CLERP 9 What you need to know Cover Story

CLERP 9 introduces significant changes to the regulation of corporate governance in Australia. Along with the ASX Guidelines for governance of listed entities, CLERP 9 ushers in a wave of new rules governing matters as diverse as auditor qualifications and independence, executive remuneration and disclosure.

CLERP 9 introduces significant changes to the regulation of corporate governance in Australia. Along with the ASX Guidelines for governance of listed entities, CLERP 9 ushers in a wave of new rules governing matters as diverse as auditor qualifications and independence, executive remuneration and disclosure.

Much has been said and written regarding the purpose of the legislation and in particular the difficulty of legislating for integrity. That said, the law is with us now and looks likely to stay.

The new rules arose from public outcries both here and in the US and UK after a number of high-profile corporate collapses.

The Government has gone for a more principles-based solution than the US Sarbanes-Oxley Act and has avoided a "prescriptive black-letter law approach that seeks to micro-manage the decisions being made across the corporate sector," according to Parliamentary Secretary to the Treasurer, Ross Cameron.

The new standards should ensure that Australian companies involved in these markets will be able to rely on Australian supervision and will not have to alter their practices to comply with overseas requirements (eg US Public Company Accounting Oversight Board's new rules on audit firms).

In an effort to reduce the 300 some pages of legislation to just "what you need to know" the table below has been designed to chronologically direct you to the more import changes arising from the CLERP legislation.

Continuous disclosure

Expands the regime of civil penalty against officers involved in a contravention of the continuous disclosure rules. . The civil penalty regime, however, is subject to a due diligence defence.

ASIC may issue infringement notices for contraventions of the continuous disclosure regime

Applies; Immediately

Whistleblowers

Protection for employees, officers and contractors who report suspected breaches of the Corporations legislation to ASIC, the entity's auditor or a director, secretary or senior manager of the entity. It is an offence for a person to whom a disclosure is made to disclose the nature of the disclosure or the identity of the discloser except to ASIC, APRA or the Federal Police. Accordingly, existing procedures should be reviewed.

Applies; Immediately

Termination payments

Shareholder approval will be required for an agreement to pay a prospective executive or director a termination payment greater than their average salary for the last three years multiplied by years of service (with an upper limit of seven years). Existing executive agreements are not covered by this new requirement

Applies; Immediately

CEO/CFO certification

Listed entities financial reports must include a statement that the directors have received a declaration from the CEO/CFO.

Applies; To financial years after 1 July 2004

MD&A

Companies must include in the directors' report for the financial year information on the operations, financial position and business strategies and prospects

Applies; To financial years after 1 July 2004

Auditor qualifications etc

The directors' report must include the names of any officer who was a former partner of their current auditor. Listed entities must disclose details of amounts paid for non-audit services and a general statement as to the independence of the auditor.

Applies; To all reports prepared after 1 July 2004

Company secretary qualifications

Listed entities must include qualifications and experience of the company secretary.

Applies; To financial reports for financial years after 1 July 2004

Director qualifications

Listed entities must include details of directorships of other listed companies held by each director in the last three years.

Applies; To financial reports for financial years after 1 July 2004

Remuneration disclosure

Listed entities must include details of:

• policy in relation to the remuneration of directors, secretaries and senior managers;
• performance conditions;
• remuneration of each director and each of the five group company executives who receive the highest remuneration for that year;
• and any securities to be allotted not subject to performance conditions as part of remuneration.

Notice of meeting must advise members about the remuneration report resolution. Members must be given the opportunity to vote on the report. The vote is non binding.

Applies; To financial reports for financial years after 1 July 2004

NEW REQUIREMENTS FOR ANNUAL MEETINGS

Electronic notification

Permits distribution of notices of meetings electronically.

Permits the distribution of annual reports electronically.

Applies; To notices after 30 September 2004

To annual reports for financial years after 1 July 2004

Notice of meeting content

A notice of meeting must be worded and presented in a clear, concise and effective manner.

Also permits regulations to be made that specify that certain information need not be included

in a notice of meeting.

Applies; To notices after 30 September 2004

Proxies

Can appoint a body corporate as a proxy. Also permits regulations to be made prescribing methods for electronic verification for proxies.

Applies; After 1 July 2004

Meeting procedure

The chair of listed entities must allow members a reasonable opportunity to ask questions about or make comments on the remuneration report.

Applies; To financial reports for financial years after 1 July 2004

Members of listed entities can submit questions to the auditor concerning the auditor's report or the conduct of the audit and make those questions available at AGM. Auditor must attend AGM.

Applies; To annual meetings for financial years commencing on or after 1 July 2004

Chair must allow the members a reasonable opportunity to ask questions of the auditor. The Act, however, does not impose an obligation on the auditor to answer questions.

Applies; To annual meetings for financial years commencing on or after 1 July 2004

Register of information about relevant interests

Listed entities must keep a register of information about relevant interests received by the entity.

Applies; To information received after 1 January 2005

Proportionate liability

A defendant will no longer be liable for all of a loss suffered when the defendant's action only contributed to the loss in a small way. Instead, liability is to rest with the defendants in proportion to their contribution to the loss.

Applies; after 30 December 2004

ADDITIONAL KEY ISSUES

While the Act introduces a range of measures designed to enhance audit regulation and the general corporate disclosure framework there are a number of key features worthy of note.

Disclosure documents and secondary sales

The "clear concise and effective" requirement currently applicable to Product Disclosure Statements has been extended to disclosure documents for shares and debentures.

Issuers of continuously quoted financial products can now issue transaction specific PDSs with further information available on request.

The secondary sales provisions have been amended. In general terms, a person offering to sell a financial product within 12 months after the issue of the financial product (where the product was first issued without a disclosure document) is exempted in certain circumstances from the requirement to prepare a disclosure document.

Managing conflicts in the financial services industry

There is now an additional obligation imposed on financial services licensees to manage conflicts of interest, with this obligation to be supplemented by ASIC guidance.

Audit reform

Audit standards are now given the force of legislative backing.

Establishment of a new Financial Reporting Panel to resolve disputes between ASIC and companies about the application of the accounting standards.

A general requirement for auditor independence, prohibiting an auditor from engaging in audit activity where a "conflict of interest situation" exists - that is, in circumstances where the ability of the auditor to exercise objective and impartial judgement in relation to the conduct of an audit might be (or might be perceived to be) impaired.

Auditor requirements

There are mandatory "cooling-off" periods of up to two years before members of an audit firm or directors of an audit company may become an officer of an audited company.

Prohibition on more than one former partner of an audit firm or director of an audit company from being a director or taking a senior management position within an audited body at any one time.

New auditor rotation requirement from 1 July 2006.

Liability for contraventions of the auditor independence provisions is imposed on all members and directors of audit firms and companies, rather than solely on the lead or review auditors. Defences will generally only be available where the audit firm or company can show that it has reasonable grounds to believe that it has in place a quality control system adequate to ensure the maintenance of auditor independence. Consequently, the establishment and communication of appropriate internal processes and control systems will be fundamental in ensuring audit firms and companies are able to comply with the standards of independence required by the Act.

New age governance

The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 ushers into Australia a new era of mandated corporate governance and a substantial set of new and substantial obligations on corporate Australia. It remains to be seen if the program can be the successful mechanism for enhancing auditor independence, achieving better disclosure outcomes and improving enforcement arrangements for corporate misbehaviour, while fostering innovation and wealth creation.

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