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Thursday, 10 March 2005
Page: 81
Senator COLBECK (Tasmania —Parliamentary Secretary to the Minister for Agriculture, Fisheries and Forestry) [3:55 PM] —I present four government responses to committee reports as listed on today’s Order of Business. In accordance with the usual practice, I seek leave to incorporate the documents in Hansard.

Leave granted.

The documents read as follows—

GOVERNMENT RESPONSE TO THE SENATE INQUIRY INTO PUBLIC LIABILITY AND PROFESSIONAL INDEMNITY INSURANCE

Recommendation

Government Response

Recommendation 1:

The Committee recommends that the Trade Practices Amendment (Liability for Recreational Services) Bill 2002 proceed through Parliament to facilitate free and open debate and to be subject to close scrutiny. Further, that the Government consider:

amending proposed section 68B of the TPA Bill to make it clear that protection from liability does not apply to those service providers who are found to have been grossly negligent;

establishing a national accreditation program for providers of recreational services-accreditation to be subject to a recreational service provider complying with specified risk management procedures and standards; and

amending section 68B to provide that protection from civil litigation is conditional on the recreational service provider being accredited.

Reponse:

The Commonwealth has enacted the Trade Practices Amendment (Liability for Recreational Services) Act 2002.

Recommendation 2:

The Committee recommends that the Commonwealth take the lead in ensuring nationwide uniformity in the various statutes of limitation.

Reponse:

On 2 October 2002, Commonwealth, State and Territory Ministers agreed in principle to the development of nationally consistent legislation for provisions relating to liability for personal injury or death resulting from negligence.

The Commonwealth enacted the Trade Practices Amendment (Personal Injury and Death) Act (No. 2) 2004 on 13 July 2004, providing a national benchmark in relation to rules for the quantum of damages and limitation of actions.

Recommendation 3:

The Committee recommends that the Commonwealth:

consider acting to protect land-holders whose land may be used to conduct recreational services; and

work with the states and territories to ensure that legislation is enacted to protect land-holders.

Reponse:

The Australian Government has enacted the Trade Practices Amendment (Liability for Recreational Services) Act 2002.

Recommendation 4:

The Committee recommends that Commonwealth, state and territory governments form a working group to examine how best to give protection to volunteer and not-for-profit organisations and their workers from civil action for damages based on negligence.

Reponse:

The Commonwealth has enacted the Common-wealth Volunteers Protection Act 2002 to protect volunteers who undertake voluntary work for the Commonwealth or a Commonwealth authority from civil liability.

All states and territories have introduced legislation to provide protection from civil liability for mem-bers of emergency rescue services, under certain circumstances. Most states and territories have also introduced legislation providing protection from civil liability for ‘good Samaritans’.

Recommendation 5:

The Committee recommends that a working group of Commonwealth, state and territory officers be established to examine how best to provide for the long term care and treatment of persons who suffer catastrophic injuries as a result of someone’s negligence.

Reponse:

Commonwealth, State and Territory officials are currently examining the issue of long term care and the treatment of persons suffering catastrophic injuries. The Insurance Issues Working Group is undertaking a comprehensive review of current arrangements and possible alternatives.

On 6 August 2003, Ministers agreed to proceed with collecting relevant data for assessing a long-term care model at their next Ministerial meeting. Ministers requested that all options be developed on the basis that there would be no net shifting of costs. Ministers also agreed to consider the possibility of linking risk management for doctors and other health care providers in exchange for possible benefits associated with a national long-term care scheme.

On 27 February 2004, Ministers examined a range of options for the possible implementation of a long-term care scheme for all catastrophically injured people. Ministers asked officials to undertake further work to explore potential costs, benefits and efficiencies that could arise from the establishment of a nationally consistent framework. Ministers noted that a long-term care scheme would have significant implications for existing health, social welfare and disability arrangements and funding.

Recommendation 6:

The Committee recommends that the Commonwealth continue to assist organisations to develop their own risk management practices for their particular industry.

Reponse:

Professional standards legislation includes a requirement for schemes to implement appropriate risk management practices. A number of states and territories have enacted professional standards legislation, and in other jurisdictions, legislation has been introduced into Parliament or drafting is underway.

The Commonwealth enacted the Treasury Legislation Amendment (Professional Standards) Act 2004 on 13 July 2004 which supports state and territory initiatives in this regard.

Recommendation 7:

The Committee recommends that the Government:

make a commitment to the development of a comprehensive national database on the insurance industry in Australia;

put beyond doubt that APRA is to be given the responsibility for developing and maintaining this database;

ensure that APRA has the statutory authority to require insurance companies and other relevant bodies to provide information; and

ensure that it is adequately funded so that it has the resources and level of expertise to effectively collect, collate and analyse data on the insurance industry.

Further, the Committee recommends that APRA:

look carefully at the evidence presented to the Committee on the nature and extent of information that is required to fully understand the insurance industry, especially the pricing of premiums;

make available a draft discussion paper that provides details of the data that it intends to collect and the procedures to be adopted in collecting this material;

follow-up the publication of this paper with industry-wide consultation with a view to determining whether the new regime is going to meet the expectations of the insurance industry; and

report to Parliament on its findings.

Reponse:

The Commonwealth has agreed to use the Financial Sector (Collection of Data) Act 2001 to require all authorised insurers operating in Australia to submit claims data to APRA for analysis and publication.

Funding for this data collection process was provided in the 2003-04 Budget.

APRA Members have decided to put out for public tender the selection of a service provider to implement and manage the National Claims and Policies Database (NCPD).

APRA Members have also proposed that ongoing funding of the NCPD be provided on a cost recovery basis by those institutions which contribute data to, and access information from, the NCPD.

Recommendation 8:

In light of this ongoing problem of the lack of good quality, nationally comparable court data, the Committee recommends that the Commonwealth give high priority to the work being done by the Australian Bureau of Statistics in developing performance frameworks.

It also recommends that the Attorneys-General treat this matter with urgency and, under the leadership of the Commonwealth Government, work together to ensure that good court data management systems are put in place throughout the country. The main objective is to have national standards apply so that the data across all jurisdictions is compatible, comprehensive and allows for consistency in interpretation.

Reponse:

The Australian Court Administrators’ Group (ACAG) provided a report on the adoption of a nationally uniform classification scheme of civil matters data for consideration at the Standing Com-mittee of Attorneys-General (SCAG) in July 2004.

SCAG Ministers endorsed the ACAG report.

It is intended that the ACAG report will be provided to the Council of Chief Justices for their consideration with a request for support for its implementation.

SCAG Ministers have requested that ACAG monitor the implementation of the national civil classification system, and report to Ministers on its progress.

Recommendation 9:

The Committee recommends that the Government propose an amendment to section 58 of the Insurance Contracts Act 1984 to ensure that insurers must give at least 14 days notice of the proposed terms of a policy renewal or proposed refusal to renew a policy.

Reponse:

This issue will be considered in the context of the response to the recent review of the Insurance Contracts Act 1984.

Recommendation 10:

Noting that the first update of the Australian Com-petition and Consumer Commission’s (ACCC) insurance industry market pricing review was made public in September, the Committee recommends that all subsequent six monthly reports be made public pursuant to section 27B of the Prices Surveillance Act 1983.

Reponse:

The Australian Government does not consider that it is necessary to subject the ACCC’s Insurance Industry Market Pricing Reviews to the formal requirements of s.27B of the Prices Surveillance Act 1983.

It is the Government’s intention to continue to release future pricing review reports.

Recommendation 11:

The Committee recommends that the Trade Prac-tices Act be amended to allow the ACCC to take enforcement action to ensure that any savings or benefits that accrue directly or indirectly from legislative reforms being implemented throughout Australia to minimise insurance premiums are passed on by the insurance companies to consumers.

Reponse:

The Australian Government considers that current price monitoring is adequate and appropriate.

To ensure that the reforms being undertaken by all governments are effective in improving the availability and cost of liability insurance, the Australian Government has asked the ACCC to monitor the industry. The most recent ACCC report indicated that the rate of increase in public liability insurance premiums had slowed in the first six months of 2003, as compared with 2002.

On the 27 February 2004, the chairman of the ACCC indicated that he would seek further monitoring powers if there was evidence that insurers were not passing on the benefits of the reforms.

Recommendation 12:

The Committee recommends that the Government more actively monitor the activities of APRA and ensure that it has adequate powers and resources as well as a commitment to diligently supervise the industry.

Reponse:

The Government, in accordance with the recommendations of the HIH Royal Commission report, has instigated a governance structure for APRA that replaces the previous non-executive board with an executive board. The board is accountable for the operation of APRA. This arrangement will further strengthen Australia’s regulatory framework.

Recommendation 13:

The Committee recommends that, in close consultation, the ACCC and ASIC review and report publicly on their respective statutory obligations in regard to consumer protection and market integrity in the insurance industry with a view to:

clarifying their respective responsibilities, giving particular attention to whether there is any unnecessary overlap; and

establishing whether, in their opinion, the legislation provides adequate and appropriate consumer protection in the insurance industry and, if not, identifying the gaps or weaknesses in consumer protection, including the prices and insurance coverage that are being offered to consumers.

The Committee further recommends that the ACCC and ASIC actively promote their roles in consumer protection for all financial products, including general insurance.

Reponse:

Both the ACCC and the Australian Securities and Investments Commission (ASIC) are required to prepare and submit annual reports which are tabled in Parliament. In addition, both agencies regularly appear before Parliamentary Committees inquiring into various matters of relevance to their functions.

ASIC’s governing legislation (the ASIC Act 2001) provides a mechanism under which ASIC can bring to the Minister’s attention any deficiencies in the legislation it administers. The ACCC’s governing legislation (the Trade Practices Act 1974) provides a similar mechanism.

The Government considers that both agencies are already active in promoting their activities, and educating the public as to their consumer protection roles.

Recommendation 14:

The Committee recommends that the Government amend the FSR Act to allow not-for-profit organisations to be included in the definition of ‘retail clients’.

