House of Representatives

Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Bill 2010

Explanatory Memorandum

Circulated By the Authority of the Minister for Financial Services, Superannuation and Corporate Law, the Hon Chris Bowen MP

Chapter 5 - Amendments relating to auditors and actuaries

Outline of chapter

5.1 Schedules 1 to 4 of the Bill contain amendments enhancing the regulatory framework that applies to the auditors and actuaries of regulated entities.

Context of amendments

Appointment of auditors and conduct of audits

5.2 Currently, under the Banking, Insurance, and Life Insurance Acts there are various provisions relating to the appointment of auditors and the conduct of audits. These provisions vary across the Acts.

5.3 Further, there are currently no provisions in the FSCODA relating to the appointment of auditors and the conduct of audits. APRA may require much of the data collected under the FSCODA to be audited via its existing powers in the Banking, Insurance, Life Insurance and Superannuation Industry (Supervision) Acts. However, these provisions do not extend to all data collected under the FSCODA.

Offences relating to auditors

5.4 Currently there are no statutory prohibitions under the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act , Retirement Savings Accounts Act 1997 ( RSA Act) or the FSCODA against misleading or otherwise interfering with an auditor in carrying out its functions. Further, the Acts do not require an auditor to advise APRA or the ATO (as relevant) where a person has sought to interfere with the auditor carrying out their duties and functions.

5.5 However, such provisions presently exist under the Corporations Act. Section 1309 of the Corporations Act makes it an offence for an officer or employee of a corporation to knowingly mislead an auditor of a corporation, or if the corporation is controlled by another corporation an auditor of the other corporation. Section 311 of the Corporations Act makes it an offence for auditors to fail to report to ASIC within 28 days attempts to unduly influence, coerce, manipulate or mislead them; or, attempts to otherwise interfere with the proper conduct of the audit.

5.6 The present offences in the Corporations Act apply when auditors are undertaking functions or exercising duties under the Corporations Act, but not when undertaking similar functions or exercising similar duties under the prudential Acts.

Information from auditors and actuaries of life insurers

5.7 Section 49 of the Insurance Act currently permits APRA to give a written notice to any person who is, or has been, an auditor of a general insurer requiring them:

·
to give APRA information about the insurer; or
·
to produce books, accounts or documents about the insurer;

if APRA considers that the provision of the information, or the production of the books, accounts or documents, will assist APRA in performing APRA's functions under the Insurance Act.

5.8 However, no equivalent provision currently exists in the life insurance context. As a result, at present APRA cannot issue a notice to auditors and actuaries of life companies to gather information that it may require to perform its functions in the life insurance context.

Summary of new law

5.9 Schedules 1 to 4 of the Bill contain amendments to the Banking, Insurance, Life Insurance, Superannuation Industry (Supervision), Financial Sector (Collection of Data) and Retirement Savings Accounts Acts that:

·
harmonise the provisions relating to the appointment of auditors and the conduct of audits under the Banking, Insurance and Life Insurance Acts, as appropriate;
·
enhance the auditing of data under the FSCODA;
·
insert equivalent offences (as relevant) to those contained in sections 311 and 1309 of the Corporations Act into the Banking, Insurance, Life Insurance, Superannuation Industry (Supervision), Financial Sector (Collection of Data) and Retirement Savings Accounts Acts; and
·
require auditors and actuaries of life insurers to give information to APRA on request that relates to APRA's functions under the Life Insurance Act or the FSCODA.

Comparison of key features of new law and current law

New law Current law
Clarifies that without limiting the prudential matters in relation to which APRA may determine a prudential standard under the Banking, Insurance and Life Insurance Acts, a standard may provide for matters relating to:

·
the appointment of auditors; or
·
the conduct of audits.

