ASIC CLASS ORDER [05/910]

EXPLANATORY STATEMENT

Prepared by the Australian Securities and Investments Commission

Corporations Act 2001

Section 341(1) – Exemptions

The Australian Securities and Investments Commission (ASIC) makes Class Order [C0 05/910] Auditor's independence declaration – exemption under s341(1) of the Corporations Act 2001 (the Act).

Section 341(1) provides that ASIC may make an order in writing relieving auditors, directors, companies, registered schemes and disclosing entities from specified requirements of Pts 2M.2, 2M.3 and 2M.4 of the Act. ASIC may only make an order if it is satisfied that complying with the relevant requirements of Pts 2M.2, 2M.3 or 2M.4 would:

(a) make the financial report or other reports misleading; or

(b)  be inappropriate in the circumstances; or

(c)  impose unreasonable burdens: s342.

1. Background

The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004  (the "CLERP 9 Act") introduced new auditor independence requirements into Divs 3, 4 and 5 of Pt 2M.4 of the Act. The independence regime comprises general requirements for auditor independence (see Subdiv A of Div 3), specific independence requirements (see Subdiv B of Div 3), requirements prohibiting an auditor from deliberately disqualifying him or herself from acting as auditor (see Div 4), and auditor rotation requirements (see Div 5).

The CLERP 9 Act also introduced a requirement that an individual auditor (or lead auditor from an audit firm or audit company) must make a written declaration to the directors of its audit client disclosing any contraventions of the auditor independence requirements of the Act or of any applicable code of professional conduct and setting out details of any applicable contraventions: s307C (the "s307C declaration").

The possible range of contraventions of the specific independence requirements that must be included in the s307C declaration include:

1. a contravention that occurs if an auditor becomes aware of circumstances that are specified in a relevant item of the table in s324CH(1) and does not, as soon as possible after becoming aware of those circumstances, take all reasonable steps to ensure that the auditor does not continue to engage in audit activity in those circumstances: s324CE(1), 324CF(1) and 324CG(1);
2. a contravention that occurs if circumstances that are specified in a relevant item of the table in s324CH(1) exist and, at the end of a period of 7 days from the day the auditor became aware of the circumstances, those circumstances remain in existence and the auditor has not informed ASIC in writing of those circumstances: s324CE(1A), 324CF(1A) and 324CG(1A); and
3. a contravention that occurs if an auditor engages in audit activity and at that time circumstances that are specified in a relevant item of the table in s324CH(1) exist: s324CE(2), 324CF(2) and 324CG(2).

A contravention described in 3 above occurs even if the person who commits the contravention could rely on the quality control system defence in s324CE(4), 324CF(4) or 324CG(4).

The s307C declaration requirement applied for the first time to financial reports for financial years that started on or after 1 July 2004 (i.e. financial years ending on or after 30 June 2005).

Following requests for clarification of the scope of the s307C declaration requirement from the professional accounting bodies and other industry participants, ASIC decided to make [CO 05/910] to deal with the anomaly that contraventions of s324CE(2), 324CF(2) and 324CG(2) need to be included in the s307C declaration even though the quality control system defence in s324CE(4), 324CF(4) or 324CG(4) could be relied upon.

2. Purpose of the class order

The purpose of [CO 05/910] is to resolve the apparent anomaly that arises from the fact that a contravention of s324CE(2), 324CF(2) or 324CG(2) must be detailed in the s307C declaration even though the quality control system defence in s324CE(4), 324CF(4) or 324CG(4) could be relied upon.

ASIC is satisfied that the operation of the relevant requirements of Pts 2M.2, 2M.3 and 2M.4  is inappropriate in the circumstances.

3. The class order

[CO 05/910] provides an exemption for:

1. an individual auditor;
2. the lead auditor of an audit firm; or
3. the lead auditor of an audit company,

(as applicable),  from the requirement to make a s307C declaration if that declaration would include details of any contraventions under s324CE(2), 324CF(2) or 324CG(2) of the Act, provided that the auditor had reasonable grounds to believe that the auditor, audit firm or audit company (as applicable) had in place, at the time of the contravention, a quality control system that provided reasonable assurance of compliance with the specific auditor independence requirements in Subdiv B of Div 3 of Pt 2M.4 of the Act.

The exemption from s307C is subject to a condition that, if the relief is relied on by an auditor, the auditor must make a written statement to the directors giving details of any contraventions of the auditor independence requirements of the Act or any applicable codes of professional conduct, other than those that arise solely under s324CE(2), 324CF(2) or 324CG(2) of the Act: see paragraph 6 of [CO 05/910]when the auditor is preparing.

The class order provides consequential relief to ensure that relief similar to that in Class Order [CO 05/83] Timing of auditor's independence declaration is available to auditors that make a written statement under paragraph 6 of [CO 05/910]when the auditor is preparing:  see paragraphs 7 and 8 of [CO 05/910]when the auditor is preparing.

The class order also provides consequential relief for directors, companies, registered schemes and disclosing entities by giving an exemption from the requirements in s298(1) and 306, to the extent that those provisions require the directors’ report to include a copy of the s307C declaration: see paragraphs 9, 10 and 11 of [CO 05/910]. If the auditor has made a written statement under paragraph 6 of [CO 05/910], that statement must be included in the director’s report in the same way a s307C declaration would have been included.

4. Consultation

ASIC consulted with the Commonwealth Treasury, CPA Australia, the Institute of Chartered Accountants in Australia, PricewaterhouseCoopers, KPMG, Deloitte and Ernst and Young before making [CO 05/910].

ASIC did not undertake further consultation because the relief in [CO 05/910] is minor in nature.