Most of the measures contained in the new law arising from what has been tagged CLERP 9 are effective from 1 July 2004.
CLERP 9: Things to keep an eye out for
By Tom Ravlic*
Most of the measures contained in the new law arising from what has been tagged CLERP 9 are effective from 1 July 2004. Things to watch out for include:
Directors' remuneration disclosure: CLERP 9 imposes disclosure requirements designed to gather more detail about the remuneration of directors and executives. The first point to note is that the directors report will have to have a section clearly labeled as a remuneration report.
All components of remuneration will need to be disclosed and this includes all of the various terms of options. You will notice that the disclosure requirements reflect the kind of guidance the ASIC has published in the past regarding remuneration disclosures.
There may be situations, because of the way companies are structured, where as many as 10 senior executives will have their details disclosed.
Accounting and legal firms have or are in the process of issuing various publications detailing some of the ways in which the disclosure requirements work in conjunction with the remuneration detail required by the Australian Stock Exchange's corporate governance council recommendations and the accounting standard on director and executive remuneration known as AASB 1046.
Chief executive and chief financial officer sign-offs: The CEO/CFO sign-off is unlike the beast with a similar name in the US. The Australian sign-off is for the assurance of a board of directors only rather than the general stakeholder community whereas the US sign-off exists to provide assurance the general stakeholder community.
True and fair reporting in financial statements: Companies will be required to explain in the directors report why they choose to include additional information in notes to the financial statements to reflect a true and fair view.
This is an amendment that goes back to the inquiry on the independence of company auditors run by the Joint Parliamentary Committee on Public Accounts and Audit. That committee decided there was a need for the law to clarify the fact the law requires both compliance with accounting standards and truth and fairness.
In other words, companies would need to indicate in their financial statements why they believe an accounting standard is a bad fit for the economic circumstances in which the company finds itself. In addition to the company needing to explain why an alternative presentation of its financial position and performance in the notes to the accounts is appropriate an auditor will need to present a view on the company's use of the additional information.
The law requires an explicit statement regarding the additional information and whether it was necessary to reflect a true and fair view of the entity's circumstances.
Financial Reporting Panel: There will be an alternative dispute resolution mechanism for issues where the corporate regulator, ASIC, disagrees with an accounting treatment a company has applied in its financial statements.
The FRP has the power to hear matters and come to an expert view on the specific matter. An FRP became increasingly popular after the corporate regulator lost the MYOB case and ultimately realised the court process was not always the best way to resolve accounting issues irrespective of how good the chances of victory in the courts were thought to be.
Experts appearing before the court in the MYOB case had much of their evidence dismissed as inadmissible, which meant the judge ignored most - if not all - of their knowledge on accounting matters. While there has been a call for nominations for the panel it is still unclear how soon we can expect the members of the panel to be appointed and announced.
Company secretaries and their experience: The new law creates a requirement that company secretaries will need to have their experience detailed in the annual report. It is arguable whether the company secretary is of sufficient prominence to make such detailed disclosure necessary. While a company secretary is important a chief financial officer or the head of a company's treasury team potentially have a greater role in affecting decision making and financial performance. The details of treasury teams are not required under the new law, so why are company secretaries the recipients of this legislative largesse?
Former auditors as directors: No more than one former partner of the current audit firm will be permitted to hold a senior office within a company such as that of a director, chief executive or chief financial officer. Those recommendations stem directly from the issues raised by HIH Royal Commissioner Justice Neville Owen. It was his reaction to the fact there were several former partners of Andersen involved in either the board of directors or senior management of the general insurer.
The idea was to distance the accounting firms doing the external audit and the former partner of the same firm so that the perception of a lack of independence was avoided. These issues have already started to bite in the corporate sector.
One senior finance manager recently told me companies were more likely to find other people to appoint to boards rather than waste time fighting a losing battle in the perception stakes if they appointed a former audit partner, for example, from the same firm.
Even if a former auditor possessed the appropriate characteristics, companies are unlikely to appoint a former partner of their external audit firm to boards so they remain generally untroubled by questions from shareholders on board composition and auditor independence.
Rotation of auditors: While rotation of audit partners has been a significant part of the way many firms operate, the law now demands a five-year rotation of those individuals that have played a significant role in an audit. This requirement will result in more companies seeing a different engagement partner every five years. ASIC is capable of extending the period for seven years but that is expected to be rare.
Auditing standards under law: The standards governing the auditors of your companies will now sit under the oversight of the Financial Reporting Council. These standards will be given legal status as disallowable instruments, which means they are likely to be subject to some degree of parliamentary review prior to their movement out of the Parliament.
* Tom Ravlic writes Company Director's regular accounting column
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