The Banking, Insurance and Life Insurance Acts provide that APRA may, in writing, determine prudential standards in relation to prudential matters to be complied with by ADIs, insurers and authorised NOHCs.
If prudential standards made under the Banking Act require an auditor to be appointed (appointed auditor), the auditor must perform the functions and duties of an auditor set out in the prudential standards. Under sections 49J of the Insurance Act and 83 of the Life Insurance Act, auditors of insurers must perform for the insurer the functions of an auditor set out in the prudential standards.
No current equivalent under the Banking Act.
An appointed auditor under the Banking Act and auditors appointed by life companies must comply with prudential standards in performing their functions and duties or exercising their powers, as relevant. Under section 41 of the Insurance Act, auditors of general insurers must comply with prudential standards in performing their duties or exercising their powers.
No current equivalent under the Banking or Life Insurance Acts.
ADIs and authorised NOHCs must make any arrangements that are necessary to enable appointed auditors to perform their functions and duties. Under sections 49J of the Insurance Act and 83 of the Life Insurance Act, an insurer must make arrangements that are necessary to enable auditors to perform their functions as set out in the prudential standards.
No current equivalent under the Banking Act.
A life insurer must appoint another person as its auditor within 6 weeks of the office being vacated. Under section 39 of the Insurance Act, a general insurer must appoint another person as its auditor within 6 weeks of the office being vacated.
No current equivalent under the Life Insurance Act.
APRA may, by written notice, require an insurer to appoint a person specified in the notice to be an auditor for a purpose specified in the notice. The Insurance and Life Insurance Acts require insurers to have an auditor appointed by the insurer to perform the functions of an auditor set out in the prudential standards. However, the Acts do not provide for the appointment of additional auditors for specific purposes.
Under the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act, FSCODA and Retirement Savings Accounts Act it is an offence for an employee, officer or trustee of a regulated entity (including authorised NOHC) to:

·
knowingly mislead an auditor of the entity; or
·
fail to take reasonable steps to ensure that information given, or allowed to be given, by them is not misleading.

Section 1309 of the Corporations Act contains equivalent offences for Corporations Act purposes.
No current equivalent under the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act, FSCODA or Retirement Savings Accounts Act.
Under the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act, FSCODA and Retirement Savings Accounts Act it is an offence for auditors of regulated entities (including authorised NOHCs) to fail to report to APRA within 28 days:

·
attempts to unduly influence, coerce, manipulate or mislead them in the performance of their functions or duties; or
·
attempts to otherwise interfere with the performance of their functions or duties.

Section 311 of the Corporations Act contains an equivalent offence for Corporations Act purposes.
No current equivalent under the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act, FSCODA or Retirement Savings Accounts Act.
APRA may, by written notice given to a person who is, or was, an auditor or actuary of a life insurer, require the person:

·
to give APRA information about the insurer; or
·
to produce books, accounts or documents about the insurer;

if APRA considers that the giving of the information, or the production of the books, accounts or documents, will assist APRA in performing APRA's functions under the Life Insurance Act or the FSCODA.
Section 49 (Duty of auditors and actuaries to give information when required) of the Insurance Act provides APRA with a similar power in relation to auditors and actuaries of general insurers.
No current equivalent under the Life Insurance Act.

Detailed explanation of new law

Appointment of auditors and conduct of audits

5.10 Currently, under the Banking, Insurance, and Life Insurance Acts there are various provisions relating to the appointment of auditors and the conduct of audits. However, the provisions vary across the Acts.

5.11 The Bill amends the Banking, Insurance and Life Insurance Acts to harmonise the obligations of auditors and actuaries under the Acts, where appropriate. In particular, the Bill:

·
Amends the Banking, Insurance and Life Insurance Acts to provide that prudential standards made under the Acts may provide for matters relating to the appointment of auditors or the conduct of audits. This clarifies the existing law . [Schedule 1, item 10, schedule 2, item 18, and schedule 3, item 49, subsection 11AF(1AB) of the Banking Act 1959, paragraph 32(3)(b) of the Insurance Act 1973, and subsection 230A(1A) of the Life Insurance Act 1995]
·
Amends the Banking Act to provide that an auditor appointed in accordance with prudential standards (appointed auditor) must perform the functions and duties of an auditor set out in the prudential standards. Similar provisions presently exist in the Insurance and Life Insurance Acts . [Schedule 1, items 2 and 36, subsections 5(1), 16AV(1) and 16AV(2) of the Banking Act 1959]
·
Amends the Banking and Life Insurance Acts to provide that an appointed auditor of an ADI or auditor appointed by a life insurer must comply with prudential standards in performing their duties and functions or exercising their powers, as relevant. Auditors of general insurers are currently subject to an express duty to comply with APRA's prudential standards. The proposal ensures that auditors of ADIs and life insurers are also subject to this duty . [Schedule 1, item 36, and schedule 3, item 11, subsections 16AV(1) and 16AV(3) of the Banking Act 1959, and section 83B of the Life Insurance Act 1995]
·
Amends the Banking Act to provide that ADIs and authorised NOHCs of ADIs must make any arrangements that are necessary to enable an appointed auditor to perform their functions and duties. Currently, under the Insurance and Life Insurance Acts, an insurer must make arrangements necessary to enable the auditor to perform the functions specified in the prudential standards. The amendment ensures that ADIs and authorised NOHCs of ADIs are subject to this requirement . [Schedule 1, item 36, subsections 16AV(1) and 16AV(4) of the Banking Act 1959]
·
Amends the Life Insurance Act to require a life insurer to appoint another person as its auditor within 6 weeks of that office being vacated. General insurers are presently subject to an equivalent requirement . [Schedule 3, item 11, subsections 83(2) of the Life Insurance Act 1995]

