House of Representatives

Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007

Corporations (Fees) Amendment Bill 2007

Corporations (Fees) Amendment Act 2007

Corporations (Review Fees) Amendment Bill 2007

Corporations (Review Fees) Amendment Act 2007

Explanatory Memorandum

(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP)

Chapter 3 Auditor Independence

Outline of chapter

3.1 This chapter outlines a number of refinements to the existing auditor independence requirements in the Corporations Act:

·
amendments relating to Proposal 3.1 of the Corporate and Financial Services Regulation Review Proposals Paper which proposed that remedial amendments contained in the Corporations Regulations and two ASIC class orders relating to the auditor's independence declaration should be included in the Corporations Act;
·
improvements arising out of public consultation on the comparative review of Australia's auditor independence requirements; and
·
a number of miscellaneous technical amendments designed to improve the operation of the existing auditor independence requirements.

Context of amendments

Anomalies arising from CLERP 9

3.2 The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (the CLERP 9 Act) established a comprehensive regime on auditor independence, implementing recommendations of the review on Independence of Australian Company Auditors (the Ramsay report) and some of the relevant recommendations of the report of the HIH Royal Commission.

3.3 The legislative framework of the auditor independence requirements in the CLERP 9 Act includes:

·
a general requirement for auditor independence;
·
specific auditor independence requirements which contain restrictions on an extensive range of specific employment and financial relationships between an auditor, and other persons connected to the auditor, and the audit client. The Ramsay report described these specific restrictions as involving 'core circumstances which, if they exist, necessarily mean that the auditor is not independent'; and
·
a number of additional requirements relating to other auditor independence issues, including the auditor's independence declaration.

3.4 A number of anomalies and unintended consequences were identified during the implementation of the CLERP 9 auditor independence requirements which required remedial action.

3.5 Three of these issues were addressed by amendments to the Corporations Regulations made in accordance with section 343 of the Corporations Act. The two remaining anomalies, which related to the auditor's independence declaration, were addressed by ASIC class orders.

3.6 In the context of the Government's consultation process to simplify the regulatory system, it was considered that the inclusion of auditor independence requirements in the Corporations Act, the Regulations and in ASIC class orders had the potential to create unnecessary complexity. Proposal 3.1 of the Corporate and Financial Services Regulation Review Proposals Paper (November 2006) recommended that these amendments to the Corporations Regulations and the matters dealt with in the two ASIC class orders should be incorporated into the Corporations Act.

Improvements arising out of public consultations on the comparative review of Australia's auditor independence requirements

3.7 The Government released a discussion paper Australian Auditor Independence Requirements : A Comparative Review (the comparative review) on 15 November 2006. The overall conclusion of the comparative review is that, despite differences in terminology, institutional arrangements and legal frameworks, there is a substantial underlying equivalence between the Australian requirements and international best practice standards.

3.8 When the comparative review was released, it was noted that several of the key findings are directly relevant to the Government's commitment to simplifying the regulatory system and reducing unnecessary or excessive red tape. The Government indicated that there may be scope, in line with overseas developments, to refine the existing auditor independence requirements without changing or weakening the existing robust regulatory framework. The Government said that it would consult with key stakeholders to identify whether any such measures could be included in the proposed Simpler Regulatory System Bill.

3.9 Treasury has undertaken a targeted consultation process on the review with the key stakeholders: ASIC, the Financial Reporting Council, the major audit firms and the professional accounting bodies.

3.10 All the stakeholders have agreed that refinements could be made in three areas of the auditor independence requirements in the Corporations Act:

·
the multiple former audit firm partner restriction;
·
the former audit partner 'cooling-off' restriction; and
·
the adoption of a 'covered person' approach in relation to the existing financial relationship restrictions.

Miscellaneous amendments

3.11 This group of technical amendments is designed to improve the effectiveness of the auditor independence requirements in the light of operational experience since the requirements were introduced by the CLERP 9 Act in 2004.

