Murphy and Australian Securities and Investments Commission
[2004] AATA 1371
•22 December 2004
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2004] AATA 1371
ADMINISTRATIVE APPEALS TRIBUNAL )
) No N2004/368
GENERAL ADMINISTRATIVE DIVISION ) Re TERANCE MURPHY Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal Mrs Josephine Kelly, Senior Member Date22 December 2004
PlaceSydney
Decision The decision of the Australian Securities and Investments Commission dated 5 March 2004 is affirmed.
[sgd] Senior Member
CATCHWORDS
CORPORATIONS LAW – registration as an auditor – requisite practical experience under the regulations – experience implementing external audits claimed – experience in business management claimed – experience under the direction of a person not registered as a company auditor claimed – whether fit and proper person not necessary to be decided – decision affirmed.
LEGISLATION
Corporations Act 2001 sections 307, 308, 309, 1279, 1280, 1317B, 1456
CASE LAW
Re Bird: Bird v NCSC (1985) 3 ACLC 24
Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321
REASONS FOR DECISION
22 December 2004 Mrs Josephine Kelly, Senior Member SUMMARY
1. Mr Murphy is a Certified Practising Accountant (CPA) who wished to help his local community radio station by doing its audit following the resignation of the previous auditors. On 13 November 2002 he applied for registration as an auditor pursuant to s 1279 of the Corporations Act 2001 (“the Act”), and was refused on 5 March 2004. Mr Murphy applied to this Tribunal on 25 March 2004 for a review of that decision. He carried out the audit for the radio station although his application had not been determined, certifying the audit in the capacity of “Auditor (Pending)” (exhibit A9).
2. For the reasons that follow I have concluded that Mr Murphy has not had the practical experience to be registered as an auditor required by s 1280(2)(b) of the Act and I am not satisfied that he is capable of performing the duties of an auditor within the meaning of s 1280(2)(c). This conclusion does not, of course, detract from Mr Murphy’s achievements and abilities as a business manager and CPA, the legislative requirements for registration as an auditor being quite specific and requiring specialised experience.
ISSUES
3. The issues to be decided in this application are whether Mr Murphy:
(a) has the practical experience in auditing as prescribed pursuant to s 1280(2)(b) of the Act, and
(b) is capable of performing the duties of an auditor and is otherwise a fit and proper person to be registered as an auditor as required by s 1280(2)(c).
THE LAW
4. Section 1280 of the Act, inter alia, sets out the criteria which have to be met to be registered as an auditor under the Act. Section 1280(2)(b), which relates to the practical experience necessary, was amended on 1 July 2004 with the effect that the practical experience requirement became s 1280(2)(b)(ii), although the substance of the requirement was unchanged. Section 1280(2)(c) was not amended. On 9 July 2004 a new regulation relating to practical experience came into force.
5. The regulation in force before 9 July 2004 was “9.2.04 Practical experience in auditing”. It provided relevantly:
“For paragraph 1280(2)(b)of the Act, the prescribed practical experience in auditing:
(a) is:
(i) work in auditing under the direction of a registered company auditor for a period of not less than 3 years, including appraising the operations of companies and forming opinions on the matters specified in sections 307, 308 and 309 of the Act; and
(ii) at least one continuous year during the 5 years immediately before the date of the application spent supervising audits of companies; or
(b) is practical experience that in the opinion of ASIC is equivalent to the practical experience specified in paragraph (a)…”
6. The regulation that commenced on 9 July 2004 was 9.2.01. It provides relevantly:
“For subparagraph 1280(2)(b)(ii) of the Act, each of the following is prescribed practical experience in auditing:
(a) during the 5 years immediately before the date of the application, at least 3000 hours of work in auditing under the direction of a registered company auditor, including
(i) appraising the operations of companies and forming opinions on the matters specified in sections 307, 308 and 309 of the Act; and
(ii) at least 750 hours spent supervising audits of companies;
(b) practical experience that, in the opinion of ASIC, is equivalent to the practical experience mentioned in paragraph (a)…”
7. In order to understand the effect of those regulations, it is necessary to refer to sections 307, 308 and 309 of the Act. They provide:
“SECTION 307
Audit
An auditor who conducts an audit of the financial report for a financial year or half-year must form an opinion about:(a) whether the financial report is in accordance with this Act, including:
(i) section 296 or 304 (compliance with accounting standards); and
(ii) section 297 or 305 (true and fair view); and
(aa) if the financial report includes additional information under paragraph 295(3)(c) or 303(3)(c) (information included to give true and fair view of financial position and performance)—whether the inclusion of that additional information was necessary to give the true and fair view required by section 297 or 305; and
(b) whether the auditor has been given all information, explanation and assistance necessary for the conduct of the audit; and
(c) whether the company, registered scheme or disclosing entity has kept financial records sufficient to enable a financial report to be prepared and audited; and
(d) whether the company, registered scheme or disclosing entity has kept other records and registers as required by this Act.