5.12 The Bill also amends the Insurance and Life Insurance Acts to provide that APRA may, by written notice, require an insurer to appoint a person specified in the notice to be an auditor for a purpose specified in the notice. At present, the Acts require insurers to have an auditor. The amendments empower APRA to require insurers to appoint additional auditors for particular purposes, for example, to conduct a special purpose audit. For ADIs, the prudential standards provide for such audits . [Schedule 2, item 28, and schedule 3, item 11, subsection 40(1) of the Insurance Act 1973, and subsection 83A(1) of the Life Insurance Act 1995]

5.13 As a result of this amendment, the Bill creates a distinction between the 'principal auditor' of an insurer and 'an auditor' of an insurer. The latter term captures both the principal auditor and an auditor appointed for a specific purpose by notice from APRA.

5.14 The distinction ensures that provisions in the Insurance and Life Insurance Acts are targeted at relevant auditors. For example, the present requirements under the Acts on insurers to appoint an auditor, [3] to notify APRA of that appointment, or for the auditor to audit the insurer's yearly statutory accounts, are not intended to apply to auditors appointed by notice from APRA for a specific purpose. As a result, such provisions are amended to refer to the 'principal auditor' rather than to 'an auditor'. Similarly, those provisions intended to apply to all auditors are amended so as to refer to 'an auditor' . [Schedule 2, items 4, 19, 21 to 34, 36 to 39, 44, and 45, and schedule 3, items 10 to 26, 28, 32 to 36, 38, 41, and 60, subsection 3(1), paragraphs 38AA(3)(a) and 38AA(7)(a), subparagraphs 38A(2)(a)(ii), 38E(1)(b)(i) and 38E(1)(c)(i), division 1 of Part IV (heading), subsections 39(2) to 39(4), subsections 40(2), 43(2), 46(1), and 46(2), paragraphs 49(1)(a), 49A(1)(a), 49A(11)(c), and 49B(a), subsections 49J(1) to 49J(4), and paragraphs 49R(1)(a) and 49R(3)(a) of the Insurance Act 1973, and subsection 80(3), section 83, subsection 83A(2), section 84, paragraph 84(a), subsection 85(1), paragraphs 85(1)(a), 85(2)(a) and 85(2)(b), subsection 85(2), section 86, subsections 87(1), 87(3), 87(4), 88(1), to 88(2A), paragraphs 88(2B)(c), 88(3)(a) and 88(4)(b), subsections 88(4), and 89(1), paragraphs 125(1)(b) and 125A(1)(a), subsection 126(1), paragraphs 132A(3)(a) and 132A(7)(a), subparagraphs 156A(2)(a)(ii), 156E(1)(b)(i) and 156E(1)(c)(i), and the dictionary in the schedule of the Life Insurance Act 1995]

5.15 The Bill also makes similar amendments to the Banking Act to clarify whether particular provisions apply only to appointed auditors (that is, auditors appointed under the prudential standards) or to all auditors of relevant entities . [Schedule 1, items 37, 39, 41 and 45, paragraphs 16BA(11)(c), subsection 17(1), subparagraphs 52A(2)(a)(ii), 52E(1)(b)(i) and 52E(1)(c)(i), and paragraphs 62A(1A)(a) and 62A(1D)(a) of the Banking Act 1959]

5.16 The Bill includes saving provisions to ensure that the amendments relating to the appointment of auditors under the Insurance and Life Insurance Acts do not unintentionally affect any present appointments. Those appointments continue as if they had been made after the relevant amendments commence. In addition, the saving provisions clarify that any auditor presently appointed under the Insurance or Life Insurance Acts is the principal auditor of the insurer after the amendments commence . [Schedule 2, item 92, and schedule 3, item 62, saving provisions-appointment as an auditor of a general insurer or life company]

5.17 Finally, the Bill amends the FSCODA to provide for the appointment of auditors and the conduct of audits under that Act.

