Effective and fair public company regulation requires a great deal of specialized knowledge, as well as feedback from the investing public, public companies and other interested parties. The United States Congress recognized this when it drafted the Act, which delegated to the SEC and other specialized regulatory bodies the authority to implement the Act through public notice-and-comment rulemaking.

Where rules apply to both US and non-US companies, this process will necessarily focus on the circumstances of US companies and investors, which participate in the legislative and rulemaking process to a much greater extent than their non-US counterparts. US companies and investors, which operate in a relatively uniform regulatory environment, often share common concerns and interests, while the unique circumstances of each country outside the United States make it difficult for non-US companies or investors as a group to present a cohesive, united set of concerns to Congress and rulemaking agencies. In addition, companies and investors outside the United States do not benefit from the same political representation within the United States as their US counterparts.

Similar legislative and rulemaking processes exist in Australia. The result is a comprehensive set of substantive governance regulations that is tailored to the circumstances of Australian companies and investors and addresses problems and issues in a manner that is appropriate to the Australian market. We do not believe that a disclosure-based US regulatory regime is inconsistent with these regulations, and agree that it is appropriate to require non-US companies that access the US capital markets to disclose business and financial information to US investors, as required by US laws. However, the substantive regulations imposed by the Act and SEC rules implementing the Act have imposed on Australian companies a set of rules that, for the reasons stated above, are tailored to US companies and investors, and should be applied accordingly.
 

In many cases, the substantive requirements of the Act and SEC rules implementing the Act are very similar to existing Australian laws and regulations. For example, the Australian Government recently enacted the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure Bill) Act 2003, or “CLERP 9,” which, as discussed below, imposes a comprehensive set of auditor independence rules on public companies and their external auditors and requires CEOs and CFOs of Australian public companies to certify their companies’ financial statements.

CLERP 9 is one example of Australian regulation that imposes requirements parallel to the Act’s substantive governance provisions. Many regulations are similar but not identical, either because of differences in the language of the regulations or differences in interpretations between US and Australian regulators. As a result, careful compliance with the regulations requires full attention to each set of rules. Even though some US rules largely overlap with Australian rules, and as a result provide very little extra protection to the investing public, Australian companies are forced to engage in a parallel compliance effort, often with separate compliance teams and separate external advisors, without relying on compliance with one set of rules as evidence of compliance with the other.
 

We believe that the Act and the SEC rules implementing the Act currently operate to require non-US companies to make changes in their governance requirements or to cease practices permitted under local laws that are immaterial in terms of the integrity of their governance regime or the preparation or auditing of their financial statements. Therefore, we respectfully submit that many of the problems currently being encountered as a result of the present Act and SEC rules implementing the Act could be alleviated by the introduction into the legislation in several areas of materiality or de minimis thresholds.

In particular, under the SEC’s new rules relating to auditor independence, relationships between Australian companies and their external auditors that might be interpreted by the SEC to violate US auditor independence standards could result in significant penalties, even if the relationships are completely immaterial. As set forth below, we believe the most appropriate approach is for the SEC to defer to Australian auditor independence rules with respect to Australian SEC-registered companies. However, if Australian companies remain subject to the SEC’s auditor independence rules, we urge you to consider implementing a standard that would deem a relationship to impair an external auditor’s independence only if the relationship had a material effect on the auditor’s independence. For example, a small engagement that might be prohibited under current independence rules should not be deemed to impair independence if the engagement is clearly immaterial to the overall audit of the client’s financial statements.
 

Australian public companies and their external auditors are subject to a comprehensive set of Australian auditor independence regulations. CLERP 9, a governance reform package enacted in 2003 that took effect on July 1, 2004, among other matters, strengthens existing auditor independence requirements through:

• the introduction of a general standard of auditor independence;
• increased restrictions on employment and financial relationships between auditors and their clients;
• increased requirements for disclosure of fees for non-audit services;
• a requirement for audit partner rotation every 5 years;
• making breaches of the above requirements offences for which ASIC will be able to take appropriate enforcement action.