SECT 308
Auditor's report on annual financial report(1) An auditor who audits the financial report for a financial year must report to members on whether the auditor is of the opinion that the financial report is in accordance with this Act, including:
(a) section 296 (compliance with accounting standards); and
(b) section 297 (true and fair view).
If not of that opinion, the auditor's report must say why.
(2) If the auditor is of the opinion that the financial report does not comply with an accounting standard, the auditor's report must, to the extent it is practicable to do so, quantify the effect that non-compliance has on the financial report. If it is not practicable to quantify the effect fully, the report must say why.
(3) The auditor's report must describe:
(a) any defect or irregularity in the financial report; and
(b) any deficiency, failure or shortcoming in respect of the matters referred to in paragraph 307(b), (c) or (d).
(3A) The auditor's report must include any statements or disclosures required by the auditing standards.
(3B) If the financial report includes additional information under paragraph 295(3)(c) (information included to give true and fair view of financial position and performance), the auditor's report must also include a statement of the auditor's opinion on whether the inclusion of that additional information was necessary to give the true and fair view required by section 297.
(4) The report must specify the date on which it is made.
(5) An offence based on subsection (1), (3), (3A) or (4) is an offence of strict liability.
SECT 309
Auditor's report on half-year financial report
Audit of financial report(1) An auditor who audits the financial report for a half-year must report to members on whether the auditor is of the opinion that the financial report is in accordance with this Act, including:
(a) section 304 (compliance with accounting standards); and
(b) section 305 (true and fair view).
If not of that opinion, the auditor's report must say why.
(2) If the auditor is of the opinion that the financial report does not comply with an accounting standard, the auditor's report must, to the extent that it is practicable to do so, quantify the effect that non-compliance has on the financial report. If it is not practicable to quantify the effect fully, the report must say why.
(3) The auditor's report must describe:
(a) any defect or irregularity in the financial report; and
(b) any deficiency, failure or shortcoming in respect of the matters referred to in paragraph 307(b), (c) or (d).
Review of financial report
(4) An auditor who reviews the financial report for a half-year must report to members on whether the auditor became aware of any matter in the course of the review that makes the auditor believe that the financial report does not comply with Division 2.
(5) A report under subsection (4) must:
(a) describe any matter referred to in subsection (4); and
(b) say why that matter makes the auditor believe that the financial report does not comply with Division 2.
(5A) The auditor's report must include any statements or disclosures required by the auditing standards.
(5B) If the financial report includes additional information under paragraph 303(3)(c) (information included to give true and fair view of financial position and performance), the auditor's report must also include a statement of the auditor's opinion on whether the inclusion of that additional information was necessary to give the true and fair view required by section 305.
Report to specify day made
(6) A report under subsection (1) or (4) must specify the date on which it is made.
(7) An offence based on subsection (1), (3), (4), (5), (5A) or (6) is an offence of strict liability.”
WHICH REGULATION IS APPLICABLE?