Summary of new law

Anomalies arising from CLERP 9

3.12 The measures will ensure that remedial action taken by amendment of the Corporations Regulations and by ASIC class orders to address anomalies in the auditor independence requirements introduced by the CLERP 9 Act will be incorporated in the Corporations Act.

Improvements arising out of public consultations on the comparative review of Australia's auditor independence requirements

3.13 There are three key measures:

·
the restriction applying to multiple former partners of an audit firm or former directors of an audit company will no longer apply to a former partner or former director who has ceased to be a member of the firm or the audit company for five or more years;
·
the way in which the existing two-year 'cooling off' period applying to a former audit partner of a firm, a former director of an audit company or a former lead or review auditor in an audit company is calculated, will be modified; and
·
the existing specific restrictions on financial investments applying to partners in a firm or directors in an audit company who are not involved in an audit and not in a position to influence the outcome of an audit will be removed.

Miscellaneous amendments

3.14 These amendments will improve the operational efficiency of the auditor independence requirements by addressing a number of anomalies and minor technical issues.

Comparison of key features of new law and current law

New law Current law
The auditor independence declaration will be able to be given to the directors before the auditor's report is signed provided specified conditions are satisfied. ASIC class order grants relief from requirement that the auditor's independence declaration must be given to the directors at the same time as the auditor's report.
An auditor will no longer be required to report inadvertent breaches of the auditor independence requirements in the auditor's independence declaration provided the statutory defence applies. ASIC Class order grants relief from requirement that inadvertent breaches of the auditor independence requirements be included in the independence declaration provided the statutory defence applies.
The ordinary course of business exception included in the Corporations Regulations will be replicated in the Corporations Act. The Corporations Regulations modified the operation of the auditor independence restriction in relation to debts owing by including an ordinary course of business exception.
The exception relating to cheques and savings accounts has been replicated in the Corporations Act. The Corporations Regulations modified the operation of the auditor independence requirements to allow members of an audit team to hold cheque and savings accounts on call with an audit client bank provided this was done in the ordinary course of the bank's business and under normal terms and conditions.
ASIC will be given the power in the Corporations Act to extend the period within which an auditor is required to resolve a conflict of interest situation. The Corporations Regulations modified the operation of the auditor independence requirements to give ASIC the power to extend the period within which an auditor is required to resolve a conflict of interest situation.
The restriction will no longer apply to a former partner or former audit company director who has left the firm or audit company five or more years ago. The restriction on multiple former audit firm partners and former audit company directors applies to all former partners and all former audit company directors.
The two-year 'cooling-off' period will be calculated from the date of the last audit in which the former partner or director participated. The two-year 'cooling-off' period is calculated from the date of departure from the firm or audit company.
The restrictions on financial investments will not apply to partners who are not involved in an audit and not in a position to influence the outcome of the audit. The specific restrictions on financial investments apply to all partners in an audit firm.
ASIC's relief powers will be extended to cover members of an audit firm who are not registered company auditors, former members of an audit firm, former directors of an audit company and former professional employees of an audit company. ASIC has limited powers to exempt registered company auditors from the auditor independence provisions in the Corporations Act.

Detailed explanation of new law

Anomalies arising from CLERP 9

Timing of auditor's independence declaration

3.1 The CLERP 9 Act introduced a new requirement in section 307C of the Corporations Act that an auditor provide a declaration as to whether the auditor is aware of any contraventions of the auditor independence requirements of the Act or of any applicable codes of professional conduct.

3.2 Subsections 298(1) and 306(2) of the Corporations Act require the auditor's independence declaration to be included in the directors' report. Subsection 307C(5) requires the auditor to give the independence declaration to the directors with the auditor's report. This means that the auditor's report would need to be signed before the directors' report.

3.3 However, the auditing standards, which have the force of law under the Corporations Act, require the auditor to comment in the auditor's report on any material inconsistencies between the director's report and the financial report, and to consider the impact of any material misstatements of fact in the directors' report.

3.4 ASIC class order 05/83 granted relief by allowing the auditor's independence declaration to be signed before the directors' report had been signed and the auditor's report to be signed after the directors' report had been signed.

