House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon David Bradbury MP)

Communications with corporations, registered schemes and disclosing entities

Outline of chapter

5.1 During the consultation process on Treasury's audit quality paper, ASIC proposed that it should be able to communicate directly with the audited body (and particularly the entity's audit committee) in relation to significant matters which it identifies during the course of the exercise of ASIC's statutory functions in relation to an audit.

5.2 A significant matter could relate to a matter concerning the audit client's accounting or disclosure practices, or to the conduct of the audit by the audit firm. ASIC has explained that it was placed in a difficult position where it became aware of significant matters affecting the audit of a company during the inspection or surveillance of an audit firm and yet it was unable to disclose this to the audited body or its audit committee. ASIC is prevented from making such disclosures to the audited body or its audit committee without the audit firm's consent because of the confidentiality requirements in section 127 of the ASIC Act.

5.3 The amendments allow ASIC to disclose information to the directors, the audit committee or a senior manager of a company, responsible entity or disclosing entity concerning the conduct of the audit or compliance by the audited body with the requirements in Chapter 2M to prepare financial statements and reports, or with the continuous disclosure requirements of sections 674 and 675 of the Corporations Act. The information that is authorised to be disclosed must have been obtained by ASIC in the course of the exercise of its functions and powers in relation to audit.

Context of amendments

5.4 The objective of the amendments is to remove the current restriction on ASIC under section 127 of the ASIC Act from communicating significant matters to the audited body or its audit committee. ASIC is currently prevented from communicating information, obtained by ASIC during the exercise of its statutory functions and powers in relation to audit, to the audited body, the directors or its audit committee. Communicating this information to the audited body would assist the directors in fulfilling their responsibilities in relation to the preparation of the company's financial statements and the audit of those financial statements.

5.5 ASIC has provided the Treasury with the following examples (based on its actual regulatory experience) where the power to communicate with a company, responsible entity of a registered scheme or a disclosing entity (or their directors or audit committee) would have been appropriate and in the public interest:

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A small audit firm conducting an audit improperly where there would be very limited prospect of the audit firm communicating appropriately with the audit committee. While ASIC could refer the individual auditor to the Companies Auditors and Liquidators Disciplinary Board (CALDB), this would be a lengthy process. ASIC's ability to communicate quickly with the audit committee about the defective conduct of an audit would enable the directors to fulfil their obligations.

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Group audits where there are impairment issues involving off shore components of the group which ASIC has become aware of during an audit inspection or through its audit surveillance work where the company does not have the relevant information that ASIC has obtained.

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A situation where ASIC is looking at 'impairment calculation' issues from both the audit point of view and the company's financial reporting point of view. ASIC's concerns arise from information it has obtained from the auditor's working papers. However, the company and the auditor are not communicating with each other. ASIC is of the view that section 127 of the ASIC Act precludes it from raising these concerns with the audit committee because the auditor's working papers are confidential.

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An example relating to concerns that ASIC has about asset values. ASIC cannot obtain the relevant information from the company but it is aware from its audit inspection work that a schedule has been prepared which discloses the calculations used by the company for determining its asset values. ASIC is of the view that section 127 of the ASIC Act prohibits it from referring to this schedule in its discussions with the company.

Summary of new law

5.6 The measures amend section 127 of the ASIC Act to ensure that certain information, obtained by ASIC during the exercise of its functions and powers in relation to audit, which is disclosed to the directors, the audit committee or a senior manager of the audited body, will be treated as authorised disclosure for the purposes of section 127.

Comparison of key features of new law and current law

Detailed explanation of new law

5.7 Subsection 127(2D) of the ASIC Act allows certain information to be communicated to the directors, the audit committee or a senior manager of a company, responsible entity or disclosing entity (as authorised use and disclosure of information for purposes of section 127) if the Chairperson is satisfied that:

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the information has been obtained by ASIC while exercising its functions and powers in relation to audit;

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the information is:

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about how an audit of a company was conducted by an Australian auditor; or

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about the company's, scheme's or entity's compliance with the requirements in Chapter 2M of the Corporations Act to prepare financial statements and reports, or with the continuous disclosure requirements of sections 674 and 675 of the Corporations Act; and

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the information should be disclosed to the company, to the responsible entity of the registered scheme or to the disclosing entity in order to assist the company, scheme or entity to properly manage its affairs. [ Schedule 2, Part 3, item 17, subsection 127(2D )]

5.8 The circumstances that must satisfy the ASIC Chairperson relate to information obtained by ASIC while exercising its powers or functions:

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in relation to audit-related matters (Corporations Act audit requirements) under Chapter 2M, Chapter 5C, Part 7.8, Part 9.2 or 9.2A of the Corporations Act or under other provisions of that Act that relate to that Chapter or that Part;

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for the purposes of ascertaining compliance with Corporations Act audit requirements;

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in relation to:

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an alleged or suspected contravention of Corporations Act audit requirements;

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an alleged or suspected contravention of a law of the Commonwealth, or of a State or Territory in this jurisdiction, being a contravention that relates to an audit matter and that either concerns the management or affairs of a body corporate or involves fraud or dishonesty and relates to a body corporate; or

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for the purposes of an investigation under Division 1 of Part 2 of the ASIC Act relating to a contravention referred to in the preceding paragraph. [ Schedule 2, Part 3, item 17, subsection 127(2E )]

5.9 The ASIC Chairperson may authorise a person to disclose the information on their behalf (the authorised person). [ Schedule 2, Part 3, item 17, subsection 127(2D )]

5.10 The authorised person must not disclose information about how an audit was conducted by an Australian auditor unless they notify the Australian auditor of the proposed disclosure at least seven days before disclosing the information. If the authorised person only discloses the information to a senior manager, they must provide a copy of the disclosure to the directors and audit committee of the company, responsible entity or disclosing entity as soon as possible. Failure to comply with these requirements does not result in the disclosed information becoming unauthorised. [ Schedule 2, Part 3, item 17, subsections 127(2F ) and 127(2G )]

Application and transitional provisions

5.11 The new measures made by Part 3 of Schedule 2 to the Bill apply in relation to information obtained by ASIC after commencement. [ Schedule 2, Part 4, item 18, subsection 294(2 )]

Consequential amendments

5.12 There are no consequential amendments in relation to the amendments made by Part 4 of Schedule 2 to the Bill.