Reform Proposals


Expanded Financial Reporting Council

1. The Government will expand the responsibilities of the Financial Reporting Council (FRC), which currently oversees the accounting standard setting process, to oversee auditor independence requirements in Australia. The FRC will:

  • Oversee auditing standard setting arrangements. This will be achieved by reconstituting the existing Auditing and Assurance Standards Board (AuASB) with a Government appointed Chairman under the auspices of the FRC, similar to the Australian Accounting Standards Board (AASB). Auditing standards will have the force of law on the same basis as AASB Standards.
  • Advise the accounting professional bodies on issues of auditor independence.
  • Monitor and report on the nature and adequacy of the systems and processes used by audit firms to deal with issues of auditor independence.
  • Monitor and report on the response of companies in complying with audit-related disclosure requirements.
  • Advise on continuing steps to enhance auditor independence.
  • Promote and advise on the adequacy of the teaching of professional and business ethics by the professional accounting bodies and tertiary institutions.
  • Monitor and assess the adequacy of the disciplinary procedures of the accounting bodies.
  • Maintain responsibility for oversight of the accounting standard setting process.

These arrangements are outlined in the diagram on the following page.

Financial Reporting Oversight Board Structure

Flowchart: Financial Reporting Oversight Board Structure

Quality of audit

Auditor independence

2. The Government will amend the Corporations Act (the law) to include a General Statement of Principle requiring the independence of auditors.

3. The Government will amend the law to require the auditor to make an annual declaration that they have maintained their independence.

4. The Government will amend the law to strengthen restrictions on employment relationships between an auditor and the audit client.

  • This will include a mandatory period of two years following resignation from an audit firm before a former partner who was directly involved in the audit of a client can become a director of the client or take a position with the client involving responsibility for fundamental management decisions.

5. The Government will amend the law to impose new restrictions on financial relationships. This will cover investments in audit clients and loans between an audit client, and the auditor or his immediate family.

Non-audit services

6. The Government supports the immediate application of Professional Statement F1 on Professional Independence, which forms part of the Joint Code of Professional Conduct of the ICAA and CPAA.

  • Statement F1 is based on the independence standard adopted by the International Federation of Accountants. It requires auditors to identify and evaluate threats to independence and apply safeguards to reduce any threats to an acceptable level.
  • Where the provision of non-audit services to an audit client poses a threat that cannot be reduced to an acceptable level, statement F1 prohibits the provision of that service.

7. The Government will implement a series of measures to deal with non-audit services. It will:

  • Amend the law to require mandatory disclosure in the annual report of fees paid for the categories of non-audit services provided.
  • Amend the law to require a statement in the annual report of whether the audit committee is satisfied the provision of non-audit services is compatible with auditor independence. This disclosure would include an explanation as to why the following non-audit services referred to in Professional Statement F1, if contracted, do not compromise auditor independence:
      • preparing accounting records and financial statements of the audit client;
      • valuation services;
      • internal audit services;
      • IT systems services;
      • temporary staff assignments;
      • litigation support services;
      • legal services;
      • recruitment of senior management for the audit client; and
      • corporate finance and similar activities.
Audit committees

8. It will be mandatory for the top 500 listed companies (that is those that compose the All Ordinaries Index) to have audit committees. The ASX has announced it will amend its rules to achieve this.

  • The Government supports the role of the ASX Corporate Governance Council in developing best practice standards for audit committees.
Appointment and removal of auditors

9. The Government will make audit partner rotation compulsory after 5 years.

  • The new requirement will apply to the lead engagement partner and the review partner. To maintain continuity of knowledge, the appointment of these partners could be staggered.
Attendance of auditor at AGM

10. The Government will amend the law to require an auditor to attend the AGM of a listed company at which the audit report is tabled and to answer reasonable questions about the audit.

  • The Government will ensure shareholders are able to submit questions by e-mail to the listed company and that the questions will be posted on the company web site.
Qualifications for registration as a company auditor

11. Accountants seeking registration as company auditors will be required to meet agreed competency standards, to undertake to abide by an accepted code of professional ethics, and to complete a specialist auditing course prior to registration.

Auditor liability

12. The Government will amend the law to allow auditors to incorporate.

13. The Government will seek the agreement of the States to introduce proportionate liability.

  • The Government believes that the market for audit services will be improved if the arbitrary consequences of the present rules relating to joint and several liability in relation to economic loss and property damage are reformed.

Quality of accounting

14. Australia will adopt accounting standards issued by the International Accounting Standards Board (IASB) for reporting entities under the law for accounting periods beginning on or after 1 January 2005, in line with the European timetable.

  • The FRC and the AASB will consult stakeholders on the measures that they regard as necessary between now and 2005 to ensure a smooth transition to IASB standards.

15. The IASB standard requiring expensing of share options will have the force of law on adoption by the AASB, expected to be in the second half of 2003.

16. The legal requirement that financial statements comply with accounting standards and that the financial statements and notes together present a true and fair view of an entity's financial position and performance will be maintained.

  • If any deficiencies in accounting standards have a general, unintended result that compliance with the standard would not result in a true and fair view, the appropriate response would be reform of the standard.

Analyst independence

17. There is a general duty on financial services licensees to ensure that financial services are provided 'efficiently, honestly and fairly'. Licensees should disclose any financial interest that they or a related party have in the subject of their advice or recommendation.

