11 August 2006

Corporate & Financial Services Regulation Review
Corporations and Financial Services Division
The Treasury
Langton Crescent
PARKES ACT 2600
CFScomments@treasury.gov.au

Dear Sir/Madam 

Corporate & Financial Services Regulation Review – Consultation Paper

The G


11 August 2006


Ms Jan Munro
Senior Technical Manager
International Ethics Standards Board for Accountants
International Federation of Accountants
545 Fifth Avenue 14th Floor
NEW YORK NY 10017 janmunro@janmunro.ca



Dear Ms Munro

Proposal to Rotate Key Audit Partners in the Ethics Code

The Group of 100 (G100) is an organisation representing the interests of the Chief Financial Officers of Australia’s major business enterprises. The G100 strongly supports legislation, regulation and guidance which improve the quality of financial reporting and corporate governance, including in the international arena of harmonisation and convergence. In doing so the G100 is actively involved in creating a cost-effective and efficient regulatory environment in which business is able to flourish while meeting community expectations.

The purpose of this letter is to explain the G100’s concerns about the practical implications of proposals being considered by International Ethics Standards Board for Accountants (IESBA), in particular, the proposed paragraph 290.154 of Agenda Paper 3-B for the June 2006 meeting as detailed on the IFAC web site. This paragraph relates to the rotation of audit partners including the engagement partner, partners responsible for the audit review and quality control and ‘other key audit partners.’ The definition of key audit partner in the IESBA draft includes ‘……….other partners involved at group level who are responsible for key decisions or judgments on significant matters with respect to the audit engagement’.

In view of current experience in Australia the G100 is concerned about the IESBA proposal to extend the rotation of audit partners of listed companies to include ‘other key audit partners,’ as defined. In Australia, practical issues are already being experienced in complying with the recently introduced Corporations Law amendments requiring the rotation of listed entity audit partners who play a significant role (usually interpreted as the engagement partner and the review partner) after five years.

We appreciate that the five-year time period is a particular Australian requirement and we will be making representations to the Australian Government on this matter. As the process of listed company auditor rotation under Australian law has already commenced, listed companies are finding that the pool of audit partners, with the requisite skills and experience, is sometimes shallow.


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This was recently brought to our attention by some of our members and the contention confirmed by members of the auditing profession from the Big 4 who, in the main, are the auditors of the top 100 companies in Australia. While the pool of available skills may be adequate in the larger centres it is not necessarily the case in the smaller Australian cities such as Perth, Adelaide and Brisbane where specialised expertise in certain industries such as oil and gas and banking is often required.

In these cities given the Australian legislation already in place, the rotation of the engagement partner and the review partner together with the IEASB proposal to rotate ‘other key partners’ presents the propensity for a pseudo ‘firm rotation regime’ to operate.

Our concerns are compounded by the prospect that the rotation requirements may be extended to other ‘specialist’ members of the audit team. It is usual in large and complex company audits for the composition of the audit team to include a number of specialist partners whose role is to provide input on technical issues, such as taxation law, information risk management, asset valuation, actuarial valuations and technical application of accounting standards and reporting requirements. It is normal and appropriate for the lead engagement partner and engagement quality control review partner to rely of the advice of these specialists.
We are concerned that these individuals may in certain circumstances fall within the proposed broad definition of ‘key audit partner’ in the IESBA draft. For example:
• the audit of financial institutions necessarily requires extensive input from specialist partners in information risk management. Their involvement with planning and conducting the audit procedures is pervasive to the entire audit; and
• most large public company audits involve regular consultation with the firm’s specialist technical partner on interpretation of accounting standards.
In many instances these partners have little, if any, direct contact with the senior management staff. Adequate safeguards can be put into place to mitigate any familiarity threat, whilst retaining the benefits of their knowledge of the company’s systems and processes.
In our view it would be impracticable and potentially detrimental to the efficiency and efficacy of the audit process to mandate the rotation of these partners.
As the Corporations Law in Australia stands the five-year rotation applies in practice only to the engagement and the review partners. Should the proposed provisions of the IESBA code for key partners be introduced into the Australian Professional Bodies’ Code of Ethics it is uncertain whether the seven-year rule, rather than the Australian five-year requirement of the Corporations Act, would apply.

In addition, the Auditing Standards in Australia have now been given the force of law and the accounting bodies’ Codes of Ethics have legal effect to the extent that they are referred to in the Auditing Standards.


The G100 does not oppose the general proposal to rotate engagement and review audit partners but considers that the extension to automatic require rotation of other key partners in the IESBA Code is impractical. The proposed requirement may well be suitable for application in major commercial and developed jurisdictions. There are many countries around the world that do not have well developed capital markets. On the basis of our experience companies in these countries will find even more difficulties in complying with the proposed rotation of key partners. While the Australian regulator has the power to use discretion in such matters the experience is that such discretion is not exercised in these circumstances.