These requirements parallel the auditor independence standards of the Act and SEC rules implementing the Act. Compliance with both CLERP 9 and US auditor independence rules is, as noted above, costly and time consuming, and we believe that the additional regulatory layer provides very little marginal benefit for the investing public.

For these reasons, we urge you to consider reforms that would permit US-reporting Australian companies and their auditors to comply only with Australian independence rules.
 

The Financial Reporting Council, or FRC, is the Australian body responsible for providing oversight of the process for setting accounting and auditing standards, as well as monitoring the effectiveness of auditor independence requirements in Australia.

The CLERP 9 reforms will significantly strengthen the regulatory requirements applying to company auditors and includes measures that:

• move the Australian Auditing and Assurance Standards Board (AuASB) under the authority and oversight of the FRC;
• enhance the financial reporting framework by expanding the powers of the FRC to include monitoring of professional bodies, audit firms and independence policies and procedures;
• improve auditor registration requirements;
• giving auditing standards legislative backing.

Generally, CLERP 9 will place liability for contraventions of the law on:

• individual auditors;
• in the case of firms – on each individual partner; and
• in the case of authorized audit companies – on the directors and the company.

The Treasury Department of the Australian Government has stated in a written submission to the Public Company Accounting Oversight Board dated January 23, 2004:

“Australia has a robust, independent and transparent corporate reporting and governance framework. Audits are generally conducted professionally and competently in accordance with recognized auditing standards, giving full regard to the interests of shareholders, the need for independence, and professional ethical rules. 

Australia’s regulatory system is based on the belief that restoring investor confidence in auditing requires transparent standard setting, effective monitoring and oversight of the financial reporting framework and effective enforcement by the regulators. Each of these aspects will be further strengthened by the CLERP 9 reforms.”

Like the Australian Government, we support efforts to ensure appropriate oversight of audit firms and measures to restore the public trust in the auditing profession, but believes that in the interest of minimizing administrative burdens and legal conflicts the PCAOB should be permitted and encouraged to continue to seek to rely on the home country’s system in situations where it has confidence in that system’s integrity. We believe that this is an area where regulatory overlap with Australia could be avoided.
 

One of the most costly and time-consuming aspects of the Act is the requirement that management and auditors of SEC-reporting companies conduct an annual evaluation and attestation of internal control over financial reporting. We do not believe it is appropriate to apply this requirement to Australian companies because, for the reasons set forth above, the rules of the SEC and Public Company Accounting Oversight Board largely reflect the circumstances of US companies and investors, and should not be applied to Australian companies.
 

Appropriate standards of corporate governance – the relationships among companies, their management and shareholders – are, for the reasons set forth above, best determined by those who are most familiar with the unique circumstances of each country’s governance environment. Some governance reforms that are appropriate for US companies may not be appropriate for Australian companies due to differences in the compliance culture or the existence of compensating factors that may not exist in the United States.

We believe that Australian governance regulations, as well as the robust Australian compliance environment, provide strong, independent oversight of the external audit function. Consistent with the above-stated principle that public company regulation is best done by those most familiar with the companies they regulate, and in recognition of the strong compliance environment in Australia, we believe it is appropriate to exempt Australian SEC-reporting companies from the requirements of Rule 10A-3.

We also believe that the new requirement that public companies disclose whether the board has determined that there is an “audit committee financial expert” on the audit committee should not apply to Australian companies. In practice, we believe that most audit committee members in Australia possess a high degree of financial literacy. In fact, under the Australian Stock Exchange Best Practice Recommendations, all audit committee members must be “financially literate.” 

However, the strict definition of “audit committee financial expert” set forth in SEC rules may make it difficult for Australian companies to find qualified candidates to fill this role and otherwise be appropriate additional appointments to the board. In addition, while SEC rules have established a safe harbour providing a certain degree of litigation protection to individuals who act as audit committee financial experts, this safe harbour may not be effective for purposes of Australian law.

Companies that have not designated an audit committee financial expert are required to disclose why they have not done so. While Australian companies have the option of not designating an audit committee financial expert, the effect of the disclosure requirement is to give negative publicity to companies that make this disclosure. We believe this negative publicity is unfair in light of the potential litigation risks faced by audit committee financial experts and the difficulty of finding suitable candidates.