5.18 There are currently no provisions in the FSCODA relating to the appointment of auditors and the conduct of audits. APRA may require much of the data collected under the Act to be audited via its existing powers in the Banking, Insurance, Life Insurance and Superannuation Industry (Supervision) Acts. However, these provisions do not extend to all data collected under the FSCODA.

5.19 The Bill addresses this situation by:

·
amending subsection 13(2) of the FSCODA so that reporting standards may include matters relating to the auditing of reporting documents; and
·
setting out the functions and duties of auditors appointed under reporting standards . [Schedule 4, item 14 and 20, paragraphs 13(2)(bb) and section 17B of the Financial Sector (Collection of Data) Act 2001]

5.20 The functions and duties of an auditor appointed under a reporting standard are equivalent to those applying in the banking and insurance contexts. The auditor must perform the functions and duties of an auditor that are set out in the reporting standards and must comply with the reporting standards in performing those functions and duties. In addition, the financial sector entity that appoints the auditor must make any arrangements that are necessary to enable the auditor to perform their functions and duties . [Schedule 4, item 20, section 17B of the Financial Sector (Collection of Data) Act 2001]

5.21 The above provisions do not apply in circumstances in which APRA may presently audit data that is collected under the FSCODA. Rather, the provisions apply if a financial sector entity is required to appoint an auditor under reporting standards that relate to the collection of information that APRA requires:

·
to perform APRA's functions in relation to the FCS;
·
to assist a financial sector agency perform its functions or exercise its powers; or
·
under a reporting standard issued on the direction of the Minister . [Schedule 4, item 20, section 17A of the Financial Sector (Collection of Data) Act 2001]

Offences relating to auditors

5.22 Currently there are no statutory prohibitions under the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act, RSA Act or the FSCODA against misleading or otherwise interfering with an auditor in carrying out their functions. Further, the Acts do not require an auditor to advise APRA or the ATO (as relevant) where a person has sought to interfere with the auditor carrying out their duties and functions.

5.23 However, such provisions presently exist under the Corporations Act for the purposes of that Act. Section 1309 of the Corporations Act makes it an offence for an officer or employee of a corporation to knowingly mislead an auditor of a corporation, or if the corporation is controlled by another corporation an auditor of the other corporation. Section 311 of the Corporations Act makes it an offence for auditors to fail to report to ASIC within 28 days attempts to unduly influence, coerce, manipulate or mislead them; or, attempts to otherwise interfere with the proper conduct of the audit.

5.24 The Bill addresses this inconsistency, by inserting equivalent offences to those in the Corporations Act into the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act, RSA Act and the FSCODA.

Auditor must notify APRA of attempts to unduly influence them

5.25 First, the Bill amends the Acts to require auditors to notify APRA in writing as soon as practicable, and in any case within 28 days, of becoming aware of certain circumstances. These circumstances are:

·
any attempt by any person to unduly influence, coerce, manipulate or mislead the auditor in connection with the performance of the auditor's functions or duties; or
·
any attempt by any person to otherwise interfere with the performance of the auditor's functions or duties.

5.26 It is an offence (punishable by 12 months imprisonment or a fine of 50 penalty units, or both) for an auditor to fail to comply with the above mentioned requirement. The penalty mirrors that applicable to the equivalent offence that presently exists in section 311 of the Corporations Act. [4] [Schedule 1, item 38, schedule 2, item 35, schedule 3, item 29, schedule 4, items 20, 29 and 35, section 16D of the Banking Act 1959, section 49D of the Insurance Act 1973, section 90 of the Life Insurance Act 1995, section 17C of the Financial Sector (Collection of Data) Act 2001, section 69 of the Retirement Savings Accounts Act 1997, and section 130BA of the Superannuation Industry (Supervision) Act 1993]