3.5 The measures in the Bill will address this timing inconsistency by amending paragraph 307C(5)(a) and inserting subsection 307C(5A). [Schedule 1, Part 1, items 34 and 35]

3.6 Paragraph 307C(5)(a) will provide that the declaration must either be given when the audit report is given to the directors of the company, registered scheme or disclosing entity or must satisfy the conditions in subsection 307C(5A).

3.7 Subsection 307C(5A) will provide that a declaration will satisfy the conditions in this subsection if:

·
the auditor's independence declaration is given to the directors and the directors sign the report within 7 days after the declaration is given to the directors;
·
the auditor's report on the financial report is made within 7 days after the directors' report is signed; and
·
the auditor's report includes a statement to the effect that either the declaration would be in the same terms if it had been given to the directors at the time the auditor's report was made, or circumstances have changed since the declaration was given to the directors, and setting out how the declaration would differ if it had been given to the directors at the time the auditor's report was made.

Auditor's independence declaration - reporting of inadvertent breaches

3.8 The CLERP 9 Act introduced a new requirement in section 307C of the Corporations Act that an auditor provide a declaration as to whether the auditor is aware of any contraventions of the auditor independence requirements of the Act or of any applicable codes of professional conduct.

3.9 The reporting obligations under subsections 307C(1) and 307C(3) require the declaration to include inadvertent breaches of the auditor independence requirements under subsections 324CE(2), 324CF(2) or 324CG(2) notwithstanding that the statutory defence in subsections 324CE(4), 324CF(4) or 324CG(4) applied to the defendant.

3.10 In the course of day-to-day audit practice, there would be many examples of inadvertent breaches of the auditor independence requirements which would be quickly addressed once the auditor became aware of the breach.

3.11 For purposes of the specific auditor independence requirements contained in sections 324CE, 324CF and 324CG of the Corporations Act, the policy intention is that for purposes of the reporting obligation in relation to an auditor's independence declaration, only contraventions under subsections 324CE(1), 324CF(1) or 324CG(1) should be included in the declaration because these contraventions relate to an intentional breach of the requirements where there is both knowledge and a failure to take reasonable steps, as soon as possible, to address the breach.

3.12 ASIC class order 05/910 exempted an auditor from making a declaration if there are any contraventions under subsections 324CE(2), 324CF(2) or 324CG(2) of the Corporations Act provided the statutory defence applied that is, the auditor had reasonable grounds to believe that it had in place, at the time of the contravention, a quality control system that provided reasonable assurance that the auditor would comply with the auditor independence requirements.

3.13 The measures in the Bill will ensure that an auditor will not be required to report inadvertent breaches of the auditor independence requirements in the auditor's declaration where the statutory defence would be applicable. Subsection 307C(5B) will provide that an individual auditor or a lead auditor is not required to give a declaration in respect of a contravention if the contravention was a contravention by a person of subsection 324CE(2), 324CF(2) or 324CG(2) and the person does not commit an offence because of subsection 324CE(4), 324CF(4) or 324CG(4). [Schedule 1, Part 1, item 35]

Money owed - debt: ordinary course of business exception

3.14 Item 15 of the table in subsection 324CH(1) of the Corporations Act prohibits an individual auditor, an audit firm or an audit company (and various other persons specified in the tables in subsections 324CE(5), 324CF(5) and 324CG(9) from owing an amount of more than $5000 to:

·
the audited body; or
·
a related body corporate; or
·
an entity that the audited body controls.

3.15 This restriction existed in the auditor independence requirements in the Corporations Act which pre-dated the CLERP 9 Act. This restriction was included in the CLERP 9 Act auditor independence requirements in accordance with a recommendation in the Ramsay report.

3.16 Notwithstanding that this restriction had been included in the corporations legislation for over 30 years, during the implementation of the CLERP 9 auditor independence requirements, concerns were raised by the accounting profession that this restriction was catching 'ordinary course of business' transactions between an auditor and an audit client. An example is where an audit firm that audited an airline, would not be able to fly with that airline unless it paid cash rather than operating an account with the airline on normal credit terms.