Accordingly, the G100 is concerned that there will not be any means for exemption from the requirements where an entity under extenuating circumstances is unable to comply.

In the first instance the G100 recommends that rotation of ‘other key audit partners’ not be a mandatory requirement. Instead, there should be a rebuttable presumption that after seven years the ‘other key audit partner’s’ independence is compromised unless it can be demonstrated that adequate safeguards have been in place to reduce the familiarity threat to an acceptable level.


Yours sincerely



Tom Honan
National President


er.

2.  Company Reporting Obligations
 
2.1 Concise Reporting Requirement: Comments are sought on separating the remuneration report from the directors’ report and requiring it to be a stand-alone report. The concise report would only include summary remuneration information. In addition, comments are sought on whether the concise report should only contain summary information from the directors’ report. Comments are sought on what summary information in both cases would be appropriate. 

The G100 has been concerned about the increasing volume of the concise report which has been attributable to the expansion in the directors’ report requirements including the remuneration report. This can be illustrated from a review of concise reports.  For example, the remuneration report section of the directors’ report in the 2005 AXA Concise Report comprised 23 pages while the concise financial report comprised 11 pages. 

The G100 strongly supports: 

  • separating the remuneration report from the directors’ report;
     
  • the inclusion of summary information from the remuneration report such as total remuneration, equity holdings and loans for each director and specified executive in the concise report; and
     
  • the inclusion of summary information from the directors’ report such as qualifications and experience of directors, dividends and material interests in contracts in the concise report.

Under the current regime a shareholder in receipt of a concise report is able to request a copy of the full annual report from the company and under the policy announced by the Prime Minister and the Treasurer will, in future will be able to access the relevant annual reports on the company’s website and only obtain a hard copy on request. In view of these proposals the G100 believes that the provision of summary information from the directors’ and remuneration reports is consistent with the underlying objective of the concise reporting regime.
 
2.2 Executive Remuneration – Disclosure Requirements: Comments are sought on the most effective means of harmonizing and removing duplication in the remuneration disclosure requirements in relation to directors and executives without any dilution of disclosure.

The G100 believes that requirements relating to director and executive remuneration disclosures should be in one location – either the Corporations Act 2001 or Accounting Standards. Irrespective of the location of the requirements the G100 considers it is essential that the measurement of the amounts disclosed be in accordance with Accounting Standards.  This can be achieved by including an ambulatory reference in the Corporations Act.

However, the G100 believes that the disclosure requirements should be located in the Corporations Act as a matter of corporate governance. As part of this process it would be appropriate to align the meaning of executive with the term key management personnel, as defined in AASB 124 ‘Related Party Disclosures’, the Australian equivalent to IAS 24 ‘Related Party Disclosures’ and to ensure that the disclosures relate to key management personnel and not the five most highly remunerated officers. The objective of the changes should be to ensure that corporate governance is enhanced while enabling entities to achieve compliance with IASB Standards.
 
2.3 CEO/CFO sign-off: Comments are sought as to whether the obligation in the ASX Corporate Governance Guidelines can be removed and replaced with a cross-reference to the similar requirement in the Corporations Act.

The G100 believes that the requirement relating to CEO/CFO sign-off in the ASX Guidelines is unnecessary and superfluous in view of the requirement in the Corporations Act 2001.
 
2.4

Thresholds for financial reporting of large proprietary companies: Comments are sought on whether the revenue and asset thresholds for financial reporting of large proprietary companies should be increased.

The G100 believes that these thresholds should be increased and suggest that in view of the period since they were last changed, the amounts should, at a minimum be doubled.

In addition, the G100 proposes that a process/system be introduced to escalate the thresholds on a regular basis. For example, the threshold amounts could be indexed in some way that reflects the growth in the economy, the increasing value of assets and general inflation.

However, the G100 considers that the potential impact of other developments should also be considered. For example, the IASB (and AASB) have exposed a proposed new definition of general purpose financial reports that could potentially have the effect that all accounts filed with a regulator are general purpose financial reports. The adoption of the revised definition would create a conflict between AASB 101 ‘Presentation of Financial Statements’ and the Corporations Act.
 
2.5 Removal of duplication in notifications
 
2.5.1 Change in officeholders: Comments are sought on whether the requirement for a company to notify ASIC of a change in officeholder, where the officeholder has already notified ASIC, should be removed.

The G100 supports this proposal.
 
2.5.2 Maintenance of registered office address: Comments are sought on whether a single process for notification of an update of a company’s service address and registered office, via the information provided by the agent to ASIC, should be implemented.

The G100 supports this proposal. In the interests of efficiency a company should only need to advise one regulator once only.
 
2.6 Share and member reporting requirements: Comments are sought on whether the requirement to notify ASIC should be removed, given the availability of the same information from an alternative source.

The G100 supports this proposal.
 