The Committee recommends that the Government, by regulation, include public liability insurance and professional indemnity insurance in the classes of insurance covered by the dispute resolution provisions of the FSR Act.

The Committee recommends that ASIC monitor the effectiveness of the dispute resolution provisions and report on this annually to the Parliament.

The Committee recommends that ASIC review, as a matter of urgency, the General Insurance Enquiries and Complaints Scheme and in consultation with the Insurance Council of Australia ensure that it covers adequately public liability and professional indemnity insurance and not-for-profit organisations. Further that it re-examine definitions in the terms of reference, such as small business, to ensure that they are consistent with definitions in Commonwealth legislation.

Reponse:

The Corporations Act 2001 (as amended by the Financial Services Reform Act 2001 (FSRA)) currently provides that a range of general insurance products, when provided to an individual or for use or in connection with a small business, are taken to be provided to a ‘retail client’. The definition of ‘carrying on a business’ in the Corporations Act includes a business carried on otherwise than for profit. Therefore, not-for-profit organisations that meet the definition of ‘small business’ (which depends on the number of employees of the business) would already be considered retail clients in respect of the provision to them of general insurance products.

The categories of general insurance products designated in the Corporations Act as provided to retail clients were closely considered when the FSRA was being drafted. The majority of these categories of insurance replicate those defined to mean standard cover in the Insurance Contracts Act (ICA) and Regulations. Personal and domestic property insurance were also added to the list on the basis that, like the policies imported from the ICA, they are essentially for personal, domestic and household protection, or ‘consumer’ policies. The products listed are widely held by a broad cross-section of the community. Professional indemnity and public liability insurance policies are generally issued to more specialised sectors of the community. Moreover, there would be little point in applying the dispute resolution provisions of the FSRA to professional indemnity and public liability insurance without applying many of the other provisions within the FSRA as well. This would amount to a very major change to the FSRA regime, which would have substantial implications.

ASIC will, as a matter of course, monitor the effectiveness of dispute resolution processes across the financial sector as part of its administration of the Corporations Act. The extent to which this matter is highlighted in ASIC’s annual report to Parliament is a matter for ASIC. However, it is noted that ASIC is accountable to the Parliament not only through its annual report, but also via its many appearances before Parliamentary Committees, at which details of ASIC’s views on the adequacy of dispute resolution procedures can be sought.

The Insurance Enquiries and Complaints (IEC) Scheme is a dispute resolution process established by the general insurance industry. As such, it is not for ASIC to initiate any review of the scheme’s coverage. However, under the Corporations Act, ASIC must approve any dispute resolution systems that the legislation requires Australian financial services licensees to have in place for retail clients.

Recommendation 15:

The Committee recommends that the General Insurance Code of Practice be revised so that it provides remedies for community groups and small businesses who are affected by price exploitation in relation to public liability or professional indemnity policies.

The Committee recommends that Insurance Enquiries and Complaints Ltd submit the revised code for ASIC’s approval under the FSR Act.

Reponse:

The General Insurance Code of Practice (the Code) is voluntary and is the responsibility of the industry.

In the event that price exploitation is exposed, the Government will look to all suitable remedies, including compelling industry to strengthen the Code.

Under the FSRA and Corporations Act, ASIC has the power to approve codes of conduct. Such codes have to be voluntarily submitted for approval since it is not mandatory to have a code. The legislation makes it clear that before ASIC can approve a code it must satisfy itself about a range of matters including that there are adequate mechanisms to ensure compliance with the code.


 

GOVERNMENT RESPONSE TO THE SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COM-MITTEE REPORT ON RECRUITMENT AND TRAINING IN THE AUSTRALIAN PUBLIC SERVICE

Background

1.   The bi-partisan report of the Finance and Public Administration References Committee (the Committee) on Recruitment and Training in the Australian Public Service (APS) was tabled in the Senate on 19 September 2003.

2.   The purpose of the Inquiry was ‘to examine whether current recruitment and training practices and policies in the Australian Public Service are adequate to meet the challenges the APS faces’.

3.   The Committee’s Terms of Reference are at Attachment A.

Human Resource Management in a devolved APS

4.   As the report acknowledges, the APS has been responding for over twenty years to the challenges presented by sustained and accelerating social, economic, demographic and technological change, combined with increasing community expectations of the APS.

5.   The APS response to these challenges has been characterised by its progressive shift away from a system of centralised control. The Public Service Act 1999 (the PS Act), together with the Workplace Relations Act 1996, represent the culmination of two decades of public sector management reform. For five years, Agency Heads have now had the responsibility, together with the flexibility, to manage their staff according to their business needs in order to maximise the performance of their agencies.

6.   Agency Heads exercise the full range of powers of an employer in respect of agency employees and have the authority to engage and terminate the employment of these employees subject to certain conditions. They also have the authority to negotiate terms and conditions of employment with their employees within policy parameters. Agency Heads have the prime responsibility for management decisions and actions within their individual APS agencies, including in respect of recruitment, and learning and development.

The Accountability and Reporting Framework

7.   The APS in 2004 operates within an accountability and reporting framework that is designed to balance the greater management and employment powers that have been given to Agency Heads with their increased accountability for the use of these powers.

8.   Annual reports are one of the main vehicles by which APS agencies publicly report on their performance. Sections 63 and 70 of the PS Act require Agency Heads to provide their Minister with an annual report detailing their activities during the year for presentation to Parliament. The annual reporting requirements, approved by the Joint Committee of Public Accounts and Audit, provide that annual reports should include an assessment of an agency’s effectiveness in managing and developing its staff to achieve its objectives. Matters suggested for inclusion in the annual report include workforce planning, staff retention and turnover and an agency’s key training and development strategies.

9.   Another critical element in the maintenance of accountability across the APS is the requirement under section 44 of the PS Act that the Public Service Commissioner report annually to Parliament on the state of the Service. In addition to the APS Commission’s own research and databases, one of the main sources of information for the report is a questionnaire sent by the APS Commission to all agencies employing staff under the PS Act. Section 44(3) of the PS Act requires Agency Heads to give the Public Service Commissioner whatever information the Commissioner requires for the State of the Service Report.

10.   The Auditor-General has an important role in ensuring APS agencies are accountable by reporting on their performance to the Parliament. The Auditor-General Act 1997 provides the Auditor-General with a high level of independence and overriding information gathering powers. The Australian National Audit Office (ANAO) also regularly produces better practice guides on public sector management issues including workforce planning and learning and development in the APS.

11.   Finally, the Management Advisory Committee (MAC) is a high level APS forum that advises the Government on matters relating to the management of the APS. The MAC is established under section 64 of the Public Service Act, and chaired by the Secretary of the Department of the Prime Minister and Cabinet, with the Public Service Commissioner as executive officer. It includes all Portfolio Secretaries and the heads of larger APS agencies. While the MAC has no statutory powers or executive functions, it provides a forum for members to discuss and report on significant issues of topical and strategic interest to the APS. The work of the MAC is becoming increasingly influential as a source of guidance and identification of better practice approaches to improving public administration.

12.   The Committee’s report notes that recent reports from the MAC and the ANAO ‘provide a firm basis for agencies to develop practical approaches to recruitment, retention and training’. An outline of these and other recent APS Commission publications to which reference is made in the Government’s response to the report is at Attachment B.

The Role of the Public Service Commissioner

   13.   While each Agency Head has employer powers, the Public Service Commissioner has an important role in contributing to the future capability and sustainability of the APS. As well as her reporting and quality assurance role through the State of the Service Report, the Commissioner has a specific statutory role under section 41 of the PS Act to develop, promote, review and evaluate people management throughout the APS, and to foster and contribute to leadership in the APS. This includes, amongst other responsibilities, promoting and upholding the merit principle, and developing and promoting people management policies and practices in recruitment, and learning and development.

The Government’s Response

   14.   The Government’s response to the Committee’s recommendations has been framed against this background, noting the report’s advice that ‘the impacts of devolution on the way the ‘new APS’ is managing recruitment and training challenges is a recurring theme throughout the report’.

   15.   For the most part, the Committee’s report reinforces the significant effort being undertaken by APS agencies, the APS Commission and the MAC in recent years to improve workforce planning and to tailor recruitment, and learning and development strategies to current and future business requirements. For example, the MAC’s report last year on Organisational Renewal provides careful analysis of demographic trends in the APS and promotes improved workforce planning, employment flexibility, targeted recruitment and more structured learning and development. The MAC report reflects much of the Government’s wider efforts to address demographic change, workforce flexibility and enhanced skills and productivity.

   16.   Accordingly, many of the Committee’s recommendations confirm that current APS recruitment, and learning and development arrangements appropriately reflect the changes in the APS and the Australian workforce over time. The recommendations are also generally consistent with the roles of Agency Heads and the Public Service Commissioner in an environment where responsibility for management decisions has been devolved to Agency Heads.

   17.   In all, many of the Committee’s recommendations endorse practices and arrangements that the Government considers all agencies should have, or already have in place. Generally, the Inquiry has affirmed the Government’s commitment to devolved people management arrangements for the APS and the role of APS agencies vis-à-vis the APS Commission, and reinforced the importance of agencies adopting a rigorous, strategic approach to workforce planning. In particular, the Committee has identified the value and appropriateness of the Government’s efforts in relation to encouraging APS agencies to consider the benefits of Indigenous employment.

   18.   The Government considers that a small number of recommendations, however, are directed to a more centrally driven recruitment and training approach that would not be consistent with the current devolved APS management environment and seek to impose reporting requirements on Agency Heads which could in practice be met adequately under the existing accountability framework.

   19.   There are some recommendations which would require all agencies to apply a uniform approach. While the proposed approach might reflect good practice in many cases, in other cases a business driven model might well lead to a different approach. The Government’s policy in favour of devolved management is based on ensuring the focus is on each agency’s business needs as determined by the Government, with the onus on Agency Heads determining and managing their workforce requirements accordingly. The Government’s response does not accept these recommendations. However, where relevant, work being undertaken by the APS Commission to assist agencies to tailor good practice to their own operations is noted in the Government’s response to particular recommendations.