3.17 The Government accepted that as a general rule, debts incurred in the ordinary course of business and on normal terms and conditions would not constitute a threat to auditor independence.

3.18 Regulation 2M.6.05 of the Corporations Regulations (which was included in the Corporations Amendment Regulations 2006 (No. 4 )) modified the operation of the auditor independence requirements by inserting a new ordinary course of business exception in paragraph 324CH(5)(b).

3.19 Paragraph 324CH(5)(b) provides that for the purposes of item 15 of the table in subsection 324CH(1) a debt owed by the person or firm to a body corporate or entity should be disregarded if:

·
the debt is on normal terms and conditions, and arises from the acquisition of goods or services on normal trading terms from:
·
the audited body; or
·
an entity that the audited body controls; or
·
a related body corporate; and
·
the goods or services will be used by the person or firm:
·
for the personal use of the person or firm; or
·
in the ordinary course of business of the person or firm.

3.20 The ordinary course of business exception will be replicated in subsection 324CH(5A), with some slight restructuring, to accord with the drafting style adopted in primary legislation. [Schedule 1, Part 1, item 56]

Money owed - deposit account

3.21 Item 16 of the table in subsection 324CH(1) of the Corporations Act prohibits amounts owing to an audit firm (and various other persons and entities specified in the tables in subsections 324CE(5), 324CF(5) and 324CG(9)) by the audited body under a loan.

3.22 While amounts owing by a bank under a cheque or savings account may not be regarded as a loan in a commercial sense, the legal interpretation of a loan includes deposit accounts with a bank.

3.23 This presented a considerable burden for auditors of banks and other financial institutions that offer cheque and savings account facilities to their customers. It involves the closing of all the savings and cheque accounts held by the audit firm and individual members of the audit team with the bank or financial institution.

3.24 The imposition of a regulatory requirement should not be disproportionate to the risk of potential damage or harm. In the context of cheque and savings accounts, the potential threat to auditor independence is perceived to be low, particularly if the cheque or savings account facility is arranged in the ordinary course of the audit client's business and made under normal lending procedures, terms and conditions.

3.25 The Government accepted that it should clarify that amounts owing under a deposit account that are 'on call' with an audited body that is an Australian ADI and which are provided in the ordinary course of business of the audited body, should be disregarded for purposes of item 16 of the table in subsection 324CH(1) of the Corporations Act.

3.26 Regulation 2M.6.05 of the Corporations Regulations (which was included in the Corporations Amendment Regulations 2006 (No. 4 )) modified the operation of the auditor independence requirements by inserting in the Corporations Act a new paragraph 324CH(6)(b) which provides that for the purposes of item 16 of the table in subsection 324CH(1), a debt owed to the person or firm by the audited body, a related body corporate or an entity that the audited body controls should be disregarded if:

·
the body, body corporate or entity is an Australian ADI; and
·
the amount is in a basic deposit product (which is defined in section 761A of the Corporations Act) provided by the body, body corporate or entity; and
·
the amount was deposited in the ordinary course of the business of the audited body, body corporate or entity, and on the terms and conditions that normally apply to basic deposit products provided by the body, body corporate or entity.

3.27 The exception relating to amounts on call will be replicated in subsection 324CH(6A). [Schedule 1, Part 1, item 57]

3.28 A consequential drafting amendment will be made to table item 16 of subsection 324CH(1) referring to the new subsection 324CH(6A). [Schedule 1, Part 1, item 54]

Notification procedures

3.29 The audit reforms in the CLERP 9 Act introduced notification procedures to ensure that there was a staged procedure in place before an auditor's appointment was terminated on the grounds of the auditor's failure to address an auditor independence conflict of interest situation. The staged procedure involves the following steps:

