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.
Overview
The ASIC Class Order 05/0083, issued in 2005, addresses a specific issue identified within the Corporations Act 2001, particularly concerning the timing of auditor independence declarations and the signing of directors' and auditors' reports. This order was introduced to resolve the inconsistency between the requirements of the Act and the auditing standards, which necessitated that auditors consider the signed directors' report when finalising their audit report. Enacted by the Australian Securities and Investments Commission (ASIC), the policy objective of this class order is to streamline the reporting process while ensuring that the integrity and information available to users of financial reports concerning auditor independence are maintained. The order allows for the auditor's report to be signed after the independence declaration is given to the directors, provided certain conditions are met, thereby aligning the legislative requirements with the practical demands of auditing standards.
Scope and Application
The ASIC Class Order [05/0083] applies to specified classes of companies, registered schemes and disclosing entities within the purview of the Corporations Act 2001. This class order directly affects the conduct and transactions of these entities, particularly in relation to the timing and requirements of independence declarations and audit reports. The class order aims to ensure the effective and efficient operation of the auditing standards and the Act by modifying the timing of when certain declarations and reports must be made. This order provides flexibility for auditors to consider the signed directors' report when finalising the audit report, thereby aligning the legislative requirements with auditing standards. The order is applicable nationally across Australia, given that it is an instrument made by the Australian Securities and Investments Commission, which operates under the Commonwealth. The class order does not exclude any specific entities or activities but provides specific conditions and timelines under which relief can be applied. The order may be further refined or extended through subordinate instruments, which may address additional technical or operational aspects as needed.
Key Provisions
The main operative sections of the ASIC Class Order [05/0083] are found in paragraphs 341(1) of the Corporations Act 2001. This order allows the Australian Securities and Investments Commission (ASIC) to modify the timing of the auditor's independence declaration, the directors' report, and the audit report to ensure the Act and auditing standards operate more effectively. The order enables the auditor to sign the auditor's report after the independence declaration is given to the directors, provided the independence declaration is provided before the directors resolve to make the relevant directors' report, the directors' report is signed within seven days after the independence declaration is provided, and the auditor’s report is made within seven days after the directors' report is signed. Furthermore, the auditor’s report must include a statement confirming the independence declaration's terms would remain the same if given at the time of the audit report or stating any changes since the independence declaration was provided to the directors and how the declaration would differ if given at the time of the audit report.
The obligations imposed by the class order on the parties it governs are primarily concerned with the timing and content of the auditor's independence declaration, the directors' report, and the auditor's report. Auditors must provide an updated independence declaration statement in their report. The directors must sign the directors' report within seven days of receiving the independence declaration from the auditor. The auditor must complete and sign the auditor’s report within seven days of the directors signing the directors' report and include a statement regarding the independence declaration. This ensures the auditor can consider the signed directors' report when finalising the audit report, aligning with auditing standards.
Any breaches of the requirements set out in the ASIC Class Order [05/0083] could result in legal consequences for the parties involved. Although the explanatory statement does not specify the exact penalties for non-compliance, under the Corporations Act 2001, breaches of class orders can attract civil or criminal penalties depending on the nature and severity of the breach. Civil penalties can include fines up to a maximum of $210,000 for corporations and $42,000 for individuals, as per section 1317E of the Act. Criminal penalties can include fines up to $210,000 for corporations and $42,000 for individuals, along with potential imprisonment for up to five years for individuals, as per sections 1311 and 1312 of the Act. These penalties underscore the importance of compliance with the class order to avoid legal repercussions.