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Spotlight on auditors' independence

ASIC has announced that it will conduct a survey of Australia's top 100 listed companies on audit independence. ASIC's survey of audit independence will question companies about relationships with their external audit firm, including any business or professional relationships that exist outside their role as external auditors.

There will also be an examination of compliance with Australian Accounting Standards Boards - AASB 1018 & 1019. AASB 1018 deals with profit and loss reporting requiring disclosure of the cost of sales (the margin) while  AASB 1019 deals with the measurement and reporting of inventories. The examination will concentrate on:

  • the usefulness of the new reporting regime to the reader;
  • how the value of inventory has been established and audited; and
  • whether there is adequate disclosure on inventories.

(Source: ASIC Media Release, MR01/230, 29/06/01)

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Auditing the auditors

Professor Ian Ramsay has been appointed by the Minister for Financial Services & Regulation, Mr Joe Hockey, to examine audit independence in Australia and make necessary recommendations. The inquiry will examine recent overseas developments such as the audit independence rules issued by the US Securities and Exchange Commission (Eds: see ITM  3 for the SEC rules). It will also look at recent proposals released by the European Community and the International Federation of Accountants.

(Source: Minister for Financial Services & Regulation Press Release, FSR/057, 2/08/01.)

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Disclosure of securities trading by directors

Changes to the requirement for disclosure of securities trading by directors under the ASX Listing Rules have now been finalised and will take effect from 1 January 2002.  

The changes follow a period of public consultation after ASX had released a discussion paper indicating its views in relation to the disclosure of directors' securities trading. In the paper, ASX had suggested 2 alternative methods of disclosure - called Alternative A and Alternative B.

Under Alternative A:

  • a listed entity must notify the ASX of any information relating to directors' relevant interests in its securities; "Relevant interest" will have the meaning given to it in the Corporations Law;
  • the information to be provided is similar to that required in the substantial holder notices;
  • the obligation to disclose arises when:
  • the director is appointed;
  • changes occur in a director's relevant interest provided the materiality threshold is met; and
  • the director ceases to hold office;
  • notification must be given within 5 business days after the obligation to disclose arises;
  • an entity must enter into arrangements with its directors that will require the director to disclose to the entity all the information it needs to comply with the obligation to notify ASX;
  • an entity is not obliged to notify ASX of information it does not have; and
  • notification may be given electronically.

Under Alternative B:

  • a listed entity must notify ASX of the information required by section 205G of the Corporations Law relating to the directors' relevant interests in its securities and in contracts relating to securities;
  • the information to be provided is similar to that required in the substantial shareholder notices;
  • the obligation to disclose arises when:
  • the director is appointed;
  • changes occur in a director's relevant interest provided the materiality threshold is met; and
  • the director ceases to hold office;
  • notification must be given within 5 business days after the obligation to disclose arises;
  • an entity must enter into arrangements with its directors that will require the director to disclose to the entity all the information it needs to comply with the obligation to notify ASX;
  • an entity is not obliged to notify ASX of information it does not have;
  • electronic notification may not be sufficient to satisfy the obligation of the director under section 205G of the Corporations Law.

After considering the responses from the public, ASX has decided to adopt Alternative B as the preferred method for the disclosure of securities trading by directors. In essence the new disclosure regime provides, inter alia, for:

  • disclosure to be made within 5 business days after the obligation to disclose has arisen;
  • the listed entity will have to enter into an agreement with its directors mandating its directors to provide information to the listed entity in relation to the directors' securities trading and the entity will be obligated to enforce the agreement; 
  • where a person departs as a director, the period for disclosure will be at the end of the day that they cease to be a director.

These disclosure obligations will not be extended for the time being to executives and employees who are not directors. In addition, the prohibition against a company purchasing shares from its directors or a related party of the director (where such purchases are not reserved under Appendix 3C of the Listing Rules) will be removed. 

As to various other proposed changes to the Listing Rules (such as the requirement that a company appoint a continuous disclosure officer and the re-naming of admission categories) these changes will take effect on 1 October 2001 subject to the approval of ASIC and non-disallowance by the Minister. (Eds: The proposed changes were reported in ITM 3 and ASX's response from its consultation was reported in ITM 4)

(Source: ASX Press Release, 10/08/01.)

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Corporations behaving badly - PJSC says no to Corporate Code of Conduct Bill 2000

The Parliamentary Joint Statutory Committee on Corporations and Securities (PJSC) recently completed its review of the Corporate Code of Conduct Bill 2000 (the Bill) and concluded that the Bill was unnecessary and unworkable. 

The Bill had as its object the requirement that "large" Australian corporations (ie, those that employ more than 100 persons in a foreign country) operating in foreign jurisdictions observe environmental, employment, health and safety, and human rights standards prescribed in the Bill and report on their compliance with these requirements to ASIC. The majority of PJSC was of the view that the Bill was unnecessary and unworkable because, inter alia:

  • it would amount to an imposition of Australian standards on Australian corporations operating in foreign jurisdictions threatening international comity;
  • there was no demonstrated need for the Bill; and
  • the reporting requirements and enforcement mechanism via ASIC would impose additional costs and any significant benefits to be derived from the reporting regime would not compensate for the loss suffered arising from the increased costs.