   20.   While the Committee has also recognised the crucial role for accountability of reporting by APS agencies in a devolved environment, its recommended requirements can, in the Government’s view, be met through the accountability and reporting requirements currently in place in the APS. In recognition of this, the Government’s response to the Committee’s recommendations does not therefore increase the current reporting requirements for APS agencies and the APS Commission. These are considered adequate to fully meet the intent of the Committee’s recommendations. In particular, the Public Service Commissioner will continue to seek information from APS agencies that enables her to provide high-level commentary on capability development and employment practices in the APS through the State of the Service Report.

   21.   The Commissioner will also continue to provide advice and support to APS agencies consistent with the recommendations of the report, and to promote people management policies and practices in accordance with her current statutory responsibilities. The APS Commission will continue in its current role of providing advice and guidance to agencies in relation to a range of recruitment strategies and practices. Workforce planning, which encompasses the relationship between the selection, retention and development of employees in the context of future business needs, will continue to promoted by the APS Commission through a range of forums to support agencies to meet their current and future business objectives and build individual and organisational capability.

   22.   The Committee calls upon the Public Service Commissioner to assume a particular role in APS recruitment practices in relation to the employment of graduates and to promote the APS as an employer of choice and public administration as a major profession. This recommendation is consistent with the recent MAC report Connecting Government: Whole of Government Responses to Australia’s Priority Challenges. The report found that:

   Whole of government opportunities have the potential to be a positive attraction factor and marketing tool for graduate recruitment and should be part of graduate programs. Research indicates, for example, that graduate recruits (in the APS) responded positively to the ability to move between departments.

   23.   The Government notes that this recommendation would require additional resources, and this would need to be tested for priority in a future budget context. Accordingly, the Government response agrees that there is value in considering at a later stage a further role for the APS Commission to promote the APS as an employer of choice and appropriate arrangements to support such a role.

DRAFT WHOLE OF GOVERNMENT RESPONSE TO RECOMMENDATIONS 1-28

Recommendation 1: The Committee recommends that the APS Commission widely disseminate advice and guidance to agencies clarifying the flexibility with recruitment available under the legislation. This should include information on the exceptions that apply to requirements for advertising vacancies, Australian nationality and candidates who have accepted a redundancy benefit (Para 2.89)

Response: Agree

Recommendation 2: The Committee recommends that, to reduce barriers to mobility, the APS Commission provide clear guidance to all agencies on efficient, flexible and streamlined recruitment and selection processes. (Para 2.91)

Response: Agree

Recommendation 3: The Committee recommends that the APS Commission provide clear guidance to all agencies on their responsibilities under the Public Service Act 1999 regarding non-ongoing employees’ entitlements and rights. (Para 2.103)

Response: Agree.

Recommendation 4 : The Committee recommends that all APS agencies develop mandatory exit interview processes to monitor and report on retention and separation trends. The APS Commission should assist agencies in this process and also develop a set of standard questions to enable it to report on APS-wide retention and separation issues and developments. (Para 2.112)

Response: Agree in part. Agencies may wish to use tailored questions in exit interviews or post separation questionnaires that meet their own purposes—this information may, for example, draw on findings of agency staff surveys and be used to support workforce planning. However, a centralised and standardised collection, analysis and reporting of APS-wide exit interview data would be resource intensive for both APS agencies and the APS Commission and would not maximise the usefulness of the exit interview process to individual agencies. The APS Employment Database (APSED), which is maintained by the APS Commission, contains APS-wide data that currently allows reporting on APS trends in engagements and separations over time. As well as providing the capacity to analyse and report by a range of variables such as classification, age, gender and location, APSED provides a resource against which agencies are able to benchmark themselves. Information on service-wide retention and separation trends will be included in the Commissioner’s State of the Service Report.

Recommendation 5 : The Committee recommends that all APS agencies, as a priority, develop a detailed analysis of their present workforce profile and a strategic action plan to meet their future workforce needs. (Para 2.116)

Response: Agree . The Government considers it important that all APS agencies develop strategic workforce plans so as to meet future workforce needs and, that for workforce planning to be effective, it is critical that agencies develop workforce planning strategies that are tailored and timed to the specific agencies’ context and meet their business objectives and changing workforce needs. The Management Advisory Committee (MAC) has noted in its report Organisational Renewal, released in 2003, that ‘agencies need to engage in more systematic workforce planning’.

Many agencies have, to date, undertaken significant steps to improve their workforce planning. Responses to the agency survey undertaken for the State of the Service Report 2002-03 indicated that 36% of agencies had in place policies or strategies to ensure they would have the skills and capabilities needed in their agency for the next one to five years. Consistent with the priority which agencies are placing on workforce planning, another 54% indicated that they are currently developing these for 2003-04.

To further support agencies’ workforce planning activities, the Australian National Audit Office (ANAO) and the APS Commission collaborated to produce the better practice guide: Building capability: A framework for managing learning and development in the APS, in April 2003. The APS Commission, together with the Departments of Employment and Workplace Relations, and Finance, and Comsuper and Comcare also developed a package of resource materials for human resource practitioners in the APS to address retention of mature aged workers which was launched in late 2003. Details of these, and other recent publications which promote and assist agencies to improve their workforce planning are provided at Attachment B.

The APS Commission is currently developing an Internet interface that will allow agencies direct access to their workforce data from APSED, including customised tables providing a demographic profile of staff in their agency, together with APS averages for benchmarking. The APS Commission is also continuing to undertake a range of other activities to support agencies workforce planning including learning and development options, case studies and collaborative projects. Responses to Recommendations 11 and 12 also consider aspects of workforce planning in APS agencies.

Recommendation 6: The Committee recommends that, as a priority, all agencies develop mentoring programs and activities to support new young recruits. (Para 2.124)

Response: Noted. The Government considers that mentoring programs are best developed by agencies to meet their particular needs and may not be appropriate to the circumstances of all agencies. They may also extend beyond new young recruits to lateral recruits of whatever age and employees from specific diversity groups.

Recommendation 7: The Committee recommends that the APS Commission assist agencies to develop collaborative arrangements with industry to establish work experience arrangements for young people, especially in areas of key skill needs. (Para 3.64)

Response: Disagree. While reciprocal work experience placements with industry are desirable, agencies are better placed to know their requirements and to generate such placements.

Recommendation 8: The Committee recommends that in its overall recruitment strategy the Government re-commit the Commonwealth to significantly increasing the number of trainees employed in the APS. (Para 3.66)

Response: Disagree. The Government is aware that the changing nature of work in the APS means that for many agencies fewer positions are needed at lower points in the classification structure—the MAC report Organisational Renewal identifies the significant change undergone by the APS workforce, including recruitment patterns that see a greater reliance on graduates and the lateral engagement of older people above the base grade level together with a decline in employment at the lower classification levels. It is considered that agencies are best placed to know their likely need for the engagement of trainees in the future and, while it is not anticipated that there will be a need for a significant increase in the number of trainees within APS agencies, it may be that as agencies face greater competition for staff, they may wish to pursue the recruitment of trainees.

Recommendation 9: The Committee supports the APS Commission’s initiative to establish an indigenous employment working group to assist development of recruitment and retention strategies. The Committee recommends that the APS Commission give priority to implementing and monitoring these initiatives and in particular improve information dissemination, awareness raising and communication strategies to indigenous people on employment in the APS. (Para 5.49)

Response: Agree. The Government is supporting the APS Commission’s priority project aimed to help agencies in the recruitment, retention and development of Indigenous employees.

The APS Commission has established:

  • a high level Deputy Secretary Steering Committee, to support and provide direction to the working group;
  • an Indigenous Employment HR Forum to provide a forum for employing agencies to discuss issues and share knowledge on good practice approaches to Indigenous employment;
  • State-based Indigenous APS employee networks in all States and Territories.

The APS Commission has also developed a communication plan to improve information dissemination and to raise awareness of the project.

Recommendation 10: The Committee recommends that the APS Commission have a dedicated budget to assist indigenous people to gain employment in the APS. The Committee also recommends that indigenous employees be provided with ongoing intensive support for career development and to improve retention rates. (Para 5.51)

Response: Noted. The Government has agreed to the APS Commission accessing funding of $400,000 from its accumulated reserve funds to support the Indigenous Employment Strategy. The need for further funding will be considered in the light of the findings of the current project.

Recommendation 11: The Committee recommends that all APS agencies develop a detailed recruitment strategy with a set of objectives for the next three years. Each agency should report annually to the APS Commission on progress in implementing its recruitment strategy. Agencies should also report on progress annually to the APS Commission. (Para 6.38)

Response: Agree in part. The Government recognises that it is important that agencies develop strategic workforce plans that are tailored to, and timed to meet the specific context and business objectives of individual agencies. It further notes that recruitment strategies represent only one aspect of workforce planning and need to be aligned with retention strategies to meet agencies’ changing demographics and capability requirements. The annual reporting requirements for APS agencies provide that annual reports should include an assessment of the agency’s effectiveness in managing and developing its staff to achieve objectives. Matters that are suggested for inclusion in the annual report include workforce planning, and staff retention and turnover. There remains scope for the APS Commission to seek information on matters such as workforce planning in connection with the State of the Service Report. Further mandatory reporting by agencies to the APS Commission is not seen as appropriate.

Recommendation 12: The Committee recommends that the APS Commission present a detailed report annually, as part of the State of the Service report, outlining the progress made by each agency in achieving its objectives in recruitment. (Para 6.40)

Refer to responses to Recommendations 5 and 11. The Government is supportive of reporting on the capability of the APS and encourages agencies to engage in workforce planning. This is a broader concept than reporting separately on agencies’ recruitment objectives. While the State of the Service Report may include some analysis of recruitment issues facing agencies, a detailed report outlining the progress made by each agency in achieving its objectives in recruitment is considered to be of limited use in assessing their effectiveness. As indicated in the response to Recommendation 11, the annual reporting requirements for agencies also includes an assessment of the agency’s effectiveness in managing and developing its staff to achieve objectives.

