ASIC CLASS ORDER [05/0083]
EXPLANATORY STATEMENT
Prepared by the Australian Securities and Investments Commission
Corporations Act 2001
Paragraph 341(1) – Order
Paragraph 341(1) of the Corporations Act 2001 (the Act) provides that the Australian Securities and Investments Commission may make an order in respect of a specified class of companies, registered schemes or disclosing entities that relieves the entities in question, their directors and/or auditors from specified requirements of Parts 2M.2, 2M.3 or 2M.4 (other than Division 4) of the Act.
1. Background
The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (the CLERP 9 Act) introduced a new provision into the Act which requires an individual auditor or, if the audit is conducted by an audit firm or audit company, the lead auditor, to make an independence declaration specifying the matters in s307C(1) or 307C(3) as applicable ("the independence declaration").
The Act requires the independence declaration to be included in the directors' report: s298(1) and 306(2) The Act also requires the auditor to give the independence declaration to the directors with the auditor's report: s307C(5). This means that the auditor's report is required to be signed before the directors' report.
This timing requirement is not consistent with the requirements of the auditing standards (which have the force of law under the Act: s307A). Auditing standards require the auditor to comment in the auditor's report on any material inconsistencies between the directors' report and the financial report, and to consider the impact of any material misstatements of fact in the directors' report. This requirement means that the auditor should not conclude the auditor's report until the signed directors' report has been reviewed by the auditor.
This matter first affects financial reports for half-years and full years commencing on or after 1 July 2004.
2. Purpose of the class order
Class Order 05/0083 modifies the timing of the independence declaration, the directors' report that accompanies a financial report, and the audit report on that financial report to allow the Act and the auditing standards to operate in a more effective manner. It does this in a way that:
(a) does not reduce the information available to users of the financial report concerning the auditor's independence;
(b) still requires the auditor to make representations on audit independence available to directors at the time they resolve to make the directors' report; and
(c) allows the auditor to consider the signed directors' report when finalising the audit report.
3. The class order
Class Order 05/0083 allows the auditor's report to be signed after the independence declaration is given to the directors, rather than requiring both documents being completed at the same time. The order requires the auditor to provide an update to the independence declaration by way of a statement in the auditor's report.
Relief may be relied upon where:
(a) The independence declaration is given to the directors before the directors resolve to make the relevant directors’ report.
(b) The directors' report is signed within 7 days after the independence declaration is provided to the directors.
(c) The relevant auditor’s report is made within 7 days after the directors’ report is signed and includes a statement or statements to the effect that either:
(i) the independence declaration would be in the same terms if it was given to the directors at the time the audit report is made; or
(ii) circumstances have changed since the independence declaration was given to the directors and setting out how the declaration would differ if it was given to the directors at the time the audit report is made.
4. Consultation
The issue addressed by this class order was raised by, and discussed with, some key industry players.
However, ASIC did not undertake any formal consultation with stakeholders before this instrument was made. Formal consultation was not undertaken because this matter needs to be resolved urgently as it affects reporting for half-years ended 31 December 2004. Additionally, this instrument is essentially of a technical nature to ensure that the legislation operates in an effective manner.