List of Q&As on this page:
Corporations Act breaches (ANT05/2008)
Disclosing director's ages (ANT01/2008)
Small foreign owned companies (ANT36/2007)
Small foreign owned (ANT33/2007)
Grandfathered companies and size thresholds (ANT32/2007)
Non-listed to listed client (ANT31/2007)
Corporations Act reporting requirements (ANT21/2007)
Corporations Act breaches
as reported in ANT05/2008
Q: Does an audit qualification for non-compliance with accounting standards require notification to ASIC under Section 311 of the Corporations Act?
A: Yes, a notification to ASIC would usually be required in these circumstances.
Under Section 311(1)(a) of the Corporations Act, an auditor is required to notify ASIC if the auditor has reasonable grounds to suspect a contravention of the Act and they believe that the contravention is either significant or, if not significant, cannot be adequately dealt with by inclusion in the audit report or by bringing it to the attention of the directors.
ASIC’s Regulatory Guide 34 “Auditors Obligations: Reporting to ASIC “ (formerly know as practice note 34) provides detailed guidance on the application of this section of the Act. This guide states at paragraph 20 that one example of a likely significant breach is “a breach of accounting standards or the true and fair view requirement”. This is on the basis that compliance with accounting standards is required by the Corporations Act (section 296) and therefore a breach (or suspected non-compliance) of an accounting standard is a breach (or suspected breach) of the Corporations Act.
Non-compliance with accounting standards is further discussed in paragraphs 33 to 35 of the Guide. This section states that an auditor’s obligations to include breaches of accounting standards under section 308(2) and 309(2) do not relieve auditors from their reporting obligations under s 311. The practice note considers that departures from accounting standards would generally be either significant or, even if not significant, it might not be dealt with adequately in the audit report or by drawing it to the directors’ attention and therefore should be reported under Section 311.
The Technical Standards team wrote an article in Charter in April 2005, which summarised the reporting responsibilities under s311.
Disclosing director's ages
as reported in ANT01/2008
Q: I have noticed that some specimen accounts disclose the ages of the directors in the Directors' Report and some do not. I thought it was a legal requirement but cannot find it in the Corporations Act.
A: There used to be a mandatory retiring age of 72 for directors of public companies, and as a result of this, the directors' ages were disclosed under S 300(10) as part of the directors' qualifications and experience. The mandatory retiring age was removed in the CLERP 7 reforms in 2003 and so it can be argued that age is no longer relevant as a qualification for office. Some of the major firms recommend disclosing the directors' age as best practice and some have removed it, hence the discrepancy between the specimen accounts you may have seen. Note that some companies still retain mandatory retiring ages in their constitutions and in such cases age would be a relevant qualification.
Small foreign owned companies
as reported in ANT36/2007
Q: Where can I find guidance on the reporting and auditing requirements for small foreign owned companies?
A: The Corporations Act provides that most small proprietary companies are generally not required to prepare financial reports. Small is defined in section 45A(2) using several thresholds. The recent passage of the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 has increased the thresholds that distinguish small and large proprietary companies for financial reporting purposes, increasing them from $10 million in revenue to $25 million in revenue and from $5 million in assets to $12.5 million in assets. The threshold regarding the number of employees will remain at 50 employees. Entities must continue to satisfy 2 of the three tests and the new thresholds are applicable for 30 June 2007 year-ends.
However a significant exception to this general rule relates to small proprietary companies under foreign company control. These types of companies are generally treated by the Corporations Act as if they are large proprietary companies. The only exception to this is if the small proprietary company 's financial statements are consolidated by an Australian company, registered scheme, disclosing entity or registered foreign company that lodges with ASIC (see section 292(2)(b).
The effect of section 292(2)(b) is that small foreign owned companies must lodge audited financial reports with ASIC. However ASIC has provided class order relief to some of these entities exempting them from:- the preparation and lodgement of financial reports (CO98/98)
- or auditing requirements (CO98/1417)
Class Order relief
The relief from preparation and lodgement applies to small proprietary companies where the company, and any related entities (i.e. controlled by an overseas parent) formed or carrying on business in Australia, and their controlled entities fall under the large/small test criteria on an aggregated basis. A notice of a directors' resolution to apply the class order must be lodged in the 3 months immediately before commencement of the year.
Class order 98/98 has recently been updated for recent changes in the Corporations Act. These changes update the amounts in the large group test and provide a temporary extension of time for lodgment for companies immediately affected by the changes. Class order 7/505 which effects these changes is available on the ASIC website and was discussed in more detail in ANT 34.
If the small foreign owned proprietary company does not meet the lodgement exemption available under class order 98/98, it may still be eligible for audit relief.
Audit relief is available in the same way as it is to any large proprietary company under CO 98/1417. This class order requires the company to have unanimous agreement from directors and shareholders not to have an audit, have not previously had an audit and meet strict financial and other criteria. Again resolutions to this effect must be made annually and ASIC notified at the start of each financial year.
Companies that do not strictly meet the criteria for relief under either class order may apply for individual relief under ASIC Policy Statement 115.
Copies of the class orders referred to above are available from the ASIC website http://www.asic.gov.au.
Small foreign owned
as reported in ANT33/2007
Q: My client used to be large, but under the new thresholds is now a small foreign controlled proprietary company. What effect will this have on its reporting requirements?
