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CLERP 9 draft legislation released
The CLERP 9 draft legislation was released on Wednesday 8 October 2003. This draft legislation has been released for a short period of public comment, ahead of its expected implementation next July. However, in light of the number of controversial proposals included in CLERP 9, it will no doubt be the subject of much debate.
This Alert provides a brief summary of the key issues raised by the draft legislation.
The emphasis of CLERP 9 is on shareholder participation, continuous disclosure, audit reform and financial reporting, auditor independence and enforcement. In the important area of continuous disclosure, civil penalties are to be increased significantly, with the Australian Securities and Investments Commission ("ASIC") given unprecedented powers to "fine" entities which it considers have not complied with the requirements.
Those most affected by CLERP 9 will be listed companies, their directors, officers and auditors, and individuals "involved in" a contravention of the continuous disclosure provisions.
What are the main changes?
Shareholder participation - director and executive remuneration
The CLERP 9 draft legislation expands the disclosure requirements in relation to director and executive remuneration. This is intended to better equip shareholders to hold directors accountable for remuneration decisions.
The draft legislation provides for disclosure of remuneration details of CEOs and the 5 highest paid executives of the disclosing entity and of the consolidated group in a clearly identified section of the annual directors' report. Shareholders will be provided with the opportunity to discuss the remuneration section of the directors' report at the AGM and to vote on a non-binding resolution.
Some current exemptions from the requirement to seek shareholder approval for significant termination benefits have been capped to the statutory formula.
Continuous disclosure penalties
The Government is seeking to improve compliance with continuous disclosure obligations by:
- significantly increasing civil penalties;
- exposing directors, officers and others involved in contraventions to civil penalties; and
- giving ASIC the power to "fine" companies where it considers there has been a contravention.
CLERP 9 increases the maximum civil penalty for a contravention of the continuous disclosure provisions by a body corporate from $200,000 to $1 million. Persons "involved in a contravention" of the continuous disclosure regime by a body corporate will also now be subject to civil penalties, with the maximum civil penalty for a contravention by an individual set at $200,000.
ASIC will also be given the power to issue companies with infringement notices (or "fines") specifying payment of a financial penalty in relation to contraventions of the continuous disclosure regime. Infringement notices will specify payment of a financial penalty of $33,000, $66,000 or $100,000, depending on whether the company is a listed or unlisted disclosing entity, whether the company had previously contravened the continuous disclosure provisions and, if the company is listed, the entity's market capitalisation. If the company fails to comply with the infringement notice within the specified time period, ASIC may bring civil proceedings against the company in relation to the alleged contravention, and if a court subsequently determines that a contravention has occurred then the maximum pecuniary penalty that the court may impose upon the company is $1 million.
CEOs and CFOs will be required to certify to the board of directors that the financial statements present a true and fair view and have been prepared in accordance with the Corporations Act and accounting standards.
The CLERP 9 draft legislation seeks to improve the reliability and credibility of financial statements by enhancing the notion of auditor independence.
This is achieved by introducing:
- a general standard of auditor independence;
- a requirement that key individual auditors (not firms) of listed companies be rotated every 5 years (or up to 7 years where ASIC relief has been granted);
- a mandatory cooling off period of 4 years in relation to former partners and key senior audit personnel who were directly involved in the audit of a client before they can become directors of the client or take a senior management position with the client; and
- a prohibition on any more than one former partner of an audit firm, at any time, from being a director of or taking a senior management position with an audited body.
The role of the Financial Reporting Council is also to be expanded to cover oversight of the audit standard setting process and monitoring and advising on auditor independence.
Shareholders will be entitled to submit questions of the company auditor in writing before the company's AGM and auditors will be required to attend the AGM to enable shareholders to ask questions regarding the conduct of the audit and the content of the audit report.
Directors must also provide a statement in the annual report that identifies all non-audit services provided by the audit firm, the fees applicable to each item of work and an explanation as to why those non-audit services do not compromise audit independence.
Financial reporting enforcement
Auditing standards will have the force of law in the same way as Australian Accounting Standards Board accounting standards. A period of 2 years has been allowed to rewrite these standards into an enforceable code.
A Financial Reporting Panel will be established to resolve disputes between ASIC and companies concerning a company's accounting treatments in its financial report.
The draft provisions also strengthen the obligations for auditors to report suspected breaches of the law to ASIC and provide protection for officers, employees and contractors of a company who report suspected breaches of the law to ASIC.
The draft legislation also includes proposed amendments to the Corporations Act in relation to a number of other issues, including:
- incorporation of auditors;
- the introduction of a proportionate liability regime;
- broader reporting obligations for directors of public companies, covering the company's operations, financial position and future direction and prospects;
- a requirement for disclosure documents (prospectuses, profile statements and offer information statements) to be presented in a clear, concise and effective way;
- improved mechanisms for shareholders to participate and vote in general meetings;
- an additional financial services licensing requirement to specifically require licensees to have adequate arrangements for managing conflicts of interest; and
- expanded periods for disqualification of directors.
What is the timetable for the changes?
The CLERP 9 draft legislation has been released as an exposure draft in order to encourage comments from business and the community.
The exposure period will finish on 10 November 2003, and it is anticipated that the bill will be introduced into Parliament in December 2003 with a view to the amendments taking effect on 1 July 2004.
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