Recommendation 13: The Committee recommends that the APS Commission assume a greater role in APS recruitment practices and in particular establish benchmarking of recruitment practices. (Para 6.40)

Response: Agree in part. The APS Commission’s advisory role includes providing advice on the benchmarking of recruitment practices. For example, the Commission has recently produced and released a Recruitment and Selection Kit to provide a benchmark for managers for best practice in recruitment. The Commission does not have a statutory role in the actual recruitment practices of agencies.

Recommendation 14: The Committee recommends that the government provide the APS Commission with such additional resources as are necessary to fulfil an enhanced role in guiding and monitoring APS recruitment strategies and practices. (Para 6.42)

Response: Noted. Any additional resources would need to be considered and prioritised in a future budget process. While recruitment is primarily the responsibility of each agency, consideration will be given to the APS Commission being tasked and provided appropriate resources to complement agency recruitment activity by better promoting the APS as an employer of choice and extending the promotion of public administration as a career. Recommendation 27 also relates to this response.

Recommendation 15: The Committee recommends that APS agencies review management processes to ensure that training outcomes are clearly and transparently linked to agency and individual goals. (Para 7.46)

Response: Agree. This recommendation reflects current good practice and the intent of publications from MAC, the ANAO and the APS Commission. It is current practice in many agencies. The recommendation reinforces initiatives in those agencies that are working to improve their workforce planning and governance arrangements to better ensure alignment of agency goals and individual learning and development.

Recommendation 16.1: The Committee recommends that the APS Commission enhance its advisory and reporting roles, including reporting to Parliament, by:

  (16.1) encouraging and supporting collection and analysis of APS-wide data on training and development; and

Response: Agree with qualification, recognising that the collection of data to measure the levels of formal off-the-job training being provided—as distinct from the broader concept of learning and development—has the potential to detract from recognition of the important role and need for effective evaluation of the full range of learning and development activities. Learning and development will continue to be a key area covered by the agency surveys undertaken by the APS Commission for future State of the Service Reports.

The 2002-03 agency survey gathered a range of APS-wide data on learning and development which was used in the 2002-03 State of the Service Report. The survey addressed both formal off-the-job training and less formal on-the-job learning and development, and the questions in the survey were based on the principles and minimum data set recommended to agencies in the ANAO-APS Commission better practice guide Building capability—A framework for managing learning and development in the APS. To further support agencies in this area, the APS Commission is currently developing a guide on Evaluation of Learning and Development in the APS.

Recommendation 16.2: The Committee recommends that the APS Commission enhance its advisory and reporting roles, including reporting to Parliament, by:

  (16.2) analysing the costs and benefits of training at both an individual agency and whole-of-government level. (Para 7.26)

Response: Agree with qualification. Evaluation (including cost-benefit analysis) and reporting on the effectiveness of training strategies should primarily be an agency responsibility. However, the APS Commission will continue to report on relevant service wide issues through the State of the Service Report. In addition, following the more widespread adoption by agencies of the minimum data set recommended to agencies in the ANAO-APS Commission better practice guide Building capability—A framework for managing learning and development in the APS, the APS Commission intends to consider assessing the extent to which agencies are themselves effectively evaluating their learning and development activities. The response to Recommendation 22 also relates to, and should be considered in conjunction with this response.

Recommendation 17: The Committee recommends that centralised graduate and post graduate training such as that offered by Australia New Zealand School of Government and other institutions, as well as the new Public Sector Management program, be promoted to employees across the APS. (Para 9.35)

Response: Agree. The APS Commission will continue to actively promote both the Australia New Zealand School of Government and the new Public Sector Management program to APS agencies.

Recommendation 18.1- 18.3: The Committee recommends that all APS agencies demonstrate continuing support for employees training and development aspirations by:

   18.1    including a strong commitment to learning and development in corporate plans;

   18.2    developing structured training programs and career pathways built on accredited and articulated training where appropriate, publicise these to employees and to potential recruits in agency marketing strategies;

   18.3    providing sufficient funds and HR personnel to support integrated training for all employees;

Response: Agree with qualification. The Government agrees that agencies need to demonstrate support for employees’ learning and development by including a strong commitment to learning and development in the corporate plan or in the whole of agency strategy and documents associated with the corporate plan. It also notes that for many agencies accredited learning is not an appropriate strategy for meeting the development needs of many of their staff and that it is important that agencies design their learning and development programs to reflect their context and business needs—this will usually involve a mix of both formal and informal development strategies

This recommendation is consistent with the intent and practice which has been promoted to agencies over recent years, including through the MAC reports Organisational Renewal in 2003 and Performance Management in the Australian Public Service: a strategic framework in 2001 and the ANAO-APS Commission better practice guide Building capability: a framework for managing learning and development in the APS in 2003. The better practice guide specifically encourages agencies to identify short and long term organisational capability requirements and establish learning and development strategies and plans that are aligned with the desired agency outcomes identified in key corporate planning documents. The guide also recommends that agencies ensure appropriate budgets are made available to support learning and development, and that agencies consider the use of accredited training and opportunities for articulating learning where appropriate.

Recommendation 18.4: The Committee recommends that all APS agencies demonstrate continuing support for employees’ training and development aspirations by:

   18.4    reporting annually to the APS Commission on progress in achieving training objectives. (Para 9.60)

Response: Agree with qualification. Agencies are required, through annual reports, to report on training and development outcomes and achievements. While detailed reporting and assessment of each individual agencies’ performance by the APS Commission would be inconsistent with the more devolved environment for APS agencies, the State of the Service Report will identify APS-wide trends and issues related to learning and development based on responses to its agency survey.

Recommendation 19: The Committee recommends that the APS Commission present a detailed report annually, as part of the State of the Service report, outlining the progress made by each agency in achieving its training objectives. (Para 9.61)

Response: Disagree. The State of the Service Report will include a general report identifying APS wide trends and issues related to learning and development based on responses to its agency survey. It is more appropriate that agencies provide detailed reports on their progress in achieving their learning and development objectives through their annual reports.

Recommendation 20: The Committee recommends that all agencies include in their guidelines on training management a requirement that all training programs must include an evaluation phase, timetable and methodology. (Para 10.86)

Response: Agree with qualification. The Government agrees that agencies should ensure that their guidelines for managing learning and development include a requirement that every learning and development program has an evaluation plan which outlines the evaluation methodology and timing. The ANAO-APS Commission better practice guide: Building capability: A framework for managing learning and development in the APS reinforces the need for an evaluation plan for learning and development programs. However, having an evaluation plan does not mean that it is always appropriate to have a specific evaluation phase as evaluation does not have to be separate in time and methodology from intrinsic aspects of a development program. Also, to make evaluation mandatory for all learning and development activities would be unduly onerous, costly and not necessarily useful. Factors such as cost, effort and effectiveness should be considered prior to undertaking evaluations.

Recommendation 21: The Committee recommends that agencies utilise experts with evaluation skills both in the design stage of training strategies and programs and during the post training evaluation stage. (Para 10.89)

Response: Agree with qualification. Agencies should be encouraged to develop the capabilities of staff responsible for the management of learning and development, in areas of design and conduct of evaluation, and to use experts with evaluation skills, where this is assessed as appropriate and cost-effective, in the design and/or implementation of evaluation.

Recommendation 22: The Committee recommends that agencies adopt the ANAO-APS Commission recommended minimum data set and performance indicators for training. The Committee also recommends that the APS Commission coordinate an evaluation of the effectiveness of these measures, to establish better practice principles and identify areas for refinement where necessary. (Para 10.95)

Response: Agree in principle. The APS Commission will continue to encourage agencies to monitor and collect information about the outcome achieved by both their on-the-job and off-the-job learning and development, so agencies can make value for money assessments in planning future learning and development. The response to Recommendation 16.1 refers.

The APS Commission will have discussions with the ANAO about the conduct of an evaluation of the effectiveness of agencies’ use of the ANAO-APS Commission minimum data-set and performance indicators for training, subject to availability of resources. As indicated in the Government response to Recommendation 16.2 it is proposed that this assessment of the extent to which agencies are themselves effectively evaluating their learning and development activities be considered in due course. It is intended that evaluation should move beyond the collection of data about the levels of activity in structured learning and development, and look to assess the value gained and ensure it includes development beyond off-the-job training, such as coaching and mentoring.

Recommendation 23: The Committee recommends that the Senior Executive Service in all APS agencies lead by example by undertaking training and demonstrating commitment to continuing professional development as a key factor in their employment. (Para 11.25)

Response: Agree.

Recommendation 24: The Committee recommends that the APS Commission provide greater leadership to facilitate coordinated cross-service training. Its aim should be to ensure efficiency in design and development of training programs, particularly for core APS-wide skills. (Para 11.40)

Response: Agree, noting the responsibility of agencies to recognise the value of cross-APS learning and development opportunities and take advantage of the programs on offer.

Recommendation 25: The Committee recommends that the APS Commission, in consultation with agencies, review the availability of training programs and opportunities in regional areas to ensure consistency with those available for APS employees in urban areas. (Para 11.44)

Response: Agree with qualification. It is noted that some agencies already have established strong training programs in their regions to meet their specific business needs. It is also noted that staff in regional centres, particularly remote areas, often have different learning and development needs to agency staff in the major urban areas and that ‘consistency’ may not be always appropriate. The difficulties in managing learning and development outside the urban areas and the increased cost of its provision (due to both the lack of a critical mass of participants and the increase in indirect costs such as travel), will limit the assistance that agencies and the APS Commission can provide. Nevertheless, where requested, the APS Commission will work with agencies in regional areas to enhance the availability of learning and development opportunities.