·
An audit firm is required to notify ASIC within 7 days if it becomes aware that it has a conflict of interest situation that has not been resolved (subsection 324CF(1A) of the Corporations Act). Similar requirements apply to an individual auditor under subsection 324CE(1A) and to an audit company under subsection 324CG(1A) of the Corporations Act. No notification is required if the conflict is resolved before the end of the 7 day period. ASIC is required to give a copy of the notice to the audit client so that the company is put on notice that its auditor has an independence issue that needs to be resolved.
·
Where the audited body is a public company, after the firm has notified ASIC, the firm has a further 21 days (the remedial period) to resolve the conflict of interest situation (subsection 327B(2B). Similar requirements apply to an individual auditor under subsection 327B(2A) and to an audit company under subsection 327B(2C) of the Corporations Act.
·
An audit firm thus has a maximum period of 28 days after it becomes aware of a conflict of interest situation to rectify the conflict (the initial 7 day period plus the 21 day remedial period)).
·
If the conflict of interest situation is not resolved at the end of the 21 day remedial period, the audit firm's appointment as auditor of the particular audit client automatically terminates (subsection 327B(2B). Similar requirements apply to an individual auditor under subsection 327B(2A) and an audit company under subsection 327B(2C) of the Corporations Act.

3.30 A similar notification regime applies under the general requirements for auditor independence in subsections 324CA(1A), 324CB(1A) and 324CC(1A).

3.31 When the CLERP 9 Act was drafted, the maximum period of 28 days was considered to give an auditor sufficient time to rectify a conflict of interest situation. However, concerns have been raised that complex circumstances do arise that would not be able to be resolved with 28 days. ASIC was not given the power to extend this period.

3.32 An example where 28 days may not be sufficient to resolve a conflict of interest situation, is where a professional member of the audit team acquires a beneficial interest in shares of the audited body through a deceased estate. This interest in the shares may not be able to be disposed of until the probate in relation to the deceased estate has been finalised, which may take months or even years.

3.33 The Government agreed that the Corporations Act should be amended in order to give ASIC the power to extend the period within which an auditor is required to resolve a conflict of interest situation beyond the 21 day period under subsections 327(2A), 327(2B) and 327(2C).

3.34 The operation of Chapter 2M of the Act was modified by regulation 2M.6.05 of the Corporations Regulations (which was included in the Corporations Amendment Regulations 2006 (No. 4 )) by omitting from subsections 327B(2A), (2B) and (2C) of the Act the words '21 days' and inserting '21 days, or such longer period as ASIC allows'.

3.35 These amendments to the Corporations Regulations will be replicated in paragraphs 327B(2A)(b), (2B)(b) and (2C)(b) of the Corporations Act. [Schedule 1, Part 1, item 63]

3.36 Similar measures will be introduced in relation to an auditor of a registered scheme in paragraphs 331AAA(2A)(b), (2B)(b) and (2C)(b) of the Corporations Act. [Schedule 1, Part 1, item 64]

3.37 Consequential amendments will be made to the notes to subsections 324CA(1A), 324CB(1A), 324CC(1A), 324CE(1A), 324CF(1A) and 324CG(1A) respectively. [Schedule 1, Part 1, items 45, 46, 49 and 51]

Improvements arising out of public consultations on the comparative review of Australia's auditor independence requirements

Multiple former audit firm partner restriction

3.38 The report of the HIH Royal Commission recommended that in implementing the proposed CLERP 9 Act, the proposals for restrictions on employment relationships between an auditor and the audit client should include 'a prohibition on any more than one former partner of an audit firm, at any time, being a director of or taking a senior management position with the client'.

3.39 The HIH recommendation was implemented as part of the CLERP 9 Act reforms in section 324CK of the Corporations Act.

3.40 In its response to the report of the Taskforce on Reducing Regulatory Burdens on Business, Rethinking Regulation , the Government announced that it would review the multiple audit firm partner restriction by the end of 2006. The Treasury progressed this review through its targeted consultation on the comparative review.

3.41 All the stakeholders agreed that the restriction in section 324CK serves a useful purpose, however there was also agreement that some changes should be made to address the perceived over reach of the existing requirement. The stakeholders proposed that former partners of an audit firm and former directors of an authorised audit firm who had departed from the firm or audit company for five or more years should be excluded from the restriction.