A: If your client is foreign controlled, the changes to the dollar thresholds will generally have no effect on its reporting requirements because these types of companies are still treated by the Corporations Act as being large. The only exception to this is if the small proprietary company 's financial statements are consolidated by an Australian company, registered scheme, disclosing entity or registered foreign company that lodges with ASIC (see section 292(2)(b).
ASIC has also provided class order relief to some of these entities exempting them from:- the preparation and lodgment of financial reports (CO98/98)
- or auditing requirements (CO98/1417)
Copies of these class orders are available on the ASIC website.
In early July ASIC issued class order 7/505 "Variation and revocation of financial reporting instruments" (refer ANT28- 19 July 2007) which revises the amounts in the 'large group' test in class order 98/98 to make these consistent with the revised small/ large thresholds. It also allows entities affected by the threshold changes an extension of time to lodge the relevant application. Previously the relief required directors resolutions and the lodgement of Form 384 three months before the financial year end (class order 98/98). However for financial years ending 28 June 2007 to 30 June 2008, the revised class order allows Form 384 to be lodged by four months after year end or 31 October 2007, whichever occurs first.
Similar modifications have been made to the thresholds contained in Declaration 02/1432 by this class order to enable registered foreign companies that are similar to small proprietary companies to be relieved from their reporting requirements.
For more details visit the ASIC website.
Grandfathered companies and size thresholds
as reported in ANT32/2007
Q: What is the status of grandfathered companies that exceeded the previous size thresholds, but which are now below the revised size thresholds introduced by the recent Corporations Act changes?
Does the company lose its grandfathered status by virtue of no longer being required to have an audit, or can the company retain that status by continuing to have an audit, despite one no longer being required? Is that perhaps a cost of retaining grandfathering?
A: A grandfathered large proprietary company that has become small as a result of the recent corporations law changes and which still wishes to maintain its grandfathered status must continue to have its financial statements audited in order to do so.
This is a requirement of the original conditions for grandfathering contained in the old s.319(4) of the Corporations Law, which is preserved through s.1408(6) of the Corporations Act.
The explanatory memorandum to the Company Law Review Bill 1997 which introduced grandfathering says:
"If the company was a large proprietary company at the end of the financial year that ended after 9 December 1995, but falls below that threshold in subsequent financial years, it may still take advantage of the exemption provided in subsection 319(4) of the Bill if it has continued to have its financial statements and reports audited before the deadline in each financial year from the financial year ending during 1993."
Thanks to Doug Niven at ASIC for helping us with this one
Non-listed to listed client
as reported in ANT31/2007
Q: A firm has already served as the auditor of a non-listed company for four financial years using the same lead engagement partner, when the client goes through an IPO in March 2008. What are the rotation requirements for the lead engagement partner?
A: Since the company has become a listed entity, the partner is now subject to the rotation requirements, which date from their appointment to the then non-listed client.
The lead engagement partner has acted in that role for each of the 2004, 2005, 2006 and 2007 years, before the rotation provisions of Section 290 of the Code of Ethics apply to the 2008 audit of the financial year beginning 1 July 2007.
Accordingly, the lead engagement partner can continue to act in that role for the 2008 year, but should rotate off for the 2009 audit.
Eligibility to play a significant role in the audit in each financial year:
2004 - yes
2005 - yes
2006 - yes
2007 - yes
IPO - March 2008
2008 - yes
2009 - no
Para 290.154 provides that the time served is from the commencement of the financial period in which the lead engagement partner, the audit review partner (if any) or Engagement Quality Control Reviews (EQCR) served in those roles, not the date the audit client listed. In accord with the international standard, Para 290.155 also provides for two additional years when an audit client becomes a listed entity.
However, the Corporations Act does not specifically address the situation where an audit client becomes a listed entity. The Act's rotation requirements (s324DA, DB, DC and DD) applied to a financial year commencing on or after 1 July 2006, to listed entities, where an individual played a significant role in the audit for 5 successive financial years. Further under the Commentary to the CLERP 9 transitional arrangements applying to the rotation obligations, "where a person has already conducted three or more successive annual audits for a listed company or scheme at the time that the legislation takes effect, they, their audit firm and the client company or scheme will need to be aware that the auditor must be replaced for the audit following the date at which the rotation provisions take effect (that is, two years following commencement of the Act)" i.e. two years following 1 July 2004.
Accordingly it would appear that the legislation was intended to be prospective in its application regarding the rotation requirements (on 1 July 2006) but recognised the role played by the lead engagement partner and audit review partner prior to 1 July 2006. It would thus be prudent to consider all the time served as a lead engagement partner, audit review partner (if any) or EQCR from the commencement of the financial period in which the individual served in those roles, not the financial period in which the client listed. In all such circumstances when a person is not rotated after the pre-defined five (5) year period equivalent safeguards, including the possible obtaining of an extension under the Corporations Act, should be applied to reduce any threats to an acceptable level.
Corporations Act reporting requirements
as reported in ANT21/2007
Q: I'm not sure that my new client has been complying with all its Corporations Act reporting requirements. Can I find a summary of all these to ensure my client is meeting its obligations?
A: March 2007 Charter includes an article by Claire Locke and Keith Reilly of the Institute's technical team which summarise all the current reporting requirements. The article covers who has to prepare and lodge reports, what class order relief is available, what accounting standards need to be complied with as well as dealing with special issues like foreign companies. |
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