Recommendation 26: The Committee recommends that the APS Commission increase its efforts in coordinating and facilitating delivery of cross-service APS training programs in administrative law, record keeping, financial management and freedom of information requirements. (Para 11.80)

Response: Agree with qualification. The APS Commission is proposing to offer a new series of interactive management programs that focus on project, contract, record, resource, relationship and performance management to complement existing programs. Current and continuing APS Commission programs incorporate aspects of these subject areas and complement the proposed new programs. The APS Commission also has a range of events and regular publications targeted at specific APS audience which provide avenues for focus on specific subject areas. The Integrated Leadership System, developed in consultation with APS agencies, will provide direction for further review of the suite of programs offered by the APS Commission.

It is noted that it may be more appropriate for some learning and development programs specifically in the areas of administrative law, record keeping, financial management and freedom of information requirements to be conducted by the relevant APS agencies, e.g. Attorney-General’s Department is conducting programs on Freedom of Information.

Recommendation 27: The Committee recommends that the APS Commission and APS agencies actively promote public administration as a major profession and develop measures to enhance a professional identity amongst APS employees. (Para 11.82)

Response: Agree with qualification. The Government’s support for institutions such as the Australia New Zealand School of Government demonstrate its on-going commitment to the recognition of public administration as a profession and the importance it places on developing the capabilities of future public sector leaders. It agrees there is value in considering a further role for the APS Commission, to extend the promotion of public administration as a career. Recommendation 14 also refers.

Recommendation 28: The Committee recommends that the APS Commission be given enhanced powers and responsibilities to ensure greater coordination on whole-of-service issues in recruitment and training. (Para 11.87)

Response: Disagree. The Commission does not require enhanced powers to meet its co-ordination responsibilities in implementing the Government’s response to the recommendations of the Inquiry.

Attachment A

Terms of Reference

On 21 March 2002, the following matter was referred to the Finance and Public Administration References Committee for inquiry and report.

1.   That the following matter be referred to the Finance and Public Administration References Committee for inquiry and report by 12 December 2002: Recruitment and training in the Australian Public Service (APS)

2.   That, in considering this matter, the Committee examine and report on the following issues:

a.   Recruitment, including

(i)   the trends in recruitment to the APS over recent years;

(ii)   the trends, in particular, in relation to the recruitment to the APS of young people, both graduates and non graduates;

(iii)   the employment opportunities for young people in the APS;

(iv)   the efficiency and effectiveness of the devolved arrangements for recruitment in the APS; b.     Training and development, including

b.   Training and development, including

(i)   the trends in expenditure on training and development in the APS over recent years;

(ii)   the methods used to identify training needs in the APS;

(iii)   the methods used to evaluate training and development provided in the APS;

(iv)   the extent of accredited and articulated training offered in the APS;

(v)   the processes used in the APS to evaluate training providers and training courses;

(vi)   the adequacy of training and career development opportunities available to APS employees in regional areas;

(vii)   the efficiency and effectiveness of the devolved arrangements for training in the APS;

(viii)   the value for money represented by the training and development dollars spent in the APS;

(ix)   the ways training and development offered to APS employees could be improved in order to enhance the skills of APS employees; c.     the role of the Public Service Commissioner pursuant to s.41 (1) (i) of the Public Service Act 1999 in coordinating and supporting APS-wide training and career development opportunities in the APS; and d.     any other issues relevant to the terms of reference but not referred to above which arise in the course of the inquiry.

c.   the role of the Public Service Commissioner pursuant to s.41 (1) (i) of the Public Service Act 1999 in coordinating and supporting APS-wide training and career development opportunities in the APS; and

d.   any other issues relevant to the terms of reference but not referred to above which arise in the course of the inquiry.

Attachment B

Recent APS publications

This is a summary of publications which have become available to APS agencies during 2003 and which are designed to assist and guide them in identifying appropriate workforce strategies to meet the particular needs of their agencies, including recruitment, and learning and development strategies.

Reference is made to some of these publications in the Committee’s report and in the Government’s responses to the Committee’s recommendations.

  • In February 2003, the APS Commission issued a paper Managing Succession, that encourages agencies to establish succession management initiatives, consistent with the APS Values, as one of their strategies to ensure the long-term capability of their agencies.
  • A key MAC report, Organisational Renewal, published in March 2003 examines the challenges of building organisational capability by APS agencies against the background of demographic change. This report encourages agencies to undertake improved workplace planning and to develop their own strategies to retain older workers. It also encourages agencies to better manage the risk of loss of corporate knowledge and skills and to recruit and to retain more young people and graduates in the APS. Organisational Renewal identified workforce planning as involving agencies’ understanding their own workforce demographics, identifying their current and future capability requirements and implementing effective succession management. This includes understanding the attraction, retention and separation factors and trends which are relevant to their particular organisation.
  • Implementing organisational renewal: Mature aged workers in the APS. This package of material, launched in November 2003, includes information provided by the Departments of Finance and Administration, and Employment and Workplace Relations, Comcare and the APS Commission. This package is designed to assist agencies to respond to the ageing of the workforce and encourage them to develop a demographic profile of their workforce to underpin their workforce planning. It was compiled to assist APS agencies to develop strategies to retain and attract mature-aged employees.
  • The better practice guide: Building capability: A framework for managing learning and development in the APS, was produced in collaboration between the ANAO and the APS Commission and released in April 2003. This guide draws from the key themes identified in the ANAO Performance audit: Management of learning and development in the Australian Public Service of June 2002 and the MAC publication Organisational Renewal. It stresses the need for alignment and integration of learning and development with other workforce planning and performance management, including recommending a ‘minimum data set’ of information that agencies need to use to evaluate the value of their investment in learning and development. The guide encourages and supports agencies in developing a more strategic approach to planning, delivering and evaluating learning and development to meet organisational goals and deliver best value for money.
  • The ANAO tabled its report Managing People for Business Outcomes, Year Two in June 2003. This report assessed agency performance in people management against nine practice areas, stressing that agencies should identify those practice areas that are most critical to business, and develop appropriate performance targets and measures.
  • The Get it Right Recruitment Kit for Managers, issued by the APS Commission in September 2003, is designed specifically to assist APS managers achieve high quality recruitment and selection decisions.

GOVERNMENT RESPONSE TO THE JOINT COMMITTEE OF PUBLIC ACCOUNTS AND AUDIT—REPORT 391—REVIEW OF INDEPENDENT AUDITING BY REGISTERED COMPANY AUDITORS

Background

On 4 April 2002, the Joint Committee of Public Accounts and Audit (JCPAA) resolved to conduct a review of independent auditing by registered company auditors. The Committee tabled its report in the Parliament on 18 September 2002.

The Government notes that many of the recommendations contained in the JCPAA report traverse proposals contained in the ninth discussion paper of the Corporate Law Economic Reform Program Corporate Disclosure: strengthening the financial reporting framework (CLERP 9). The Government consulted widely on the CLERP 9 policy proposals receiving over 60 submissions from interested parties. The submissions were taken into consideration throughout the drafting of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (the bill). The bill was released for consultation in October 2003 and approximately 50 submissions were received and taken into account while finalising the bill. The bill passed through the Parliament on 25 June 2004.

The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 received the Royal Assent on 30 June 2004 (the CLERP Act). Most of the provisions of the CLERP Act commenced on 1 July 2004. Schedule 3 to the CLERP Act (containing the proportionate liability reforms) commenced by Proclamation on 26 July 2004. The regulations relating to the CLERP Act commenced on 9 July 2004.

During the development of the CLERP 9 policy paper and the CLERP Act, the Government considered the recommendations of the JCPAA. A number of the recommendations have been taken up in the CLERP Act including Chief Executive Officer and Chief Financial Officer (CEO/CFO) sign off of financial reports, true and fair view requirements, a general requirement for auditor independence as well as proportionate liability and incorporation of auditors. The Government considered that some of the recommendations could be better implemented through other channels such as the Australian Stock Exchange (ASX) listing rules and by the Australian Accounting Standards Board (AASB).

The Government’s response to the Committee’s recommendations is as follows.

CORPORATE GOVERNANCE

Committee Recommendation 1

That the Corporations Act 2001 (the Corporations Act) be amended to require the Chief Executive Officer and Chief Financial Officer of a company to sign a statutory declaration that the company’s financial reports comply with the Corporations Act and are materially truthful and complete. This declaration must be attached to the company’s financial reports whenever they are lodged with ASIC and provided to the company’s members and the market operator pursuant to the Corporations Act.

Response

The CLERP Act amends the Corporations Act to require CEOs/CFOs to certify to the directors of a listed entity that the annual financial statements are in accordance with the Corporations Act and accounting standards and that the statements present a true and fair view.

Committee Recommendation 2

That the Corporations Act be amended to require all publicly listed companies to have an independent audit committee and the Act prescribe the minimum requirements in regard to the role, responsibilities and composition of an audit committee.

Response

The Government supports strengthening the role of audit committees but does not agree that audit committees should be mandated in the Corporations Act. The Government’s CLERP 9 policy paper proposed audit committees be mandated only for the top 500 listed companies, not all listed companies. This requirement was implemented through ASX listing rules.

The Government notes that more than 85 per cent of listed companies already have audit committees. At the smaller end of the market, flexibility is required as not all companies will be large enough to warrant the establishment of an audit committee.

ASX Listing Rule 12.7 provides that an entity which was included in the S&P All Ordinaries Index (the top 500 listed companies by market capitalisation) at the beginning of its financial year must have an audit committee during that year. If the entity was in the top 300 of that Index at the beginning of its financial year, it must also comply with the ASX Principles of Good Corporate Governance and Best Practice Recommendations (ASX Principles) on the composition, operation and responsibility of audit committees. Under the ASX Principles, the audit committee should:

  • have at least three members;
  • consist of only non-executive directors;
  • have a majority of independent directors; and
  • have an independent chairperson, who is not the chairperson of the board.

