The Government's CLERP Program has steadily modernised Australia's corporations law and given it an economic focus, introducing world's best practice in business regulation. Market developments continue to focus the Government's attention on regulation that protects the legitimate interests of all market participants, including the individual owners of shares and the companies in which they invest. Australia is well served by a highly skilled accounting profession. However it is timely for Australia to review its own regulatory framework in this area, in view of widespread questioning overseas of the quality of financial disclosure and supporting regulatory structures.
So the issues explained before which very much relate to the audit function, can be analysed that how well the bill CLERP 9 addresses them.
The release of paper CLERP 9 addressed the Ramsay report on auditor independence together with a number of other issues on financial disclosure. A list of key issues in the discussion paper are:
Audit Reform
Audit reform, including:
- the market for audit and non-audit services;
- the institutional framework for setting auditing standards and whether they should be given the force of law;
- the rules and practices governing the audit engagement including appointment and removal of auditors and related corporate governance arrangements;
- auditor independence issues canvassed in the Ramsay report including:
- proposed amendments of the Corporations Act to strengthen the independence objective, require an annual independence statement from auditors, and strengthen provisions relating to employment, financial and business relationships between auditors and their clients;
- proposals to require disclosure of individual non-audit services and fees, address the question of limits on the provision of non-audit services, and strengthen the role of audit committees in relation to auditor independence;
- whether a new oversight body is needed to monitor and advise the Government on auditor independence issues, including a role in monitoring the adequacy of independence processes used by audit firms and compliance by companies;
- the structures for oversight of the profession, including disciplinary procedures, ethical rules, external quality assurance, educational requirements, professional development, competency standards etc; and
- liability issues, drawing on current work in the context of public liability and medical indemnity insurance, including the question of incorporation of auditors.
Disclosure Framework
- a review of the present continuous disclosure regime;
- conflicts of interest in relation to the provision of financial product advice;
- review of the current disclosure requirements for shares and debentures including:
- whether they should be merged into the general financial product disclosure requirements inserted by the Financial Services Reform Act;
- placements and other disclosure issues; and
- the sophisticated investor test.
Shareholder Participation
- consideration of possible amendments to the Corporations Act to encourage investors to become more active in companies they invest in (eg. simplification of notices of meetings)."
The Ramsay Report on Independence of Australian Company Auditors made recommendations to the Government designed to ensure the independence of auditors from the companies they audit. As well as providing a response to the Ramsay report, the discussion paper considered a range of issues relating to the quality of audit, including a review of oversight structures for the profession and for auditing standards.
Accountability and disclosure are central to the integrity and efficiency of markets. The package of proposals addressed in the CLERP 9 paper is directed to ensure, that Australia has an effective regulatory and disclosure framework that is at the forefront of defining world's best practice and provides the structures and incentives for a fully informed marketThe CLERP 9 reforms in their entirety should pave the way for a more effective disclosure regime and help to restore investor confidence, which was badly shaken by the collapses of HIH, Pasminco and other companies.
Indeed many of the shortcomings identified by the HIH Royal Commission are addressed in the CLERP 9 proposals. The independence of auditors will be re-defined; a cooling-off period of four years will apply before an audit partner can become a director of a client and no more than one former audit partner will be able to join a client at any time.
Companies will also have to provide details of all non-audit work, the fees applicable to each item and a statement explaining why those non-audit services do not compromise audit independence.
Arguably none of these measures go quite far enough. There is always potential for companies to make use of non-audit services as a bargaining point, and for auditors, wishing to retain high value fee work, to appease their client companies.
The Australian Shareholders’ Association would like to see auditors debarred from undertaking other services for their clients and audit partners prohibited from employment by former client companies. Why fiddle around with half-measures that may still compromise the integrity of an audit?
Other audit requirements include attendance at AGMs, rotation after five years, an ability to incorporate and the introduction of a regime of proportionate liability to ensure that liability rests with all defendants in proportion to their contribution to a plaintiff's loss. ASIC will be able to impose conditions on an auditors' registration.
One other important result of the HIH enquiry is the requirement to prepare an operating and financial review that will give an overview of the past, present and expected future direction of the company. If taken seriously, this will become one of the most useful sections of an annual report.
CLERP 9 proposes a number of measures to enhance disclosures. ASIC will be empowered to issue infringement notices and impose on-the-spot fines for companies guilty of poor disclosure. Penalties for contravention will be increased from $200,000 to $1,000,000 and civil penalties will be introduced for individuals who contravene the continuous disclosure regime.
Disclosure requirements applying to director and executive remuneration will also be expanded and enhanced. In particular shareholders will have a greater say in the termination benefits of directors and be able to signal their unhappiness with executive remuneration by way of a non-binding vote.
While shareholders do not want to be involved in the management of their companies, the hardheads within the Business Council of Australia should be aware of the cynicism that runs deep amongst shareholders. Directors and management have acquiesced in soaring executive remuneration. It is nonsense to blame current disclosure requirements.