8. Section 1456 of the Act entitled “Audit reforms in Schedule 1 to the amending Act (new competency standard provisions)” provides:
“If an application by a person for registration as a registered company auditor;
(a) is lodged with ASIC before the Schedule 1 commencement; and
(b) has not been determined before that day;
section 1280 of the old Act continues to apply to the application despite the amendments made by the amending Act.”
The relevant Schedule 1 (to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004), commenced on 1 July 2004.
9. In my opinion, s 1456 applies to Mr Murphy’s application. The application was lodged before Schedule 1 commenced but was not “determined” before that day. The decision of ASIC of 5 March 2004 did not “determine” the matter, there being a right of review pursuant to s 1317B(1)(b) of the Act. As s 1280(2)(b) applies, the regulation prescribed in respect of that provision, Regulation 9.2.04 is applicable. However, in case that conclusion is not correct, I provide my findings in relation to both regulations.
DOES MR MURPHY HAVE THE PRACTICAL EXPERIENCE IN AUDITING PRESCRIBED PURSUANT TO S 1280(2)(b) OF THE ACT?
10. Mr Murphy carried out an audit of the community radio station in 2003. He was then an associate of an accounting practice owned by Mr Barry Martz. Mr Murphy purchased the practice in October 2003 and Mr Martz is now a consultant. Mr Martz was not a registered company auditor when the audit was done, although he had carried out audits of companies between 1964 and 1978 in Canberra. Mr Marz may have been appropriately registered at that time, however, he specifically stated that he did not seek registration with ASIC in 1990 when he started his own practice. He was accepted by the Real Estate Institute of New South Wales to audit real estate agent clients after that date, however I am not satisfied that makes Mr Marz equivalent to a registered company auditor. In any event, Mr Murphy made it clear that he was not under Mr Martz’s “direction” when he was carrying out the audit. He was able to ask Mr Martz for advice, but that was the extent of Mr Martz’s involvement.
11. Mr Murphy described his involvement with the radio station as “hands on” and emphasised that the radio station had gone from a loss to a profit under his guidance. He became very involved in the running of it, which took up a lot of his time. The result is that I am uncertain as to the number of hours he spent preparing the audit as opposed to being involved in the running of the radio station. Further, it was not a complex audit. The figure of 450 hours is not justified.
12. This audit cannot be taken into account pursuant to regulation 9.2.04(a)(i) because it was not undertaken under the supervision of a registered company auditor and does not satisfy subclause (b) of the regulation because there was relevantly no direction by a person with skills equivalent to a registered company auditor.
13. The audit may be taken into account for the purpose of satisfying regulation 9.2.04(a)(ii), although the 450 hours is an over-estimate. Of itself, that audit of the radio station is not sufficient to satisfy that requirement of that regulation.
14. The audit of the radio station does not satisfy regulation 9.2.01(a) because it was not undertaken under the direction of a registered company auditor. It was also not the equivalent of such practical experience pursuant to 9.2.01(b).
15. Mr Murphy included in Appendix C to his application, a reference to a company called “Ho Shin”, claiming 250 hours of auditing time in 2002 and 100 in 2003. He listed Mr Barry Martz as his supervising auditor. As explained above, I have found that Mr Martz was not a registered company auditor at the time of the audit. Further, this was a small proprietary company which was not required to lodge with ASIC financial reports, directors’ statements or auditors’ reports. This work was not relevantly auditing work and was not equivalent to such work.
16. In coming to that conclusion I rely on the decision of Murray J in Re Bird: Bird v NCSC (1985) 3 ACLC 24. In that case, the applicant for registration had extensive experience in auditing in a number of government and quasi-government organisations, as well as auditing solicitors’ trust accounts. The regulation in issue was similar to the two regulations addressed in this decision in terms of the requirements for practical experience under direction of a registered company auditor, supervising company audits or equivalent practical experience. His Honour said at page 28 “… it cannot be said that experience which does not contain experience in the actual auditing of the accounts of companies and the appraisal of the operations of companies and the formation of the opinions required of a company auditor can be regarded as equivalent to the practical experience required by the regulation”. His Honour was not satisfied that the experience relied on in that case was equivalent to the work of an auditor.