The role of the audit committee is to review the integrity of the company’s financial reporting and oversee the independence of the external auditors.

Companies outside the top 300 who do not have an audit committee in the form set out in the best practice recommendations should disclose how their alternative approach assures the integrity of the financial statements of the company and the independence of the external auditor. This approach recognises the significant range in size and diversity of Australian listed companies and the difficulties smaller companies may face in applying all the ASX principles.

The Government supports the specification of standards for audit committees—including in relation to their charter, structure, membership, and the nature and scope of their duties and responsibilities—but as a matter of best practice rather than legislative requirement. In this way the standards respond flexibly to changing market circumstances.

Committee Recommendation 3

That the Financial Reporting Council:

  • develop a set of corporate governance standards, including prescriptions for internal audit, taking primary guidance from the findings of the ASX’s Corporate Governance Council; and
  • take all steps to ensure these standards be given legislative backing in the Corporations Act, as either pursuant to or mirroring section 334.

Response

Not accepted. The Government supports a co-regulatory approach and considers that some matters are better left to industry bodies to pursue. Best practice corporate governance standards have been developed by the ASX’s Corporate Governance Council and ASX listing rules continue to require listed companies to report on their performance against these standards. These include recommendations that systems be developed to identify, assess, monitor and manage risk. The standards encourage companies to have an internal audit function.

The Government does not favour giving corporate governance standards legislative backing. The co-regulatory approach will allow standards to respond flexibly to changing market circumstances and require disclosure to the market, with the market able to apply sanctions where appropriate.

The Government also notes that the Financial Reporting Council (the FRC) is not a standard setting body but rather oversights the standard setting process relating to accounting and auditing standards.

Committee Recommendation 4

That section 1288 of the Corporations Act be amended to incorporate the following principles:

  • require audit firms undertaking assurance audits of publicly listed companies to submit a report to ASIC on an annual basis detailing how audit firms have managed independence issues in the preceding period and any future independence management issues that are deemed pertinent;
  • provide ASIC with the authority to investigate and address independence issues arising from these reports or from other sources as ASIC considers appropriate; and
  • require publication of the ASIC benchmark criteria used for determining the adequacy of the internal systems and processes of large audit firms.

Response

Not accepted. The Government notes, however, that the CLERP Act has introduced a comprehensive regime on auditor independence which incorporates the recommendations of the Ramsay Report (Independence of Australian Company Auditors) and that many of the proposals in the Ramsay Report have been endorsed by the JCPAA.

The CLERP Act has expanded the role of the FRC to monitor the effectiveness of auditor independence requirements in Australia. One of the FRC’s specific auditor independence functions in the CLERP Act is to monitor and assess the nature and overall adequacy of the systems and processes used by audit firms to ensure compliance with auditor independence requirements. The FRC is required to report annually to the Minister on its audit independence functions, including findings and conclusions that it reached in performing those functions and any action taken.

The CLERP Act includes a requirement that auditors make an annual declaration to the directors of an audit client that they have not contravened the auditor independence requirements of the Corporations Act or of any applicable code of professional conduct in relation to the audit or review.

ASIC is responsible for surveillance, investigation and enforcement of the responsibilities of companies and auditors in relation to financial reporting, including the enforcement of auditor independence requirements and Australian accounting and auditing standards.

FINANCIAL REPORTING

Committee Recommendation 5

In the process of adopting the international accounting standards by 1 January, 2005, as announced by the FRC, the AASB should ensure that those contentious issues and deficiencies identified by the Committee are resolved as a matter of priority at the earliest possible date.

Response

The AASB made Australian equivalents to International Financial Reporting Standards (IFRS) on 15 July 2004. The development of IFRS is based on the Framework for the Preparation and Presentation of Financial Statements (Framework). The Framework, which is issued by the International Accounting Standards Board, underlies the principles based approach to drafting taken in the development of IFRS.

The 40 international equivalent standards made by the AASB include standards specifically addressing:

  • leases;
  • financial instruments, including derivatives;
  • intangible assets;
  • executives’ and directors’ remuneration;
  • share options;
  • investment properties;
  • pensions or superannuation accounting; and
  • accounting for the impairment of assets.

Committee Recommendation 6

That section 297 of the Corporations Act be amended as follows:

  • add the requirements that, in undertaking the assessment of a true and fair view, directors must consider the objectives contained in section 224(a) of the ASIC Act and must include a statement in the financial report that they have done so;
  • delete the current footnote that states:

If the financial statements and notes prepared in compliance with the accounting standards would not give a true and fair view, additional information must be included in the notes to the financial statements under paragraph 295(3)(c).

  • add the following new sub-sections:

In the case of conflict between sections 296 (compliance with accounting standards) and 297 (true and fair view), the notes to the financial statements must indicate why, in the opinion of the directors, compliance with the accounting standards would not give a true and fair view of the financial performance and position of the company.

The notes to the financial statements must include a reconciliation to provide additional information necessary to give a true and fair view.

Response

The Government considered that the JCPAA’s recommendations in relation to the true and fair requirements have merit and they have been implemented in the CLERP Act. The CLERP Act provides that, where compliance with accounting standards would result in the financial statements and notes together not giving a true and fair view, the directors report should set out:

  • the directors’ reasons why compliance with accounting standards would not result in the financial statements giving a true and fair view; and
  • the additional information and explanations needed to give a true and fair view.

Sections 298 (annual directors’ report) and 306 (half-year directors’ report) of the Corporations Act have been amended by the CLERP Act for the purpose of giving effect to the JCPAA’s recommendations.

Where an entity’s directors consider that compliance with the accounting standards would result in an entity’s financial statements not giving a true and fair view, and they include additional information in the notes to the financial statements in accordance with paragraphs 295(3)(c) (financial year) or 303(3)(c) (half-year) in order to give such a view, the directors will be required to include in their directors’ report:

  • their reasons for forming the view that the additional information was needed for the purpose of giving a true and fair view in accordance with sections 297 or 305; and
  • the location of the additional information in the financial report.

The Government has not accepted the JCPAA recommendation that the directors, in undertaking the assessment of a true and fair view, must consider the objectives contained in section 224(a) of the Australian Securities and Investments Commission Act 2001 (the ASIC Act). Section 224(a) of the ASIC Act relates to the framework for the development of accounting and auditing standards in Australia and has no relevance to the assessment required to be made by directors in relation to the true and fair view.

Committee Recommendation 7

It is recommended that sections 307 and 308 of the Corporations Act be amended to require the auditor to form an opinion and report on any additional disclosures made pursuant to section 297.

Response

The CLERP 9 Act adopts this recommendation.

Committee Recommendation 8

It is recommended that the ASX amend the Listing Rules to require additional reporting by companies in the following areas:

  • commentary on internal control systems, including risk management processes;
  • management discussion and analysis;
  • commentary on the main factors affecting reported financial performance and financial position;
  • commentary on the key judgments made in the application of accounting policies;
  • results for a set of key performance indicators pointing to the health of the organisation; and
  • details of directors’ and executives’ performance appraisal or management systems

Response

The Government considers that many of these issues are best addressed by the ASX in the first instance or, where appropriate, the accounting standards.

The Government notes however that the CLERP Act requires listed companies to include in their directors’ report an operating and financial review.

THE AUDITING FRAMEWORK

Committee Recommendation 9

That section 324 of the Corporations Act be amended by including:

  • the following statement:

The Auditor must be independent of the company in performing or exercising his or her functions or powers under this Act.

  • a footnote to indicate that this statement may be interpreted by reference to the Code of Professional Conduct of the Professional Accounting Bodies.

Response

Agree in principle. The CLERP Act puts in place a general requirement for auditor independence, breach of which is a criminal offence.

The CLERP Act also requires an auditor to provide to the directors of the audit client an annual declaration that there have been no contraventions of the auditor independence requirements of the Corporations Act or of any applicable code of professional conduct in relation to the audit or review.

Committee Recommendation 10

That the following sections of the Corporations Act be amended:

  • section 307 be amended to require that auditors form an opinion on whether the company has complied with corporate governance standards (see Recommendation 3);
  • section 308 be amended to require the auditor to report as to whether the company has complied with corporate governance standards (see Recommendation 3); and
  • section 308 be amended to require the audit report to include comment on significant matters arising during the audit process.

Response

Not accepted. As indicated in the response to recommendation 3, the Government does not support giving legislative backing to corporate governance standards. Corporate governance standards contain a range of matters outside of auditors’ expertise. Auditors are not necessarily equipped to form opinions and report on compliance with such standards. The proposal could add significantly to audit costs.

The Corporations Act already contains provisions requiring the audit report to describe any defect or irregularity in the financial report, and any shortcoming relating to whether the auditor has been given all information, explanation and assistance necessary for the conduct of the audit, or relating to the keeping of financial and other records by the company. The Corporations Act also requires the auditor to notify ASIC of a suspected contravention of the Act if it cannot be adequately dealt with in the audit report or by bringing it to the attention of the directors. The CLERP Act expands the matters which auditors must report to ASIC to include any attempt to influence, coerce, manipulate or mislead persons involved in the conduct of the audit.

Committee Recommendation 11

That ASIC explore the costs and benefits and alternative methods of introducing performance audits in the private sector and, in conjunction with the ASX, evaluate the costs and benefits of requiring pronouncements and other disclosures under the continuous disclosure listing rule to be subject to a credible degree of assurance and report its findings to the Treasurer.

Response

Not accepted. While performance audits perform a valuable role within the public sector, difficult questions arise in relation to their application in the private sector. The Government believes that the market should determine the need for private sector performance audits, including in response to any demand from shareholders.

Performance audits are designed to evaluate outcomes and the achievement of objectives. Evidence presented to the JCPAA on this issue was mixed. For example, the ASX advised the JCPAA that they did not agree with the notion of the conduct of performance audits in the private sector saying that they believed that performance criteria for companies could not be readily developed, measured and kept current. Professor Ramsay told the JCPAA that in certain circumstances it may enhance confidence in information to have the auditor do performance audits, but he did not think that they should be mandated.