Person knows the information is false or misleading

5.27 Second, the Bill amends the Acts to make it an offence for an employee, officer or trustee of a regulated entity to knowingly give false or materially misleading information relating to the affairs of the entity to an auditor of the entity, or to knowingly allow such information to be so given . [Schedule 1, item 38, schedule 2, item 35, schedule 3, item 29, schedule 4, items 20, 29 and 35, subsection 16E(1) of the Banking Act 1959, subsection 49DA(1) of the Insurance Act 1973, subsection 91(1) of the Life Insurance Act 1995, subsection 17D(1) of the Financial Sector (Collection of Data) Act 2001, subsection 70(1) of the Retirement Savings Accounts Act 1997, and subsection 130BB(1) of the Superannuation Industry (Supervision) Act 1993]

5.28 The penalty for the offence is imprisonment for five years or a fine of 200 penalty units, or both. The penalty mirrors that applicable to the equivalent offence that presently exists in section 1309 of the Corporations Act. [5]

Person fails to ensure the information is not false or misleading

5.29 Finally, the Bill amends the Acts to make it an offence for an employee, officer or trustee of a regulated entity to give false or materially misleading information relating to the affairs of the entity to an auditor of the entity, or to allow such information to be so given, in circumstances where they did not take reasonable steps to ensure the information was not false or materially misleading . [Schedule 1, item 38, schedule 2, item 35, schedule 3, item 29, schedule 4, items 20, 29 and 35, subsection 16E(2) of the Banking Act, subsection 49DA(2) of the Insurance Act 1973, subsection 91(2) of the Life Insurance Act 1995, subsection 17D(2) of the Financial Sector (Collection of Data) Act 2001, subsection 70(2) of the Retirement Savings Accounts Act 1997, and subsection 130BB(2) of the Superannuation Industry (Supervision) Act 1993]

5.30 The penalty for the offence is imprisonment for 2 years or a fine of 100 penalty units, or both. The penalty mirrors that applicable to the equivalent offence that presently exists in section 1309 of the Corporations Act. [6]

5.31 For the purpose of the above mentioned offences, if the information given to the auditor is in response to a question asked by the auditor, the information and the question must be considered together in determining whether the information is false or misleading . [Schedule 1, item 38, schedule 2, item 35, schedule 3, item 29, schedule 4, items 20, 29 and 35, subsection 16E(3) of the Banking Act 1959, subsection 49DA(3) of the Insurance Act 1973, subsection 91(3) of the Life Insurance Act 1995, subsection 17D(3) of the Financial Sector (Collection of Data) Act 2001, subsection 70(3) of the Retirement Savings Accounts Act 1997, and subsection 130BB(3) of the Superannuation Industry (Supervision) Act 1993]

Information from auditors and actuaries of life insurers

5.32 The Bill amends the Life Insurance Act to provide that APRA may, by written notice, given to a person who is, or was, an auditor or actuary of a life insurer, require the person:

·
to give APRA information about the insurer; or
·
to produce books, accounts or documents about the insurer;

if APRA considers that the giving of the information, or the production of the books, accounts or documents, will assist APRA in performing APRA's functions under the Life Insurance Act, the FSCODA, or the First Home Saver Accounts Act 2008. [Schedule 3, items 8, 27 and 30, subsections 74(2), 88B(1) and 98B(1) of the Life Insurance Act 1995]

5.33 It is an offence for a person to fail to comply with such a notice, or in complying with such a notice for them to give APRA information that is false or misleading. The penalty for the offence is 60 penalty units if prosecuted as an offence of strict liability. Otherwise, the penalty is imprisonment for 6 months or a fine of 100 penalty units, or both . [Schedule 3, items 27 and 30, subsections 88B(2) to 88B(5) and 98B(2) to 98B(5) of the Life Insurance Act 1995]

5.34 Similar provisions presently apply under the Insurance Act in relation to persons who are, or have been, auditors and actuaries of general insurers. It is important that APRA can obtain accurate information from such persons to ensure that it can effectively perform its functions, including protecting the interests of the owners and prospective owners of insurance policies in a manner consistent with the continued development of a viable, competitive and innovative insurance industry.

5.35 As a result of the amendments, consequential amendments are made to subsections 132A(3) and 132A(7) of the Life Insurance Act to update notes in those subsections that informs readers of the provisions in the Act related to auditors and actuaries giving information to APRA . [Schedule 3, items 37 and 39, subsections 132A(3) (note 1) and 132A(7) (note 1) of the Life Insurance Act 1995]


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