Bills Digest no. 173 2011–12
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WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Law and Bills Digest Section
26 June 2012
21 June 2012
House: House of Representatives
Commencement: Sections 1–3 on the day of Royal Assent; Schedule 1 on the earlier of a day to be fixed by Proclamation or six months after Royal Assent.
Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.
The purpose of the Corporations Legislation Amendment (Financial Reporting Panel) Bill 2012 (the Bill) is to repeal the functions and powers of the Financial Reporting Panel.
The Financial Reporting Panel was established by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (known as CLERP 9).
The Financial Reporting Panel is a statutory authority established to determine contested issues between the Australian Securities and Investments Commission (ASIC) and entities concerning the application of accounting standards and the true and fair view requirement in financial reports. The Financial Reporting Panel is an independent third party mechanism which allows disputes between ASIC and entities lodging financial reports to be resolved without the cost of court proceedings. Whilst a dispute is predominantly referred to the Financial Reporting Panel by ASIC, it may, with consent from ASIC, also be referred to it by the lodging entity.
The Explanatory Memorandum to the CLERP 9 Bill describes the intended benefits of the Financial Reporting Panel as follows:
The Financial Reporting Panel represents a less expensive method of resolving these disputes and allows matters to be heard by persons with particular expertise. This will overcome the concerns about the unfamiliarity of courts with subject matter concerning the application of accounting standards and the true and fair view.
The Financial Report Panel commenced operations on 3 July 2006. It was expected that small and medium-sized enterprises that wanted to debate the use of accounting standards in their financial statements without incurring sizeable legal costs would significantly benefit from the Financial Reporting Panel's alternative dispute resolution process.
However, it has been reported that:
... in the three years it heard no cases (2007–10), the [Financial Reporting Panel] still cost the government $800 000.
The FRP has received almost $1.75 million in funding since 2006. This equates to almost
$350 000 of taxpayer’s money expended on each case.
In November 2011, Treasury circulated a discussion paper entitled The Future of the Financial Reporting Panel. The discussion paper explained that:
From July 2006, when the FRP was established, to August 2010, the Financial Reporting Panel did not determine any cases. This lack of activity brings into question whether there is a need for the Financial Reporting Panel going forward, and if so whether the current referral process should remain unchanged.
The discussion paper also noted that in August 2010, ASIC had referred four disputed financial reports dealing with a diverse range of accounting issues to the Financial Reporting Panel.
There were 10 submissions to Treasury. In general, they supported the retention of the Financial Reporting Panel. For example, KPMG took the view that the Financial Reporting Panel:
... provides a cost-effective and timely process for the resolution of disputes over the application of accounting standards between ASIC and financial reporting entities. The process acts as a circuit breaker between the parties and minimises the need for judicial proceedings. Reporting entities are unlikely to challenge ASIC’s interpretation in court.
Deloitte also supported the retention of the Financial Reporting Panel, suggesting that it ‘could expand its scope and make determinations of audit related matters’.
Ernst & Young expanded on this further stating that it believed that the Financial Reporting Panel ‘can be enhanced by expanding its role and reconsidering the constitution of the panel’. These comments were made in the context of the amendments to the Australian Securities and Investments Act 2001 (ASIC Act) contained in the Corporations Legislation Amendment (Audit Enhancement) Bill 2012 (the Audit Enhancement Bill). The Audit Enhancement Bill was passed by both Houses of the Parliament on 18 June 2012—although at the time of writing this Bills Digest it had not received the Royal Assent.
The Audit Enhancement Act (when enacted) will insert new Division 5A into Part 3 of the ASIC Act to allow ASIC to identify a deficiency in an audit conducted by an Australian auditor which consists of a failure by the auditor to comply with auditing standards, auditor independence requirements in the Corporations Act 2001 (Corporations Act), an applicable code of professional conduct or with the provisions of the Corporations Act dealing with the conduct of audits, where ASIC reasonably believes that it indicates a significant weakness in the auditor’s quality control system or in the conduct of the audit.
In such a case, ASIC may give notice in writing to the auditor of the identified audit deficiency, and if ASIC is satisfied that the auditor has not taken steps within a six month period to remedy the identified deficiency, then ASIC may publish the audit deficiency report on its website.
According to Ernst & Young the Financial Reporting Panel ‘would be an appropriate body to arbitrate disputes between ASIC and audit firms with regard to audit deficiency reports under proposed Division 5A’.
Despite the views of stakeholders that the Financial Reporting Panel should be retained, in February 2012, the Parliamentary Secretary to the Treasurer, David Bradbury, announced that the Financial Reporting Panel would be wound up due to lower than expected referral rates. In particular he stated:
Between 2006, when it was established, and 2010, only one case was referred to the FRP, but the matter was resolved before a determination was made. Four cases were referred to the FRP in August 2010. These referrals led the Government to review whether there was an ongoing role for the FRP but there have been no referrals to the body since that time.
At the time of writing this Bills Digest, neither the Senate Selection of Bills Committee nor the Senate Standing Committee for Scrutiny of Bills had referred the Bill to any Committee for inquiry and report.
According to the Explanatory Memorandum the financial implications of the Bill are nil.
Items 1 and 2 of Schedule 1 to the Bill amend the Australian Securities and Investments Commission Act 2001 (the ASIC Act). In particular, item 2 repeals Part 13 of the ASIC Act which establishes the Financial Reporting Panel including its membership and how it is to conduct its business.
Items 3–6 of Schedule 1 to the Bill amend the Corporations Act 2001 (Corporations Act). In particular, item 4 repeals Division 9 of Part 2M.3 of the Corporations Act, which provides that ASIC (or a lodging entity with the consent of ASIC) may refer a financial report to the Financial Reporting Panel for an opinion on whether the financial report complies with one or more of the financial reporting requirements.
Item 7 repeals paragraphs 4(1)(ja) and (jb) of the Corporations (Fees) Act 2001 to remove references to the Financial Reporting Panel from the list of chargeable matters in that Act.
Item 8, in Part 2 to the Bill inserts new Part 10.21 (consisting of proposed section 1538) into Chapter 10 of the Corporations Act. Proposed section 1538 is a transitional provision which operates so that, despite the repeal of section 323EM of the Corporations Act (by item 5 of Schedule 1 to the Bill) a Court, or a tribunal of fact, may have regard to a Financial Reporting Panel’s report in determining whether an entity’s financial report complied with the financial reporting requirements.
There appears to have been little take-up of the dispute resolution process offered by the Financial Reporting Panel in the six years since it was established—although it is unclear whether the need to have ASIC’s consent for a referral acted as a deterrent to those entities wishing to contest issues about the application of accounting standards to financial reports.
After the passage of this Bill, companies which disagree with ASIC over the application of accounting standards to financial reports will have to take proceedings in court in order to obtain a judicial determination of the matter.
Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2434.
. Ernst & Young, op. cit.
. Explanatory Memorandum, p. 3.
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