The Government believes that audit assurance of the requirements of the Corporations Act and ASX listing rules relating to continuous disclosure is unnecessary. The enforcement capacities of ASIC and ASX in this regard are considered appropriate, taking into account the Government’s strengthening of the penalty regime for continuous disclosure contraventions in the CLERP Act, including a power for ASIC to issue infringement notices, and to encourage the ASX and other market operators to provide listed entities with education and guidance to promote compliance. The Government considers that the continuous disclosure regime has its own checks and balances.

Committee Recommendation 12

To support an expansion in the role of registered company auditors, the following reforms should be put in place to provide a greater level of protection for their personal assets:

  • principle of joint and several liability replaced with the principle of proportionate liability, so as to provide a more equitable basis for allocating damages;
  • amend the Corporations Act so that audit firms can operate within limited liability structures; and
  • introduce a cap for professional liability claims to limit the quantum of damages which can be awarded against auditors.

Response

Proportionate liability: Agree. The CLERP Act has introduced a proportionate liability regime in respect of claims for economic loss or damage to property arising from misleading or deceptive conduct. The introduction of proportionate liability is one of the key measures on which all governments in Australia have agreed in order to improve the availability and affordability of professional indemnity insurance.

Incorporation of audit firms: Agree. The CLERP Act has established a framework for incorporation of audit firms, which was not previously allowed under the Corporations Act. Allowing auditors to incorporate addresses the concerns relating to the professional liability of auditors arising from the joint and several liability of partners of a firm. Incorporation also provides accounting firms with an additional option in terms of how they structure their operations.

Capping of professional liability: The Government has agreed to support State and Territory professional standards legislation based on the NSW legislation. The Treasury Legislation Amendment (Professional Standards) Act 2004 amends the ASIC Act, the Corporations Act and the Trade Practices Act 1974 to give effect to the Australian Government’s commitment to support the State and Territory professional standards legislation. This Act was passed by the Parliament on 25 June 2004 and received the Royal Assent on 13 July 2004.

Committee Recommendation 13

That a framework for protected (or whistleblower) disclosure be established in the Corporations Act. Included in this framework should be clear accountability mechanisms over the administration and management of disclosures.

Response

Agree. The CLERP Act contains provisions to amend the Corporations Act to provide qualified privilege and protection against retaliation in employment for any company employee reporting internally within a company or to ASIC, in good faith and on reasonable grounds, a suspected breach of the Corporations Act and associated legislation.


GOVERNMENT RESPONSE TO RECOM-MENDATIONS OF THE PARLIAMENTARY JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES

Background

On 8 October 2003 the Parliamentary Joint Committee on Corporations and Financial Services (PJC) resolved to inquire into and report on the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (the CLERP 9 Bill). The PJC tabled its report on the CLERP 9 Bill in two parts—part 1 was tabled on 4 June 2004. Some recommendations contained in part 1 were agreed to by the Government and moved as amendments during the bill’s passage through the Parliament.

Part 2 of the PJC report was tabled on 15 June 2004. In light of the timetable for debate of the bill in the Parliament, there was insufficient time for detailed consideration of the recommendations in part 2 of the report. As a result, during the Senate debate on the CLERP 9 Bill, the Government undertook to consider the recommendations of the PJC in detail and to provide a written response following commencement of the CLERP 9 Act.

It is noted that some recommendations from parts 1 and 2 of the report were moved as amendments by the Democrats and agreed to by the Government during debate in the Senate.

The Government’s response to the Committee’s recommendations is outlined below.

Part 1—enforcement, executive remuneration, continuous disclo-sure, shareholder participation and other

Recommendation 1

The Committeee recommends that the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (the CLERP 9 Act) require corporations to establish a whistleblower protection scheme that would both facilitate the reporting of serious wrongdoing and protect those making or contemplating making a disclosure from unlawful retaliation on account of their disclosure. The Committee refers to Australian Standard AS8004—2003 as a starting point for corporations.

Response

The Government does not accept this recommendation.

In recognition that the whistleblowing provisions apply to companies of varying size and characteristics, the CLERP 9 Act has adopted a flexible framework which does not mandate the establishment of particular systems to deal with formal complaints. Prescribing particular systems which all companies must implement in order to facilitate whistleblowing could prove to be overly rigid and unsuitable for particular companies in the Australian market.

The CLERP 9 provisions acknowledge that individual companies are best placed to determine what internal systems are most appropriate for them according to their circumstances.

Recommendation 2

The Committeee recommends that CLERP 9 require the Australian Securities and Investments Commission (ASIC) to publish a guidance note designed for all companies, using AS8004—2003 as a model, to help further promote whistleblowing protection schemes as an important feature of good corporate governance.

Response

This is a matter for consideration by ASIC.

Recommendation 3

The Committeee recommends that paragraph 1317AA(1)(a)(iv) read “an employee of a person who has contracted for services with, or the supply of goods to, a company”.

Response

The Government accepts this recommendation.

Prior to the passage of the CLERP 9 Act through the Parliament, the Government amended paragraph 1317AA(1)(a) in order to implement this recommendation.

Recommendations 4 - 6

Recommendation 4—The Committeee recommends that the threshold test of “in good faith” be removed and replaced by “an honest and reasonable belief”.

Recommendation 5—The Committeee recommends that the whistleblowing provisions should stipulate that the report must relate to “a serious offence”.

Recommendation 6—The Committeee recommends that the Government give serious consideration to providing for anonymous reports. It believes that by having the requirements that a person must have an honest and reasonable belief that an offence has or will be committed and that the offence is a serious offence will represent a sufficient safeguard against frivolous or vexatious reporting.

Response

The Government does not accept these recommendations as their implementation would alter the overall whistleblowing framework within the CLERP 9 Act.

The CLERP 9 Act provides protection for officers, employees and subcontractors of a company who report suspected breaches of the Corporations Act 2001 (the Corporations Act) and the Australian Securities and Investments Commission Act 2001 (the ASIC Act) to ASIC or to specified persons within the company. As a way of minimising vexatious disclosures, the provisions require that the disclosure be made in good faith and on reasonable grounds. In addition, to promote the integrity of the whistleblowing provisions, anonymous disclosures are not permitted.

This is a package of measures which seeks to balance two competing objectives: encouraging company employees and officers to report suspected breaches of the law, while at the same time ensuring that the whistleblowing protections are not abused or used for a malicious purpose.

The CLERP 9 Act encourages the reporting of wrongdoing by prohibiting companies from victimising employees, officers or subcontractors when they report a suspected breach of the Corporations Act and related legislation in good faith and on reasonable grounds. Whistleblowers who make disclosures in accordance with the Act receive protection from criminal or civil liability and attract qualified privilege in respect of the disclosure. Requiring all disclosures to be made in good faith is designed to enhance the integrity of the system by ensuring that persons making disclosures do not have ulterior motives. Further, to attract the whistleblowing protections contained in the CLERP 9 Act, there must be a reasonable basis to suspect that a breach has been committed.

Recommendations 4 to 6 propose changes to the threshold requirements that determine whether a particular disclosure will attract the protection of the whistleblowing provisions.

Implementing Recommendation 4 would mean that the purpose or motive of the person making the disclosure would no longer be relevant. This could give rise to the possibility that a disgruntled employee might attempt to use the provisions as a mechanism to initiate an unnecessary investigation and thereby cost the company time and money.

Implementing Recommendation 5 would result in the application of the protections to disclosures that relate only to serious offences. It could prove difficult for many company employees to determine what constitutes ‘a serious offence’ and to assess whether their disclosures would attract the protections afforded by the whistleblowing protections.

Further, providing for anonymous reports as suggested in Recommendation 6 may encourage the making of frivolous reports, and would generally constrain the effective investigation of complaints. Allowing anonymity would also make it more difficult to extend the statutory protections to the relevant whistleblower.

Overall, the Government considers that the framework in the CLERP 9 Act achieves an appropriate balance between the policy objectives and should therefore be maintained.

Recommendation 7

The Committeee recommends that a provision be inserted in the proposed whistleblowing scheme that expressly provides confidentiality protection to persons who make protected disclosures to ASIC or to the designated authorities within a company. Similar provisions should also be inserted to protect the rights of persons who are the subjects of disclosures.

Response

The Government accepts the general intent of the PJC’s recommendation to provide confidentiality protection.

Under section 127 of the ASIC Act, protected information provided to ASIC must be treated confidentially. The Government considers that disclosures made to ASIC under the whistleblowing provisions will be protected from unauthorised use or disclosure by section 127 of the ASIC Act. Therefore, the Government does not consider an amendment is required to implement this aspect of Recommendation 7.

In relation to information given to designated authorities within a company, the CLERP 9 Act inserted section 1317AE in order to ensure that protected information provided to a company is treated confidentially.

Recommendation 8

The Committeee recommends that the Government review the proposed penalty to be set down in Schedule 3 as item 338 to ensure that it is comparable with other jurisdictions and offences of a similar nature.

Response

The Government does not accept this recommendation.

Item 338 of Schedule 3 in the CLERP 9 Act provides that a breach of subsection 1317AC(1), (2) or (3) of the provisions attracts a penalty of up to 25 penalty units and/or 6 months imprisonment. This penalty is consistent with similar provisions contained in the Inspector General of Taxation Act 2003.

Recommendation 9

The Committeee recommends that a provision be inserted in the whistleblowing provisions that would allow ASIC to represent the interests of a person alleging to have suffered from an unlawful reprisal.

Response

The Government does not accept this recommendation.

Where a company violates the whistleblowing provisions, whistleblowers are entitled to pursue compensation under the statute. Existing section 50 of the ASIC Act already provides ASIC with the ability in certain circumstances to commence civil proceedings in a person's name to recover damages. Where it is in the public interest, this would generally permit ASIC to represent a whistleblower in a claim for damages. However, this provision would not permit ASIC to conduct a criminal prosecution or to represent a whistleblower in an action for reinstatement. The Government considers that an ability for ASIC to represent a person in this sort of action is not necessary.