18. The Australian Securities and Investments Commission (ASIC) will be asked to provide guidance by policy statement on the level and manner of disclosure required under this general duty, following consultations with relevant stakeholders.

Continuous disclosure

19. The Government will maintain and enhance the framework of continuous disclosure.

20. Both ASIC and ASX will continue to have the capacity to enforce the continuous disclosure provisions that apply to listed entities.

21. The maximum civil penalty for a contravention of the continuous disclosure provisions by a body corporate will be increased from $200,000 to $1 million. The maximum penalty for bodies corporate in relation to contraventions of other financial services civil penalty provisions (relating to market manipulation and insider trading) will also be increased to $1 million.

22. ASIC will be given the power to impose financial penalties and issue infringement notices in relation to contraventions of the continuous disclosure regime.

23. In addition to its power to seek civil penalties in relation to contraventions of the continuous disclosure regime by disclosing entities, ASIC will be empowered to seek such a penalty against any other person involved in a contravention.

24. The Government will amend the civil recovery provisions relating to contraventions of the continuous disclosure provisions of the law to clarify that a person may seek compensation regardless of whether ASIC has sought a declaration of contravention. It will also allow persons to recover loss or damages from either the relevant entity or any other person involved in a contravention.

25. All investors should have equal access to materially price sensitive information disclosed by listed entities.

26. Market operators will be encouraged to ensure that they provide listed entities with education and guidance to promote compliance with the continuous disclosure provisions of their respective listing rules.

27. Market operators should require listed entities to respond to externally generated speculation in circumstances where the operator determines that this is having a significant impact on the market for their securities.

28. Issuers of managed investment products that are continuously quoted securities will be permitted to issue transaction specific Product Disclosure Statements. The Government will amend the law to ensure that ASIC is empowered to deny access to these arrangements in relation to issuers that have contravened relevant provisions of the law in the past 12 months.

Disclosure requirements for shares and debentures

29. The Government will improve the effectiveness of disclosure in prospectuses through extending the requirement for 'clear, concise and effective wording and presentation' in Chapter 7 for product disclosure statements to Chapter 6D for prospectuses.

30. The Government will more closely align the exemptions from the disclosure regimes that apply to sophisticated investors and wholesale clients.

31. The Government proposes that the disclosure requirements for secondary sales reflect the principle that where a person:

  • already holds pertinent information, or
  • has access to comparable information to what they would have otherwise received in a reasonable, timely and cost-effective manner,

no further disclosure obligations should apply. This will provide a sounder legislative basis for the operation of placements and will also facilitate ASIC taking relief action where appropriate.


32. ASIC will monitor the adequacy of civil and criminal penalties and make such recommendations as are required to ensure consistency and adequacy of penalties under the law.

33. The Government will amend the law to expand matters which auditors must report to ASIC to include any attempt to influence, coerce, manipulate or mislead the auditor.

34. The institutional arrangements for taking disciplinary action against registered company auditors will be strengthened to:

  • provide a majority of members of the CALDB, with appropriate skills, who are non-accountants;
  • allow the CALDB to sit in more than one Division simultaneously and provide for the appointment of a deputy chairman of the CALDB; and
  • enable the CALDB to provide information obtained in the course of a disciplinary proceeding to the investigation and disciplinary committees of the ICAA, CPAA and NIA to facilitate the disciplinary procedures of those bodies.

35. The Government will amend the law to provide qualified privilege and protection against retaliation in employment for any company employee reporting to ASIC, in good faith on reasonable grounds, a suspected breach of the law.

Shareholder participation and information

36. The Government will establish a Shareholders and Investors Advisory Council, to be chaired by the Parliamentary Secretary to the Treasurer, which it will consult on all disclosure-related reforms to ensure they meet the needs of retail investors.

37. To encourage shorter, more comprehensible notices of meetings:

  • the Government will amend the law to introduce a 'comfort provision' to protect disclosures made in good faith in a short-form notice of meeting; and
  • best practice guidelines concerning notices of meetings should be developed by the ASX Corporate Governance Council in consultation with ASIC.

38. The proposed best practice guidelines on notices of meetings will include a section dealing with the explanatory material for 'bundled resolutions'. The guidelines will include material on best practice for:

  • explaining 'bundled resolutions', including the primary purpose, impact and material implications;
  • providing access to fuller information on the component resolutions for those shareholders who seek it (for example, through company websites);
  • describing categories of resolution that should not be bundled but always dealt with as a separate item, with a separate explanation provided (for example, transactions affecting executive remuneration).

39. The Government will facilitate improved shareholder participation by electronic means (including electronic proxy voting, internet broadcasting and related technologies) by:

  • removing unnecessary legislative hurdles to the use of the technologies, subject to the need to maintain the rights of shareholders who are not internet users; and
  • requesting the ASX's Corporate Governance Council, in consultation with ASIC, to prepare guidelines for their use.

40. The Government will amend the law to require the annual directors' report for listed companies to disclose, with respect to each director holding office during the reporting period, details of all other directorship positions held currently and held over the past two reporting periods.

41. The Government will:

  • amend the law to permit members to elect to receive annual reports and notices electronically; and
  • support best practice guidelines concerning electronic distribution of annual reports being developed by the ASX's Corporate Governance Council in consultation with ASIC.