2.7 Removal of annual review fees for companies approved for voluntary deregistration: Comments are sought on whether to remove the obligation to pay the annual review fee for those companies that have applied for voluntary deregistration and had this approved by ASIC.

The G100 supports this proposal.
 
2.8 Parent entity financial statements: Comments are sought on whether only summary financial information should be required in relation to the parent entity. Comments are also sought on the type of information that should be required to be disclosed.

The G100 strongly supports removal of the need to provide parent entity financial statements. As indicated in the G100 submission to the Regulation Task Force the G100 supports the provision of summary parent entity financial information such as an abridged balance sheet and income statement as a note accompanying the group consolidated financial statements. We consider that the parent entity information would be included within the scope of the audit opinion on the group’s consolidated financial statements and the notes thereto.

In this regard we are not aware of corporate mischiefs being perpetrated in the United Kingdom as a result of the provision of summary financial information relating to parent entities.
 
3. Auditor Independence 
 
3.1 Anomalies arising from CLERP 9: Comments are sought on whether the changes to be implemented through regulation should be reflected in the Corporations Act itself.

The G100 would prefer matters to be addressed directly in the Corporations Act rather than by regulation.
 
4. Corporate Governance
 
4.1 Related party transactions
 
4.1.1 Amounts that can be paid to related parties without member approval: Comments are sought on whether the law should be amended to allow a financial benefit below a prescribed level (for example $5,000) to be provided to related parties without member approval. This would avoid member approval of what could be considered minor transactions.

The G100 supports this proposal.
 
4.1.2 Amounts given to director or spouse without member approval: Comment on whether the threshold level should be increased to a higher fixed level or to some other quantifiable level, for instance, in relation to asset levels or cash flow.

The G100 supports the increasing threshold levels and suggests that the amounts should be indexed to take account of ongoing changes.
 
4.2 Remove directors’ duties for single-director companies: Comment on whether members of single-director companies can, by resolution, agree to disapply some of the directors’ duties provisions under the Corporations Act. This would not impact on the application of contract, tort and criminal laws which assist in regulating the conduct of a director of such a company.

The G100 does not believe that the case for having differential levels of responsibilities for directors has been established.
 
4.3 Extend the Business Judgment Rule: Comment on whether there should be a general protection for directors, excusing them from liability under the Corporations Act subject to certain conditions.

The G100 supports this proposal. In the absence of extending the business judgment rule it is likely that directors will be disinclined to provide future oriented information to shareholders in a report of operations and financial condition. Enhanced protections for directors is likely to result in a greater willingness to communicate relevant information to shareholders for decision making purposes. However, given the conditions, application of an extended business judgment rule should not absolve directors from acting in good faith and in the best interests of the company.
 
4.4 Greater flexibility for company meetings: Comment on whether some of the detailed provisions about the conduct of company meetings could be made replaceable rules (for example requirements relating to notice of meetings, place, technology, proxy appointments).

The G100 supports the proposals to make replaceable rules.
 
5. Fundraising
 
5.1 Obligation to produce a prospectus for rights issues of quoted securities: Comment on whether the requirement to issue a prospectus for rights issues of quoted securities should be removed.

The G100 considers that the purpose for rights issues should be clearly set out in a prospectus.
 
8. Dealing with Regulators
 
8.1 Implement ‘up front’ payment option for ASIC annual fees: Comment on whether companies should be able to elect to make a lump sum payment to cover their obligations to pay annual statement fees for an extended fixed period, for example 10 years.

The G100 supports this proposal.
 
8.2 ASIC/APRA information exchange: Comment on the nature and extent of duplicated information currently required and on the most efficient way for businesses to provide information to ASIC and APRA collectively.

The G100 supports the removal of regulatory duplication. In the interests of efficiency the G100 believes that entities should only be required to deal directly with one corporate regulator (a one-stop shop).
 
8.3 Enhancing communication with ASIC: Comment on appropriate mechanisms to enhance communication between business, consumers and ASIC. 

The G100 supports recent efforts by ASIC to establish consultative mechanisms with the entities that it regulates. However, in undertaking these processes it is necessary to build an atmosphere of trust and co-operation in achieving shared objectives if the processes are to contribute to an enhanced regulatory environment.
 
8.4 Breach reporting requirements: Comment on the most appropriate way to address inconsistencies between legislation referring to breach reporting requirements to ASIC and APRA.

The G100 supports action to achieve consistency in breach reporting requirements. We believe that ASIC and APRA should address these inconsistencies by applying a materiality threshold and being directed to agree common requirements. Any actions to clarify the respective roles of regulators, for example, ASIC and ASX in respect of continuous disclosure by listed entities, is welcome. Enhanced co-operation and co-ordination by regulators would minimise the disruptions experienced by companies in responding to both regulators in respect of the same issue.

Yours sincerely

Tom Honan
National President