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Preliminaries

Date

© Commonwealth of Australia 2002

ISBN 0 64274164 6

This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth available from the Department of Communications, Information Technology and the Arts. Requests and inquiries concerning reproduction and rights should be addressed to:

The Commonwealth Copyright Administration
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GPO Box 2154
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or posted at:

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The Government is seeking comments from interested parties on the detail of the proposals in this paper. The comments should be forwarded to the following address:

The General Manager
Corporate Governance Division
The Treasury
Langton Crescent
PARKES ACT 2600

Inquiries concerning the paper can be made to:

Mike Kooymans
Telephone: 02 6263 3984

Ian Beckett
Telephone: 02 6263 2855

Copies of this paper are available on the Treasury website (

http://www.treasury.gov.au).

 

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Foreword

It is with great pleasure that we present the next chapter of the Government's Corporate Law Economic Reform Program, CLERP 9.

The program, which started under the Howard Government five years ago, has modernised business regulation and played a major role in building a strong and vibrant economy. Central to the whole program have been key principles of market freedom, investor protection and quality disclosure of relevant information to the market.

CLERP 9 builds on these reforms and adopts principles that provide for flexible law that takes account of the changing environment in which business operates, and ensures clear guidance on appropriate corporate behaviour and effective enforcement where breaches occur.

There have been a number of instances of unacceptable corporate behaviour in Australia and overseas and it is important that those who choose to circumvent effective ethical practice and legislative standards are deterred and appropriately dealt with.

However, we should keep in mind that Australian corporate governance regulation and practice are recognised internationally as being of high quality. We have an effective disclosure regime that provides timely and reliable information to the market.

But no country can afford to be complacent. Cases of corporate irresponsibility are not just about accounting standards and corporate governance rules. They potentially involve a range of questions for regulators, companies, auditors, analysts and investors. These issues are covered in this paper.

This Government is determined to ensure that Australia's corporate regulatory framework remains effective and helps define world's best practice. We will continue to work to protect investors and encourage business to innovate and move with the marketplace.

The Hon Peter Costello, MP
Treasurer

September 2002

Senator the Hon Ian Campbell
Parliamentary Secretary to the Treasurer

 

Table of contents

Foreword iii

Reform proposals 1

Part 1: Introduction 11

1.1 Background to review 11

1.2 Key economic principles 14

Part 2: Oversight of the auditing profession 17

2.1 Introduction 17

2.2 Background 17

2.3 Current structure for audit oversight in Australia 18

2.4 Overseas structures for auditor oversight 20

2.5 Options for oversight of auditing functions 22

Part 3: The market for audit services 29

3.1 Background 29

3.2 Market responses to accounting developments 29

3.3 The nature of audit contracting 33

3.4 Challenges to the value of audit reports 35

3.5 Competition in audit services 38

3.6 Conclusion 39

Part 4: Auditor independence 41

4.1 Background 41

4.2 The importance of auditor independence 42

4.3 Co-regulatory environment 43

4.4 Overseas developments 43

4.5 Core circumstances creating lack of independence 44

4.6 General statement of principle requiring independence 45

4.7 Employment relationships 47

4.8 Financial relationships 53

4.9 Provision of non-audit services 57

4.10 Audit committees 72

4.11 Appointment and removal of auditors 79

4.12 Attendance of auditor at AGM 83

Part 5: Auditor liability 87

5.1 Background 87

5.2 Incorporation of auditors 90

5.3 Joint and several and proportionate liability 93

5.4 Capping liability scheme 97

5.5 Conclusion 99

Part 6: Accounting standards 101

6.1 CLERP 1 reforms 101

6.2 Adoption by Australia of international accounting standards by 2005 102

6.3 Purpose of accounting standards 106

6.4 Particular accounting standards 107

6.5 Requirement for accounts to be true and fair 111

Part 7: Analyst independence and the regulation of general advice 115

7.1 Introduction 115

7.2 Sources of conflicts of interest 116

7.3 Current regulatory framework 117

7.4 Forced separation 117

7.5 Licensing 118

7.6 Disclosure 122

Part 8: Continuous disclosure 129

8.1 Introduction 129

8.2 Rationale for continuous disclosure 129

8.3 Principles of continuous disclosure 130

8.4 The current regulatory framework 132

8.5 Issues and proposals 135

Part 9: Disclosure requirements for shares and debentures 159

9.1 Introduction 159

9.2 The disclosure regimes 160

9.3 Better targeting the disclosure regimes 161

Part 10: Enforcement issues 169

10.1 Penalties for breaches of the Corporations Act auditing and accounting requirements 169

10.2 Auditors duty to disclose information to ASIC 173

10.3 Disciplinary procedures for auditors 174

10.4 Reporting of breaches to ASIC 178

Part 11: Shareholder participation and information 181

11.1 Shareholders and Investors Advisory Council 182

11.2 Form of notices of meetings 183

11.3 Access to general meetings 188

11.4 Disclosure of directorships in annual reports 192

11.5 Electronic distribution of annual reports and notices 193

Abbreviations 195