Mr Rocher asked the Treasurer, upon notice, on 20 May 1996:

Will small businesses that reach stipulated asset, turnover and employment levels be required to engage professional auditors after 30 June 1996; if so, (a) will the requirement apply if the shareholders of a business are also its managers, (b) on what basis will affected businesses be deemed large, (c) will the relevant books of account for 1995-96 also be required to be audited to avoid otherwise inevitable qualifications being attached by auditors to final accounts for 1996-97, (d) what is the estimated average cost of compliance to affected businesses and (e) what implications does the requirement have for the Government's stated intention to reduce the regulation and compliance costs of small businesses.

Mr Costello —The answer to the honourable member's question is as follows:

A proprietary company will be classified as a large proprietary company, and thus be required to have its accounts audited under the Corporations Law, where it and the entities that it controls meet 2 of the following criteria:

   consolidated gross operating revenue of $10 million or more;

   consolidated gross assets of $5 million or more; or

   50 or more employees at the end of the financial year.

Answers to the specific matters raised in the question are:

(a) Each large proprietary company that was formerly classified as an exempt proprietary company will be required to have its accounts audited for the first financial year of the company that commences after 9 December 1995. This requirement will apply irrespective of whether a company's shareholders are directors of the company or are otherwise engaged in the management of the company. Companies meeting the large proprietary company test are significant enterprises and generally have a number of creditors or members with an interest in the company's accounts.

The Corporations Law does, however, provide that the Australian Securities Commission (ASC) may relieve a large proprietary company of the obligation to have its accounts audited where the audit would impose an unreasonable burden on the company. In considering whether to provide such relief, the ASC must have regard to, inter alia, the expected costs of complying with the audit requirements and the expected benefits of having the company comply with those requirements.

On 19 November 1996 the ASC released its audit relief policy for large proprietary companies (Policy Statement Number 115). The audit relief policy permits large proprietary companies that have not been audited since 1993:

   to continue to prepare and lodge unaudited accounts for the first financial year commencing after 9 December 1995; and

   to apply for ongoing relief from the requirement to be audited for the second financial year commencing after 9 December 1995, where they can satisfy criteria demonstrating that they are well managed and in sound financial position.

A small proprietary company will not be required to appoint an auditor unless:

   it is a disclosing entity as defined in the Corporations Law; or

   it is controlled by a foreign company and its profit or loss for the period is not included in the foreign company's accounts; or

   it is subject to a shareholder request to prepare audited accounts; or

   it is required by the ASC to lodge audited accounts.

(b) See introductory comments.

(c) I am advised that the question whether the accounts for 1995-96 will have to be audited to avoid having the accounts for 1996-97 qualified will be a matter for consideration by each company and its auditor. An auditor, in forming a view on this matter, would be guided by his or her professional judgement. The final decision would be based on a consideration of issues such as the level of reliance that can be placed on the accounting records.

(d) I am advised that no Treasury or Australian Securities Commission estimate of the average cost of compliance with the audit requirements is available. I would expect the audit fee to be determined by factors such as the form in which the accounting records are maintained and the adequacy of those records, the nature and adequacy of the company's internal controls, the number of transactions and the geographical spread of the company's operations.

(e) The Government remains firmly committed to reducing the regulation and compliance costs for all levels of business. The small/large test for proprietary companies will be reviewed after 2 years operation of the legislation to ensure that its practical operation does not place an undue burden on business.