On 10 April 2006, ASIC released its Policy Proposal on auditor rotation. Auditor rotation dates back to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 ("CLERP 9"), which made changes to Part 2M.4 of the Corporations Act 2001 in connection with listed companies or registered managed investment schemes. Two auditor rotation obligations exist. The first is known as the "time-out rule" (section 324DA(1) refers) and the second is the "5/7 rule" (section 324DA(2) refers). The time-out rule prevents an individual auditor from playing a significant role in an audit where that individual has done so for five successive financial years. The 5/7 rule complements the time-out rule and provides that an individual cannot play a significant role in an audit for more than five out of seven successive financial years. ASIC has the power to modify the operation of section 324DA in any given case. The purpose of the Proposal is to obtain views from the public on how ASIC should exercise its modification powers under section 342A to grant relief from the auditor rotation obligations. Following a period of public consultation (which ended on 26 May 2006), ASIC will release a new Policy Statement later this year.

The principles applying to relief from rotation obligations include ensuring informed investor choice, independent scrutiny of financial reports, maintaining and improving audit quality and minimising the commercial impact of the rotation obligations on auditors and audit clients. ASIC has indicated that it prefers to use its specific modification powers under section 342A instead of making exemption orders under section 340 or class orders under section 341.

ASIC proposes to grant relief only if it is satisfied that the auditor rotation requirements will impose an unreasonable burden on either the auditor or the audit client. ASIC believes that an unreasonable burden is one which goes beyond what is equitable, or is otherwise excessive. ASIC has tentatively stated that the rotation requirements are more likely to impose an unreasonable burden on sole practitioners or small audit firms practising in rural or remote areas than on larger audit firms practising in urban areas.

ASIC's view is that audit eligibility should be monitored by auditors. ASIC considers that any contraventions of the rotation rules amount to significant contraventions of the Corporations Act 2001 that must be reported to ASIC under section 311.

Audit clients will need to monitor the likely outcome of this Policy Proposal when ASIC issues its Policy Statement later this year. Audit clients and audit firms will need to liaise to determine whether or not an application for relief from the audit rotation rules should be made under section 342A.
By Alan Eden & Prins Ralston.

Brisbane

Alan Eden

t (07) 3114 0229

e aeden@qld.gadens.com.au

Michael Owens

t (07) 3114 0146

e mowens@qld.gadens.com.au

Sarah Toohey

t (07) 3114 0124

e stoohey@qld.gadens.com.au

Prins Ralston

t (07) 3231 1621

e pralston@qld.gadens.com.au

Sydney

Charles Cowper

t (02) 9931 4724

e ccowper@nsw.gadens.com.au

Grant Hummel

t (02) 9931 4994

e ghummel@nsw.gadens.com.au

This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.