Commonwealth Numbered Regulations - Explanatory Statements

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CORPORATIONS AMENDMENT REGULATION 2012 (NO. 5) (SLI NO 171 OF 2012)

EXPLANATORY STATEMENT

Select Legislative Instrument 2012 No. 171

Issued by authority of the Parliamentary Secretary to the Treasurer

Corporations Act 2001

Corporations Amendment Regulation 2012 (No. 5)

Subsection 1364(1) of the Corporations Act 2001 (the Corporations Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Corporations Act to be prescribed by regulations, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.

The Corporations Legislation Amendment (Audit Enhancement) Act 2012 (the Audit Enhancement Act) amends the Corporations Act to strengthen Australia's audit regulation framework.  

The Audit Enhancement Act inserts Part 2M.4A into the Corporations Act. Part 2M.4A provides that an auditor must publish an annual transparency report if, during a transparency reporting year, they conduct audits of 10 or more bodies of any of the following kinds: listed companies, listed registered schemes; authorised deposit-taking institutions; and insurance companies.

Part 2M.4A includes Section 332B, which provides that an annual transparency report must contain information prescribed by the Regulations. The purpose of the Regulation is to prescribe the information that must be included in an annual transparency report.  

The information required is broadly similar to that required in an annual transparency report in the European Union (EU), as set out in Article 40 of the EU's Statutory Audit Directive 2006/43/EC.

The EU was the first jurisdiction to require audit firms to publish annual transparency reports.  The United States (US) also requires audit firms to publish annual transparency reports, requiring similar information to that required in the EU.  Basing the Australian requirements on the EU requirements ensures that Australia's requirements are in line with international best practice and will minimise the compliance burden on multinational audit firms that are required to publish transparency reports in multiple jurisdictions.

When audit firms perform audits of significant entities, there are a number of parties that have an interest in the operations of the audit firm.  However, because Australia's larger audit firms are usually structured as partnerships, minimal information about their ownership, governance, business structure and activities is publicly available.  The type of information required in an annual transparency report is intended to provide existing and potential clients, and stakeholders that rely on the audit report of a significant entity, with factual information about operation of the audit firm.

The Regulation specifies that an annual transparency report must contain (where relevant):

•                 information about the auditor's legal structure and ownership;

•                 where the auditor belongs to a network, information about the network and the legal and structural arrangements in the network;

•                 information about the auditor's governance structure;

•                 information about the internal quality control system of the auditor;

•                 details of when the last reviews of the auditor conducted by an authorised body took place;

•                 the names of entities of audited;

•                 information about the auditor's independence practices;

•                 the auditor's continuing professional development policy;

•                 financial information for the auditor regarding their audit and non-audit revenue; and

•                 information regarding the basis of remuneration of an auditor's partners or directors.

The Regulation would apply in relation to annual transparency reports for the transparency reporting year in which Schedule 1 to the Audit Enhancement Act commences and all later transparency reporting years.

Details of the Regulation are set out in the Attachment A.  A Statement of Compatibility with Human Rights is at Attachment B.  

Under the Corporations Agreement 2002 (the Corporations Agreement), the State and Territory Governments referred their constitutional powers with respect to corporate regulation to the Commonwealth. Under subclauses 506(1) and 507(1) of the Corporations Agreement, the Commonwealth is required to consult with State and Territory Ministers of the Ministerial Council for Corporations (the Council) before making a regulation under the national law. The Council approved the amendments and agreed to a reduction of the period of public consultation to two weeks. The Regulation was then publicly exposed for consultation.

The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Regulation commences on the commencement of Schedule 1 to the Audit Enhancement Act, to coincide with the commencement of Part 2M.4A of the Corporations Act.

ATTACHMENT A

Details of the Corporations Amendment Regulation 2012 (No. 5)

Section 1 - Name of Regulation

This provides that the title of the Regulation is the Corporations Amendment Regulation 2012 (No. 5).

Section 2 - Commencement

This provides for the Regulation to commence on commencement of Schedule 1 to the Corporations Legislation Amendment (Audit Enhancement) Act 2012 (Audit Enhancement Act), to coincide with the commencement of Part 2M.4A of the Corporations Act 2001 (the Corporations Act). 

Section 3 - Amendment of Corporations Regulations 2001

This provides that the Corporations Regulations 2001 (the Principal Regulations) are amended as set out in Schedule 1.

Schedule 1 - Amendments

Item [1] - Part 2M.4A

This item inserts Part 2M.4A after Part 2M.4 of the Principal Regulations.

