In a challenging economic environment, companies are continuing
to review their spending to ensure that they are obtaining maximum
value for their shareholders. As part of this, many companies are
reviewing their external audit arrangements and undertaking a
competitive audit tender process to test the marketplace.
Conducting an audit tender and replacing an auditor requires
strict compliance with prescribed procedures, including obtaining
the approval of shareholders. Companies who are intending to
conduct an audit tender should therefore consider commencing the
process now in order to align with their annual general meeting
In this Alert, Partner Simon Panegyres and Associate Ryan White
consider the steps involved in the resignation and replacement of
an auditor in the context of a competitive tender process.
The key steps involved are set out in the following diagram:
Conducting a competitive tender can take approximately six weeks
and is typically overseen by the company's audit committee
(where one has been established). Selection of participants is
clearly an important element of the tender process. Companies
should establish appropriate selection criteria (being mindful of
any requirements of their audit charter) and may want to consider
approaching firms with different profiles in order to obtain a
fuller picture of what the marketplace has to offer.
It is also important to ensure that the incumbent auditor is
notified of the company's intention to have a tender of the
external audit contract prior to completing the auditor's
report for the current financial year.
Having concluded the tender and (assuming that the existing
auditor is not chosen) selected a preferred candidate, the company
must obtain consent to act from the proposed auditor. This consent
will be subject to the resignation of the incumbent auditor and the
approval of shareholders at the next AGM of the company. The
proposed auditor must also be formally nominated by a shareholder
either before the AGM is convened or not less than 28 days before
The company must notify the incumbent auditor of the result of
the tender and request the auditor's resignation, to take
effect at the next AGM (subject to receiving ASIC's consent and
shareholder approval). The meeting materials for the company's
AGM are then prepared and will include a resolution for appointment
of the proposed new auditor. If ASIC's consent has been given
and shareholders approve the appointment, the change of auditor
takes effect at the end of the AGM and notice must be given to the
Obtaining ASIC consent
The incumbent auditor must obtain the consent of ASIC before
resigning. This is a crucial element of the tender process and ASIC
guidance indicates that it expects the application for consent to
be lodged before the auditor's report is signed for the current
financial year and at least three weeks before the AGM.
ASIC takes a cautious approach to granting consent. Its
overriding concern is to ensure that the independence and integrity
of the audit function is preserved and ASIC will refuse to consent
where the resignation arises out of "opinion shopping",
conflicts between the board and the auditor or other circumstances
which ASIC believes are unacceptable.
Unless there are exceptional circumstances, ASIC will generally
only consent to the resignation taking effect at the next AGM,
meaning that companies looking to conduct an audit tender this year
should start planning the process now.
The Full Federal Court has allowed Lilyvale Hotel Pty Ltd to bring forward losses in reliance on the same business test where Lilyvale previously ran a hotel business using a manager.
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