3.42 A minimum five year separation period was considered appropriate because the longer former partners have been out of the firm, the less likely they will be in a position to influence the current professional members of the audit team or be so familiar with the audit approach and testing strategy that they are able to circumvent them. A time limit is also easy to apply and enforce.

3.43 The amendment to paragraph 324CK(c) will limit the application of the restriction in section 324CK to a former member of an audit firm or former director of an audit company who becomes an officer of the audited body within a period of five years after the person ceased (or last ceased) to be a member of the audit firm or a director of the audit company (as the case may be). [Schedule 1, Part 1, item 62]

3.44 It is noted that where a former partner or former director, as described in paragraph 324CK(d), is also an officer of the audited body, the time when that former partner or former director ceased to be a partner of the firm or director of the audit company, is irrelevant in determining whether an offence under this section has been committed by the person referred to in paragraph 324CK(c).

'Cooling-off' period for former audit team partners

3.45 Section 324CI of the Corporations Act imposes a mandatory period of two years from the date of departure from the firm before a former partner of an audit firm, or a former director of an audit company, who was on the audit team can become an officer of the audit client. Section 324CJ imposes a similar restriction on the lead or review auditor of an authorised audit company.

3.46 The two year 'cooling-off' period is in line with overseas requirements (although Canada only imposes a one year 'cooling-off' period). The comparative review noted, however, that the Australian requirement, unlike the position overseas, applies regardless as to how far back the partner's participation on the audit team took place - the Australian requirement would, for example, apply to a former partner who last worked on the audit team 20 years ago. Canada, the UK and the US place a limit on the time of participation on an audit team prior to the partner's date of departure. All the key stakeholders agree that a similar limit should be included in the Australian restriction.

3.47 Most of the stakeholders have suggested that the two year 'cooling-off' period should run from the time the person ceased to be a member of the audit team, rather than from the time the person resigned from the audit firm.

3.48 The amendment to paragraph 324CI(d) will ensure that the two year separation period in relation to a former partner, or former director of an audit company, commences from the date the auditor's report under section 308 (annual financial report) or section 309 (half year financial report) was made in respect of the latest audit in which that partner or director participated. A similar amendment will be made to s. 324CJ(d) in relation to a former lead auditor or review auditor of an audit company. [Schedule 1, Part 1, items 60 and 61]

Introduction of a 'covered person' approach to existing financial relationship restrictions

3.49 The auditor independence regimes in Australia, Canada, the European Commission, the UK and the US have all adopted specific employment and financial relationship restrictions between an audit firm and an audit client.

3.50 The comparative review, however, identified that only Australia and the UK applied these restrictions on an 'all partner' basis rather than focusing on those persons in the audit firm with a close connection with a particular audit that is,. the professional members of the audit team. In the US, a person who has a close connection with an audit is referred to as a 'covered person'.

3.51 All the key stakeholders have agreed that the existing restrictions in relation to financial investments could be limited to professional members of the audit team rather than all the partners in the firm because it is considered that auditor independence can best be protected by applying the restrictions to persons in the firm who are in a position to influence the audit and also because of the reduction in the compliance burden for both the firm and for partners who have no connection with an audit. An example of a financial investment restriction is the existing prohibition on a professional member of the audit team owning a share in the audit client. It is noted in the context of this proposal that ASIC would always be able to use the general auditor independence obligations in the Corporations Act to challenge situations where a partner, unconnected to an audit, held a financial investment in the audit client and in the circumstances of the particular case, the investment gave rise to a perception threat to the audit firm's independence.

3.52 It is proposed to achieve a 'covered person' approach in relation to the restrictions on financial investments by:

·
expanding the scope of the definition of a 'professional member of the audit team' in section 324AE of the Corporations Act to include some additional persons who come within the scope of the definition of 'audit team' in the Code of Ethics for Professional Accountants (APES 110);
·
modifying the application of some of the existing prohibited financial relationships as they apply to a member of the firm and to a professional member of the audit team conducting the audit of the audited body; and
·
making a number of consequential amendments and also addressing some anomalies that have been identified in relation to the existing financial relationship restrictions.