Part 2M.4A.01 specifies that the amendments apply in relation to annual transparency reports for the transparency reporting year in which Schedule 1 to the Audit Enhancement Act commences, and all later transparency reporting years. A transparency reporting year is a period of 12 months starting on 1 July. 

Part 2M.4A.02 specifies that the information that an annual transparency report must contain is set out in Schedule 7A.  It also specifies that Part 2 of Schedule 7A relates to the requirements for an audit firm or authorised audit company, and that Part 3 relates to the requirements for an individual auditor. 

Item [2] - Schedule 7A

This item inserts Schedule 7A after Schedule 7 of the Principal Regulations, to specify the information that must be contained in an annual transparency report. 

Part 1 of Schedule 7A defines key terms used in the schedule.  The terms that are defined are:

•                 'management body' - in the case of an authorised audit company, the Board of Directors; and

•                 'relevant transparency reporting year' - the transparency reporting year to which an annual transparency report relates.  'Transparency reporting year' is defined in subsection 332(2) of the Corporations Act, which was inserted by the Audit Enhancement Act.

Other terms and expressions have the same meaning given by the Corporations Act.  These include:

•                 annual transparency report;

•                 audit;

•                 audit activity;

•                 authorised audit company;

•                 audit firm;

•                 director;

•                 engage in audit activity;

•                 financial year;

•                 individual auditor;

•                 non-audit services provider;

•                 professional accounting body;

•                 professional member of an audit team; and

•                 remuneration.

Part 2 of Schedule 7A prescribes the information that a transparency reporting audit firm or authorised audit company must include in the annual transparency report.  The transparency reporting auditor must provide:

•                 a description of their legal structure and ownership;

•                 if they belong to a network, a description of the network, the legal arrangements of the network and the structure arrangements of the network;

•                 a description of their governance structure;

•                 a description of their internal quality control system;

•                 a statement from their administrative or management body on the effectiveness of the functioning of the internal quality control system during the year to which the report relates;

•                 the name of each body that is authorised to review the auditor (for example, the Australian Securities and Investments Commission (ASIC) or a professional accounting body) and the date of the most recent review conducted by those bodies;

•                 the names of the listed companies, listed registered schemes, authorised deposit-taking institutions and insurance companies for which they have conducted an audit under Division 3 of Part 2M.3 of the Corporations Act during the year to which the transparency report relates (that is, bodies of the kinds that will be mentioned in subsection 332A(1) of the Corporations Act as qualifying an auditor for the transparency report requirements);

•                 a statement about their practices to ensure auditor independence in the year to which the report relates, including the date they most recently conducted an internal review of their compliance with auditor independence requirements;

•                 a statement about their policy regarding the minimum amount and nature of continuing and professional education that the professional members of the audit team must undertake during the year to with the transparency report relates;

•                 financial information for the year to which the report relates, including total revenue, and revenue relating to audits of financial statements and other services provided by the auditor; and

•                 information concerning the basis for remuneration of the partners or directors.

Part 3 of Schedule 7A prescribes information that an individual transparency reporting auditor must include in the annual transparency report.  This information is broadly the same as that required for audit firms and authorised audit companies in Part 2 of Schedule 7A.  The transparency reporting auditor must provide:

•                 if the belong to a network, a description of the network, the legal arrangements of the network and the structure arrangements of the network;

•                 a description of their internal quality control system;

•                 the name of each body that is authorised to review the auditor (for example, ASIC or a professional accounting body) and the date of the most recent review conducted by those bodies;

•                 the names of the listed companies, listed registered schemes, authorised deposit-taking institutions and insurance companies for which they have conducted an audit under Division 3 of Part 2M.3 of the Corporations Act during the year to which the transparency report relates (that is, bodies of the kinds that will be mentioned in subsection 332A(1) of the Corporations Act as qualifying an auditor for the transparency report requirements);

•                 a statement that sets out their practices to ensure auditor independence in the year to which the report relates; and

•                 financial information for the year to which the report relates, including total revenue, and revenue relating to audits of financial statements and other services provided by the auditor.

Some requirements that apply to audit firms and authorised audit companies are not able to be applied to individual auditors because they relate specifically to the structure or operations of a firm or company.  For example, individual auditors are not required to provide information on the latest internal review of their auditor independence practices because it is not possible for an individual to conduct an internal review of themselves.

ATTACHMENT B

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Corporations Amendment Regulation 2012 (No. 5)

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview of the Legislative Instrument

The purpose of the Legislative Instrument is to specify the information that must be included in an annual transparency report, where an auditor or audit firm is required to publish an annual transparency report by Part 2M.4A of the Corporations Act 2001.

Human rights implications

This Legislative Instrument does not engage any of the applicable rights or freedoms.

Conclusion

This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.

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