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.