Shareholder participation and even activism is encouraged throughout the CLERP 9 proposals.
Activist shareholders will of course remind their companies that corporate governance is not an end in itself. It needs to be kept in perspective. Like good management it is one, albeit important, cog in the wheel that delivers dividends and share price growth. Smart shareholders will keep the focus on the generation of long-term shareholder value.
Comparison of auditing legislations in US, UK and New Zealand with Australia.
In Australia
The latest phase in the Corporate Law Economic Reform Program (CLERP) is a review of audit regulation, corporate disclosure framework and shareholder participation to improve the accountability and transparency of public companies.
The Federal Government released the CLERP (Audit Reform & Corporate Disclosure) Bill, also known as CLERP 9 on 8 October 2003. The key reforms include giving auditing standards the force of law, measures to enhance auditor independence, provisions intended to promote greater transparency in financial reporting and stronger enforcement mechanisms for continuous disclosure. The Bill was introduced into parliament in December 2003 and is commenced from 1 July 2004.
In the United Kingdom
The UK Government published its core proposals for reform in a White Paper entitled Modernising Company Law.
The listing regime in the UK has been under review by the Financial Services Authority (FSA). In its discussion paper published in July 2002, the review focuses on, amongst other things, corporate governance and financial information. The London Stock Exchange has also announced that it is considering a number of proposed changes to the Alternative Investment Market rules including disclosure of dealings by directors or families in a related financial product.
The Financial Reporting Council (FRC), which keeps the Combined Code under review has agreed to the text of a new Code. The new Code will apply to listed companies for reporting years beginning on or after 1 November 2003.
The FSA will annex the new Combined Code to the Listing Rules and will seek to make consequential Rule changes after consultation.
In New Zealand
The New Zealand Stock Exchange (NZSE) Listing Rules set out corporate governance requirements for companies listed on the NZSE. On 1 December 2002, the Listing Rules were amended to include rules relating to the disclosure of directors’ interests in listed companies.
The NZSE Board has made a policy decision to increase the corporate governance obligations of listed companies and, to this end, has released proposed Listing Rule changes relating to corporate governance together with a Corporate Governance Best Practice Code, intended to be included as an appendix to the Listing Rules. Included in these proposed changes are mandatory audit committees for listed companies and the voluntary adoption by listed companies of a code of ethics. The Institute of Chartered Accountants of New Zealand is also currently looking into the area of corporate governance and corporate transparency. A discussion paper on corporate transparency has been released and submissions have been received, but as yet there is no set of recommendations from the Institute.
The Institute is looking closely at developments in the area of corporate governance in various jurisdictions around the world. Furthermore, a new code of ethics for accountants addressing issues concerning corporate governance has been introduced effective from 1 July 2003.
In the United States
The Sarbanes-Oxley Act, signed into law on 30 July 2002 in response to the collapse of Enron, WorldCom and other high-profile business failures. The Act introduced corporate governance reforms relating primarily to corporate disclosure and auditor independence. Unlike Australia, the United Kingdom and New Zealand, the US has adopted a more rigid legislative and prescriptive approach to corporate governance.
The New York Stock Exchange (NYSE) has submitted proposals to the Securities and Exchange Commission (SEC) to revise their listing standards to reflect the corporate governance reforms introduced by the Sarbanes-Oxley Act. All listed companies are required to comply with the new NYSE standards within 18 months of SEC approval of the rules. The Conference Board formed a highly respected 12 member commission in June 2002 to issue best practice guidelines. The Conference Board Commission has produced findings and recommendations on executive compensation, corporate governance and auditing. The Business Roundtable, an association of chief executive officers committed to improving public policy, produced a white paper known as the Principles of Corporate Governance in May 2002. The principles are also intended to be used as a best practice guide.
CLERP 9 development
In conclusion, the CLERP 9 developments are unique to Australia. However there have been similar legislation reforms in other countries, at the time of writing CLERP 9. There was the introduction of the Sarbanes-Oxley legislation in the USA, and CLERP 9 here in Australia. All legislation reforms in different countries are likely to interact with other jurisdiction. For example, the Sarbanes - Oxley Act not only affects US companies and auditors, but also any audit firm working as an auditor of a public traded US company or its subsidiary. That means the Act cover any Australia audit firm that does the audit of a subsidiary of a US listed company.
References
Gay, G.E. & R. Simnett (2003), Auditing and Assurance Services in Australia, 2nd ed., McGraw-Hill Australia
Victorian Auditor General’s Office, <>, assessed 25th September 2004
Australian Securities and Investments Commission (ASIC), <>, assessed 20th September 2004
Australian Shareholders’ Association limited, <> assessed 25th September 2004
Lawyers Weekly, <>, assessed 29th September 2004
MinterEllison Lawyers, <>, assessed 29th September 2004