17. Mr Murphy referred in passing in his oral evidence to auditing about 50 superannuation funds with an average of $200,000 to $300,000 invested in them, and totalling approximately $10,000,000. However, there is no evidence of how much of Mr Murphy’s time was taken up doing that work. For that reason, it cannot be taken into account. There are further reasons for not doing so.
18. Mr Pipett, an auditor since 1970 and registered company auditor since 1982, was called by ASIC and cross-examined by Mr Murphy about this work. Mr Pippet worked with Coopers & Lybrand from 1970 to 1980 and from 1980 was a senior audit partner at an international accounting firm, BDO. He retired in 1997 but rejoined the workforce in November 2003 with ASIC to help set up a new Audit Surveillance Team. That team’s role is to lift the standard of the Australian auditing profession. He accepted that the requirements for auditing superannuation funds would meet about a third of the requirements for a registered company audit, although they were carried out under different legislation.
19. Despite Mr Pipett’s evidence, in my opinion, the auditing of superannuation funds is not equivalent to the practical experience required by the Act and regulations and I would not take it into account for that reason. In coming to that conclusion, I rely on Re Bird.
20. In Appendix C to Mr Murphy’s application, he described his position with the CSR Timber mill as “auditor” for three years from 1999 to 2001. He claimed 1000 hours of supervisory experience. However, principally what Mr Murphy did was to implement the recommendations contained within an audit that had been carried out by auditors Coopers & Lybrand. I do not consider that such work satisfies the regulations.
21. In oral evidence he said that the “audit” took on a life of its own. That is, he found additional problems which he fixed. He was “using it (the audit) as a weapon to revive the business”, prevented it from closing and made it “the best sawmill in Australia”. He improved the productivity of the mill by securing “the biggest order off seas [China] that CSR had ever received” which allowed the mill to operate at full capacity rather than 50% capacity and to go from a $6 million loss to a $4 million gain in 12 months. While those results are highly commendable, the work involved does not satisfy the practical experience requirements for registration under the Act as an auditor pursuant to either regulation and I do not take that into account. It is work involved in running the business, not auditing it.
22. Mr Murphy claimed a further 600 hours in respect of supervisory audits of a Joint Venture between CSR and Boral in relation to the same mill. In the course of his evidence, Mr Murphy seemed to say that he was being guided by a registered auditor who was Boral’s accountant for the Joint Venture, but at other times emphasised that it was a team effort and he also helped out the other accountant. They prepared financial reports for the Joint Venture, however those reports were not subject to the requirements under Chapter 2M of the Act. The work was not relevantly auditing for the purposes of the Act and was not equivalent to such experience. I am also not satisfied that Mr Murphy was working under the direction of a registered company auditor. That work does not satisfy either regulation.
23. Mr Murphy was employed by Oakbridge Pty Limited for a period of six months as the Commercial Manager of a mine. His responsibilities included the financial position of the mine. In Appendix C to his application, he stated that he was the internal auditor with Coopers & Lybrand being the external auditor. The mine “was stand alone” and produced its own reports. This information does not suggest that Mr Murphy was undertaking any work which would satisfy the regulations. At highest, he may have been involved in implementing the audit undertaken by others. I do not consider that this experience falls within either of the regulations.
24. Mr Murphy relied on what he termed his “supervisory experience” with James Hardie which he calculated at 4,400 hours. Mr Murphy was employed as an accountant with the company for 11 years. In Appendix C to his application he described his level within the firm as “internal auditor”. He said he carried out “audits” for a period of 3 years under the supervision of Mr Round, who Mr Murphy believed was a registered auditor. At that time Mr Murphy was the senior accountant of the Building Boards division of James Hardie.
25. A search of ASIC’s register of auditors carried out by Mr Pippet did not disclose Mr Round’s name. Mr Pippet is a user of that system but has no knowledge of its maintenance. It emerged in the course of evidence that he had carried out a search to find registered auditors in the area where Mr Murphy works which disclosed the previous auditor of the radio station as still being registered. That was incorrect as ASIC had approved the resignation of that person in 2002. The accuracy of the computer records is questionable.
