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.
t (07) 3114 0229
t (07) 3114 0146
t (07) 3114 0124
t (07) 3231 1621
t (02) 9931 4724
t (02) 9931 4994
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).