3.53 The definition of a 'professional member of the audit team' in section 324AE will be amended to include:

·
any person who recommends or decides what the lead auditor is to be paid in connection with the performance of the audit; and
·
any person who provides, or takes part in providing, quality control for the audit. [Schedule 1, Part 1, item 44]

3.54 The table in subsection 324CF(5) which applies to an audit firm will be amended to achieve the following outcomes:

·
a member of an audit firm who is not a professional member of the audit team conducting the audit will no longer be subject to the specific financial investment restrictions in table items 10 to 14 of subsection 324CH(1);
·
a professional member of the audit team will be made subject to the non-loan and loan debt restrictions under subsection 324CH(1). This addresses an anomaly in the CLERP 9 reforms which did not apply non-loan debt restrictions to a professional member of the audit team; and
·
for consistency purposes, the non-loan and loan restrictions applying to an immediate family member of a professional member of the audit team conducting the audit of the audited body will be brought into line with the corresponding requirements applying to a professional member of the audit team. [Schedule 1, Part 1, item 50]

3.55 Corresponding amendments will be made to the table in subsection 324CE(5) which applies to an individual auditor and to the table in subsection 324CG(9) which applies to an audit company to achieve similar outcomes applying to an audit firm. [Schedule 1, Part 1, items 48 and 52]

3.56 Table item 15 of subsection 324CH(1) will be amended in order to remove the existing carve out for debts on non-commercial terms up to $5000. This exemption can no longer be justified in light of the introduction of the ordinary course of business exemption which was introduced by regulation in mid-2006. The Government has taken the view that there should be zero tolerance of any transaction on non-commercial terms between an auditor and an audit client because of the perception threat to auditor independence. [Schedule 1, Part 1, item 53]

3.57 Table item 18 of subsection 324CH(1) which applies to loan debt restrictions will be deleted. As table item 15 of subsection 324CH(1) will no longer contain the existing $5000 carve out, it is simpler to deal with both non-loan and loan debt restrictions under table item 15. [Schedule 1, Part 1, item 55]

3.58 The new subsection 324CH(5B) will replicate the ordinary commercial loan exemption in subsection 324CH(7) (which applies to table item 18) for purposes of the revised table item 15. Subsection 324CH(7) will also be repealed. These are consequential amendments as a result of the deletion of table item 18 of subsection 324CH(1). [Schedule 1, Part 1, items 56 and 58]

3.59 Subsection 324CH(8A) will clarify that a reference to a debt or amount owing in the section includes a reference to a debt or amount that will (or may) be owed under an existing agreement between the entities. The purpose of the amendment is to ensure that a debt or amount owing under an existing agreement between two entities, such as a loan, that has not yet crystallised as a 'debt' should be covered by section 324CH. A similar amendment has been made in relation to a liability under a guarantee of a loan. [Schedule 1, Part 1, item 59]

Miscellaneous amendments

Drafting amendment

3.60 A drafting error in table item 2 of subsection 324CE(5) will be addressed by deleting the word 'firm' and replacing it by a reference to 'individual auditor'. [Schedule 1, Part 1, item 47]

ASIC relief powers

3.61 ASIC at present has limited powers to exempt members of audit firms who are registered company auditors from the requirements of Division 3 of Part 2M.4 (auditor independence) of the Corporations Act.

3.62 The auditor independence requirements of the CLERP 9 Act inserted new obligations applying to members of firms who are not registered company auditors, to retiring members of audit firms, to retiring directors of an audit company and to retiring professional employees of an audit company.

