before a director agrees to hold office will no longer apply where the payments exceed a certain limit.

These changes build on proposals originally contained in the Corporations Amendment Bill 2002 (released for public comment in December 2002).

Managing conflicts of interest

  • The Bill introduces a specific licensing obligation for financial services licensees to have adequate arrangements for managing conflicts of interest. This will be supplemented by an ASIC Policy Statement, a draft of which is expected to be released for comment during the Bill’s exposure period.
    • CLERP 9 originally proposed that ASIC provide guidance on the level and manner of disclosure of conflicts of interest required under the duty to provide financial services ‘efficiently, honestly and fairly’. The current proposal provides a stronger legislative basis under which ASIC can develop guidance.

Disclosure of fundraising documents

  • The Bill expressly provides that disclosure documents must be presented in a clear, concise and effective manner.
  • In relation to Product Disclosure Statements for Continuously Quoted Securities, the Bill will:
    • permit issuers of managed investment products that are continuously quoted securities to issue shorter or transaction specific Product Disclosure Statements; 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.
  • The Bill also provides an exemption from the requirement to prepare a disclosure document 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.
  • Similar relief is granted in respect of the Chapter 7 secondary sale provisions.

CLERP 9 originally proposed to align more closely the exemptions from the disclosure regimes that apply to sophisticated investors and wholesale clients under Chapters 6D and 7 of the Corporations Act. To allow for a smooth transition to the Financial Services Reform Act (FSRA) regime, it was considered that this issue would be more appropriately considered after industry has fully transitioned to the FSRA regime.

8 Oct 2003

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