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One decade on CASAC reconsiders insider trading

The Company and Securities Advisory Committee (CASAC) has on the tenth anniversary of the introduction of the current form of insider trading laws issued a discussion paper for the purposes of reviewing the law. The discussion paper reviews  the insider trading laws in Chapter 7 dealing with securities trading - it does not discuss insider trading provisions in Chapter 8 dealing with futures trading. 

In the paper, CASAC has indicated its provisional views on 40 issues and seeks public comment. The issues are grouped into:

(a)    matters that should not be changed;

(b)    matters that may require legislative change; and

(c)    other possible changes for consideration.

In relation to (a), CASAC is the of view that the following matters should be retained:

  • the market fairness and market efficiency principles underlying the existing insider trading laws;
  • the definition of an "insider" as anyone having confidential price-sensitive information; and
  • the insider trading provisions should continue to cover matters exempt under continuous disclosure requirements; 

CASAC is of the view that there are certain matters that may require legislative change:

  • the definition of inside information should exclude information that relates to securities generally or to issuers of securities generally;
  • the introduction of a rule similar to US SEC Rule 10b5-1*, which permits persons to set up securities trading plans to be implemented in the future, provided that they are not aware of inside information at the time of settling of the plans and have no discretion to alter those plans if they become aware of inside information at a later stage;
  • there should be a prohibition against a broker trading in affected securities on behalf of a client who has given the broker inside information; and
  • there should not be any minimum material change threshold for notification by directors of listed companies to  ASX of any changes to their holdings of securities in the company.

Finally, in relation to (c), CASAC is of the view that:

  • there should be a prohibition against an insider disclosing inside information without lawful reason even if the recipient does not intend to trade;
  • a person who lawfully discloses inside information should inform the recipient that the information is inside information;
  • insider trading legislation should be confined to securities and other financial products that:
  • are traded or capable of being traded on a financial market;
  • involve a financial services provider; or
  • give an indirect interest in a tradeable financial product;
  • the civil penalty provisions could provide for recovery of a multiple of the profit gained or loss avoided in trading; and
  • directors and other corporate decision makers be prohibited from short selling their company's securities or transacting in options over those securities.

The date of the deadline for submissions to CASAC is 12 October 2001.

* (Eds: SEC Rule 10b5-1 allows insiders to set up a trading plan when they are not in possession of material non-public information and then be able to trade in the future even if at that point in time, they possess material non-public information)

(Source: CASAC Papers, 16/07/01.

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Turnbull to look at MIA

Mr Malcom Turnbull has been appointed to review the effectiveness of the arrangements for the regulation of managed investments. The review is required under s3 of the Managed Investments Act 1998 (Cth). 

Mr Turnbull will be required under the terms of reference to determine whether:

  • the arrangements have delivered benefits in terms of:
  • better protection of investors' investments;
  • greater certainty as to the responsibilities, obligations and liabilities of scheme operators (responsible entities);
  • the rights of investors in managed investment schemes; and
  • the reduction in costs of investing in such schemes.
  • the arrangements have strengthened compliance practices, procedures and awareness amongst responsible entities and parties involved in the industry;
  • the arrangements cater for the diversity of managed investments and include a consideration of how the legislation is being administered by ASIC; and
  • any refinements that can be made to enable more efficient and effective arrangements while maintaining investor protection.

Mr Turnbull is required to report back to the Minister for Financial Services & Regulation, Mr Joe Hockey by 3 December 2001. Those interested in making submissions should do so by 7 September 2001.

(Source: Minister for Financial Services & Regulation Press Release, No. FSR/059, 6/08/01.

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Fines for sloppy disclosure practices?

In a speech at the launch of the Australasian Investor Relations Association, the Chairman of ASIC, Mr David Knott has highlighted the need for ASIC to be given powers to fine companies that fail to make full and prompt disclosure to shareholders. Mr Knott also highlighted the disturbing number of "...instances of unacceptable information leakage, and late or inadequate disclosure from companies of substance and experience." 

According to Mr Knott, despite the introduction of a civil penalty regime, the nature of court proceedings has meant that reliance on such methods of enforcement is not necessarily the best means of regulating and improving disclosure conduct. Granting a regulator power to issue fines for market offences was not in Mr Knott's opinion "unique  or ground breaking". For example the Financial Services Authority of the United Kingdom (FSA) has been given considerable powers to levy financial penalties. Of interest to Australia is the fact that the FSA can impose a penalty on any person, whether that person is regulated or not, who engages in behaviour which is based on information which is not generally available to other market users. Such a power would in the view of Mr Knott be effective in the case of companies failing to make full and prompt disclosure to shareholders. Whilst recognising that the ASX plays an important role in ensuring continuous disclosure, Mr Knott did not consider it appropriate to impose additional regulatory responsibilities on the ASX, which was the market operator.

(Source: ASIC Media Release, MR 01/283, 13/08/01. For more, see a copy of the speech)