ASIC Class Order [CO 05/910]

Administered by Department of the Treasury

Legislation au F2005L02538 Not in force Legislative Instrument

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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.

 

 

Overview

The ASIC Class Order [CO 05/910], introduced under the Corporations Act 2001, aims to address a specific issue arising from the new auditor independence requirements established by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004. This Class Order was issued by the Australian Securities and Investments Commission (ASIC) to clarify the scope of the auditor's independence declaration requirement, particularly concerning situations where auditors might contravene specific independence provisions but could rely on a quality control system defence. The policy objective is to ensure that auditors are not unduly burdened by having to report certain contraventions if they can reasonably claim that their quality control systems would have prevented such contraventions. ASIC's decision to create [CO 05/910] was in response to requests for clarification from professional accounting bodies and industry participants, aiming to resolve the anomaly where contraventions under sections 324CE(2), 324CF(2), and 324CG(2) must be declared even if the quality control system defence could apply. The Class Order provides an exemption from the requirement to make a declaration under section 307C if the auditor believes that their quality control system provided reasonable assurance of compliance with the specific independence requirements. This exemption applies to individual auditors, lead auditors of audit firms, or lead auditors of audit companies and requires them to make a written statement to the directors detailing any other contraventions. The order also provides relief to directors, companies, registered schemes, and disclosing entities by exempting them from certain requirements related to the inclusion of the declaration in the directors' report.

Scope and Application

The ASIC Class Order [C0 05/910] applies to individual auditors, lead auditors from audit firms or audit companies, as well as directors, companies, registered schemes, and disclosing entities within the scope of the Corporations Act 2001. This Class Order provides exemptions from the requirement to make an auditor's independence declaration under section 307C of the Act, in specific circumstances. The exemption is available if the auditor has reasonable grounds to believe that their audit firm or company had a quality control system in place at the time of any contravention, which provided reasonable assurance of compliance with the specific auditor independence requirements. The Class Order also exempts directors, companies, registered schemes and disclosing entities from the requirement to include a copy of the s307C declaration in the directors’ report, if the auditor has made a written statement under the Class Order. The Class Order does not apply to contraventions that must be disclosed in the s307C declaration under sections 324CE(1), 324CF(1) and 324CG(1) of the Act, which relate to circumstances where the auditor failed to take reasonable steps to avoid the contravention. The Class Order is subject to consultation with relevant stakeholders and provides minor relief in relation to the auditor independence regime introduced by the CLERP 9 Act.

Key Provisions

The ASIC Class Order [CO 05/910] provides exemptions under section 341(1) of the Corporations Act 2001 (the Act) for auditors, directors, companies, registered schemes and disclosing entities from certain requirements in Parts 2M.2, 2M.3 and 2M.4 of the Act. Specifically, it exempts individual auditors, lead auditors of audit firms, or lead auditors of audit companies from making a declaration under section 307C if such declaration would include details of certain contraventions of the Act's auditor independence requirements (ss324CE(2), 324CF(2), and 324CG(2)). This exemption applies if the auditor had reasonable grounds to believe that their firm had a quality control system in place that provided reasonable assurance of compliance with the specific independence requirements in Subdivision B of Division 3 of Part 2M.4 of the Act at the time of the contravention. The class order imposes the obligation on the exempted auditors to provide a written statement to the directors of their audit client detailing any contraventions of the auditor independence requirements or applicable codes of professional conduct, excluding those specifically exempted by the order. This written statement must be prepared when the auditor is preparing the financial report and must be included in the directors' report, in the same manner as a section 307C declaration would have been. Companies, directors, registered schemes, and disclosing entities are also subject to certain exemptions from the requirement to include a copy of the section 307C declaration in the directors' report if the auditor has made a written statement under the class order. Breaches of the requirements imposed by this class order do not explicitly outline specific offences, penalties, or consequences within the explanatory statement. However, the broader context of the Corporations Act 2001 indicates that non-compliance with statutory obligations can lead to civil penalties for corporations and criminal penalties for individuals, including fines and imprisonment. The maximum penalties for breaches of the Act can vary depending on the nature and severity of the contravention, but can include significant fines for both corporations and individuals. Additionally, the failure to comply with the reporting requirements can result in legal consequences for directors and officers, including disqualification from managing corporations.

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