26. For that reason, I assume in Mr Murphy’s favour that Mr Round was a registered company auditor. However, the nature of the audit being undertaken by Mr Round is unclear on the evidence. It may have been an audit of the division of James Hardie in which Mr Murphy worked for the purpose of the company, or it may have been an audit of the financial report of that division.
27. Further, Mr Murphy’s evidence about this work changed. In written material provided to ASIC, he stated that his job was to assist in ensuring that all recommendations of the audit report were met in the branches of James Hardie for which he was responsible, that is, he was supervising the implementation of the audit recommendations. However, in the hearing before ASIC and his oral evidence in this Tribunal he described how he assisted Mr Round in the carrying out of the audit. In either case, he was not supervising the audit.
28. Mr Murphy may have assisted Mr Round by providing information necessary for the audit, however, I am not persuaded that he was involved in conducting the audit such as to satisfy the regulations.
29. For those reasons I am not persuaded that the work Mr Murphy did carry out was work that satisfies either regulation.
30. I do not consider that Mr Murphy’s experience undertaking “audits” of the James Hardie Social Club, the Springwood Blind Society, Springwood Red Cross, Macquarie Liberal Party and Myall Lake Greens party is experience which satisfies either of the regulations. The work involved was not the auditing of the financial reports of companies and applying Re Bird is not equivalent to such experience.
31. Mr Murphy’s application is unsuccessful because I am not satisfied that he has had the practical experience required under either regulation 9.2.04 or 9.2.01.
SECTION 1280(2)(c)
32. Section 1280(2)(c) was also in issue and although not necessary for this decision, I address it briefly.
33. There are two aspects of this provision. The first is whether I am satisfied that Mr Murphy is capable of performing the duties of an auditor. A matter of concern to me during the course of the evidence was Mr Murphy’s confusion or misunderstanding of what an audit involves under the Act. He seemed to confuse that concept with the efficient management of a business. He did not seem to appreciate that a registered company auditor is to be independent of the entity being audited.
34. Mr Murphy’s misunderstanding resulted in his including, in his application and in his evidence, work of a kind that does not satisfy the requirements of the Act and the regulations. This confusion or misunderstanding reflects his lack of understanding of what auditing is and also his lack of experience doing such work.
35. A further matter of concern were the errors Mr Murphy made in the audit report of the radio station. I do not make findings on the seriousness of the errors because the evidence of Mr Pippet and Mr Murphy was inconclusive on this point. However, the fact that there were errors reinforces the conclusion that Mr Murphy has not had a great deal of experience in carrying out audits. I would have expected Mr Murphy to have taken great care with this particular audit, given that his reason for applying for registration was to carry out the audits for the radio station, and his application was being considered by ASIC at the time he was preparing the audit and when it was lodged with ASIC.
36. For those reasons I am not satisfied that Mr Murphy is capable of performing the duties of an auditor within the meaning of s 1280(2)(c) of the Act.
37. Mr Johnson argued that the second part of s 1280(2)(c) was not satisfied. That is, that I would not be satisfied that Mr Murphy is otherwise a fit and proper person to be registered as an auditor. He relied on the discussion of “fit and proper person” in Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321. Given the findings above, it not necessary for me to consider this aspect of the case and I do not. It raises a question of statutory interpretation which was not fully argued and therefore it is appropriate to leave that question for another time.
DECISION
38. The decision of the Australian Securities and Investments Commission dated 5 March 2004 is affirmed.
I certify that the 38 preceding paragraphs are a true copy of the reasons for the decision herein of Mrs Josephine Kelly, Senior Member.
Signed: Guy Moloney .....................................................................................
Associate
Date/s of Hearing 13, 24 September, 19 October 2004
Date of Decision 22 December 2004
Counsel for the Respondent G. Johnson
Solicitor for the Respondent G. Heaton (ASIC)
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