3.63 ASIC's existing relief powers will be extended to cover members of an audit firm who are not registered company auditors, former members of an audit firm, former directors of an audit company and former professional employees of an audit company. Section 342AA provides for ASIC to grant specific relief from the auditor independence requirements to these categories of persons. Section 324AB will enable ASIC to make class orders in relation to these persons. The criteria that ASIC must apply in making an order under either section 342AA or section 342AB are set out in section 342AC. These criteria are identical to the existing criteria in section 342 which apply to ASIC's existing relief powers. [Schedule 1, Part 1, item 65]

3.64 Subsection 342AA(5) is included to assist readers of the legislation, as the instrument is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 . [Schedule 1, Part 1, item 65]

Audit of compliance plan

3.65 Subsection 601HG(1) requires a registered managed investment scheme's compliance plan to be audited by a registered company auditor. A registered company auditor must be a natural person and therefore an authorised audit company is ineligible to be appointed as the auditor of a compliance plan. This is inconsistent with subsection 601HG(4A) which assumes that the compliance plan can be audited by an authorised audit company.

3.66 This anomaly will be addressed by amending section 601HG to make it clear that a registered company auditor, an audit firm or an authorised audit company is eligible to be appointed as the auditor of a compliance plan. [Schedule 1, Part 1, item 67]

Deletion of cross reference to a repealed provision

3.67 Section 990A provides that nothing in sections 990B to 990H (deALIGN with the appointment of an auditor by a financial services licensee) applies where the licensee is a body corporate to which section 327 applies. Section 327 was repealed by the CLERP 9 Act. A revised section 990A will provide that nothing in sections 990B to 990H applies to a financial services licensee that is a public company. [Schedule 1, Part 1, item 127]

Appointment of auditor by licensee

3.68 Section 990B will be amended to clarify that an individual person and an authorised audit company can be appointed by a financial services licensee to audit its financial statements. [Schedule 1, Part 1, item 128]

Auditor's right of access to records, information etc

3.69 Subsections 990I(2) and (3) provide that an auditor of a financial services licensee may require assistance from the licensee and where the licensee is a body corporate, from any senior manager of the licensee. The reference to 'senior manager' is in contrast to the pre-CLERP 9 Act provisions which referred to an 'executive officer'. A director and secretary of a body corporate came within the scope of the definition of an 'executive officer' in the pre-CLERP 9 legislation. The definition of 'senior manager' expressly excludes a director or secretary of the body corporate.

3.70 The measures in subsections 990I(2) and (3) will enable ASIC to seek assistance from a director, secretary or senior manager of the body corporate where the licensee is a body corporate. [Schedule 1, Part 1, items 129 and 130]

Application and transitional provisions

Anomalies arising from CLERP 9

3.71 The amendments relating to the time when an auditor's independence declaration must be given to the directors and the reporting obligation in relation to inadvertent breaches in the auditor independence declaration will apply to a report for a financial year that ends on or after the day on which those amendments commence (the day on which the Act receives the Royal Assent). [Schedule 1, Part 6, item 233]

Improvements arising out of public consultations on the comparative review of Australia's auditor independence requirements

3.72 The amendments which will give effect to a 'covered person' approach in relation to the auditor independence restrictions on financial relationships will apply to an audit of the financial report for a financial year or an audit or review of the financial report for a half-year in a financial year, if the financial year begins on or after the day on which the relevant amendments commence (the day on which the Act receives the Royal Assent). [Schedule 1, Part 6, item 234]

3.73 The amendments which will modify the way in which the two-year 'cooling-off' period is calculated under sections 324CI and 324CJ, and the amendment to the multiple former audit partner restriction, will apply to any person who ceases to be a member of an audit firm, a director of an audit company or a professional employee of an audit company whether the person so ceases before or after the day on which those amendments commence (the day on which the Act receives the Royal Assent). [Schedule 1, Part 6, item 235]

3.74 The amendments in sections 327B(2A), (2B) and (2C) and sections 331AAA(2A), (2B) and (2C) which will empower ASIC to extend the period within which an auditor is required to resolve a conflict of interest situation will apply in relation to information given to ASIC under those provisions on or after the day the amendments commence (the day on which the Act receives the Royal Assent). [Schedule 1, Part 6, item 236]


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