Recommendation 10

The Committee recommends that ASIC release as soon as possible a guide that leaves no doubt that the remuneration report is to contain a discussion on the board policy for determining the remuneration of its most senior executives which is to be presented in such a way that links the remuneration with corporate performance.

Response

This is a matter for ASIC.

The Government notes that paragraph 300A(1)(b) of the Corporations Act, as amended by paragraph 300A(1)(ba) of the CLERP 9 Act, requires disclosure of the link between the board’s remuneration policy and company performance.

Recommendation 11

The Committee also recommends that regulations to be promulgated under this section adopt the direct and specific language used in the Explanatory Memorandum and not the vagueness of the wording in the bill. The Committee recommends that regulations make clear that what must be included in the remuneration report is information “such as performance hurdles to which the payment of options or long term incentives of directors and executives are subject; why such performance hurdles are appropriate and the methods used to determine whether performance hurdles are met”.

Response

The Government does not accept this recommendation.

Paragraph 300A(1)(ba) of the CLERP 9 Act requires that where an element of remuneration is contingent on satisfying a performance condition, details of the performance condition and the methods used to determine whether performance has been met must be included in the directors’ report.

Regulations made pursuant to paragraph 300A(1)(c) require additional information in respect of performance related remuneration to be disclosed. Regulation 2M.3.03 cross references relevant disclosure paragraphs of the Accounting Standard AASB 1046 Director and Executive Disclosures by Disclosing Entities, including estimates of the maximum and minimum amounts of bonuses in forthcoming financial years that could be paid under a current remuneration agreement.

The Government considers the changes recommended by the PJC are unnecessary given that section 300A, including associated regulations, requires specific disclosures in relation to performance based remuneration.

Recommendation 12

The Committee recommends that the Government review the penalty provisions for contraventions of section 300A with a view to allowing a greater degree of flexibility in applying penalties especially for offences unlikely to satisfy the test that the contravention “materially prejudices the interests of the corporation or materially prejudices the corporation's ability to pay its creditors or is serious or is dishonest”.

Response

The Government does not accept this recommendation.

The current penalties for breaches of remuneration disclosure provisions are those that apply in respect of other breaches of general purpose reporting requirements in Chapter 2M of the Corporations Act.

A breach of section 300A attracts a civil penalty where the breach is not dishonest, but the contravention either:

  • materially prejudices the interests of acquirers or disposers of the relevant financial products; or
  • materially prejudices the issuer of the relevant financial products or if the issuer is a corporation or scheme, the members of that corporation or scheme; or
  • is serious.

In these circumstances a Court may impose a pecuniary penalty of up to $200 000.

If the breach is dishonest, a fine of up to 2000 Penalty Units ($220 000) and/or five years imprisonment may be imposed pursuant to subsection 344(2).

The CLERP 9 Act also implements non-financial sanctions such as increasing directors’ accountability to shareholders via the non-binding vote on the remuneration report. This is an important mechanism to lift standards within companies rather than relying merely on the imposition of financial penalties. The impact of the shareholder vote should be gauged before changes to penalties are considered.

Recommendation 13

The Committee recommends that a new sub section 300(10)(d) be inserted in CLERP 9 which would require the directors’ report to include details of the qualifications and experience of each person who has held the position of company secretary during the reporting period.

Response

The Government accepts this recommendation.

Amendments were made to the CLERP 9 Act to implement this recommendation.

Recommendation 14

The Committee recommends that the Government include in the Corporations Act a general principle that executive directors not be involved in determining their own remuneration unless there are reasonable grounds for that not to occur.

Response

The Government does not accept this recommendation.

The approach adopted in the CLERP 9 Act to director and executive remuneration is to enhance disclosures made to the market to assist shareholders to hold directors accountable. The Act does not interfere with the internal management of companies.

The CLERP 9 Act requires that information on remuneration be disclosed in a remuneration report and presented to shareholders at the company AGM. This mechanism provides an avenue whereby shareholders are able to provide directors with a clear view on the appropriateness of their decisions regarding remuneration and thereby influence those decisions. The Government’s policy has not been to prohibit directors’ involvement in setting their remuneration but rather to ensure there is appropriate disclosure and accountability.

Recommendation 15

The Committee recommends that CLERP 9 be amended to include a provision that requires equity based schemes as a form of executive remuneration to be subject to shareholder approval.

Response

The Government does not accept this recommendation.

The CLERP 9 Act looks to maintain clear lines of accountability whereby shareholders set directors’ remuneration and directors are responsible for determining the remuneration of executives. The Act implemented measures to enhance the accountability of the board of directors to shareholders in respect of those decisions. The Government does not consider it appropriate to introduce more intrusive measures which would blur these lines of accountability.

In respect of executives who are also directors of a company, the Government notes that the ASX Listing Rules already require shareholder approval where directors are granted equity remuneration.

Recommendation 16

The Committee recommends that all payments made to directors be subject to shareholder resolution including payments such as the maximum annual cash payment and any retirement benefit or termination payout.

Response

The Government does not accept this recommendation.

Prior to the measures introduced in the CLERP 9 Act, shareholders already had a significant direct influence over non-executive directors’ remuneration under the Corporations Act and ASX Listing Rules.

The Corporations Act provides that directors are to be paid remuneration as determined by the company at a general meeting. This requirement is a replaceable rule. In relation to listed companies, the related party provisions of the Corporations Act require shareholder approval in order to give a financial benefit to a director. Shareholder approval is not required for ‘reasonable’ remuneration. ‘Reasonable’ is determined with reference to the circumstances of the company and the director in question, including the responsibilities of the director.

The ASX Listing Rules require shareholder approval of any increase in the total pool of directors’ fees payable to all directors. This does not apply to the salary of an executive director.

In light of the above, the Government considers that there are already appropriate mechanisms available that require shareholder approval of non-executive directors’ remuneration.

The non-binding shareholder vote introduced by the CLERP 9 Act is a powerful tool to hold directors to account for their decisions regarding remuneration.

Recommendation 17

The Committee notes the many concerns expressed about the proposed infringement notice regime. In particular, the Committee refers to the blurring of ASIC's functions of investigator and adjudicator. In light of these concerns, the Committee recommends that ASIC’s guide on issuing infringement notices more fully explain and document the procedures it will adopt to ensure that there is a clear and definite separation of its responsibilities to investigate and to adjudicate.

Response

This is a matter for ASIC.

On 20 May 2004, ASIC released Continuous disclosure obligations: infringement notices—An ASIC guide. The guide provides information to interested parties about ASIC’s general approach to the infringement notice remedy and the stages in the infringement notice process.

Recommendation 18

The Committee recommends that CAMAC review the operation of the infringement notice provisions two years after they come into force. It recommends further that in light of comments suggesting that ASIC is not fully or effectively using its current powers to enforce the continuous disclosure provisions that the review take a broader approach and examine the effectiveness of the enforcement regime for continuous disclosure as a whole including the criminal and civil provisions.

Response

The Government partially accepts this recommendation.

The Government has undertaken to review the provisions in two years. The terms of the review and the persons to undertake it will be determined at that time.

Recommendation 19

The Committee recommends that a three-year sunset clause relating to the infringement notice provisions be inserted in CLERP 9.

Response

The Government does not accept this recommendation.

The Government does not favour a sunset clause and, in the light of the response to Recommendation 18, it would be inappropriate to agree to Recommendation 19 because there is no certainty that the review, and Government consideration and implementation action, will have been completed within this timeframe.

The Government has, however, committed to reviewing the operation of these provisions after two years.

Recommendation 20

The Committee recommends that Treasury make the submissions it receives on the draft due diligence defence publicly available.

Response

The Government accepts this recommendation.

The submissions are available on the Treasury website.

Recommendation 21

The Committee recommends that the law be amended to ensure that the voting intentions of shareholders through their proxyholder are carried out according to their instructions.

Response

The Government did not consider that the CLERP 9 Act was an appropriate vehicle to progress this recommendation, as it did not allow sufficient time for consultation and consideration. Issues surrounding proxy voting are being considered as part of the exposure draft Corporations Amendment Bill (No. 2) 2005, which the Government exposed for public consultation on 7 February 2005.

Recommendation 22

The Committee recommends that the provisions governing voting at meetings be reviewed by CAMAC with a focus on the matters that have been raised during the inquiry but which the PJC has not examined in depth, including the disclosure of voting —numbers for, against and abstentions on each resolution before the meeting.

Response

The Government does not accept this recommendation.

Issues surrounding proxy voting, including the disclosure of voting, are being considered in the context of the exposure draft Corporations Amendment Bill (No. 2) 2005 (see Recommendation 21 above).

Recommendation 23

The Committee recommends that, as best practice, institutional investors:

  • include a discussion of their voting policies in their annual report which includes how they manage conflicts of interest in regard to their investments.
  • disclose their voting record in the annual report.

Response

The Government agrees that these issues are best dealt with through industry self-regulation. Industry guidelines, such as those issued by the Investment and Financial Services Association (IFSA) and the Association of Superannuation Funds of Australia (ASFA), are flexible enough to ensure improved disclosure without imposing unnecessary compliance costs.

The success of this approach is demonstrated by a recent IFSA survey (Shareholder Activism Among Fund Managers: Policy and Practice, 2003), which was verified by KPMG and found that 94 per cent of IFSA members have a formal voting policy.

Industry guidelines are currently moving to improve disclosure of voting record. IFSA recently released guidelines, which require disclosure of an aggregate summary of voting records. This is preferable to requiring disclosure of every resolution that an institutional investor may vote on. This approach would be costly to compile and unlikely to be of any use or comprehensible to retail members.

Recommendation 24

The Committee recommends that the 100 member rule for the requisitioning of a general meeting be removed from section 249D of the Corporations Act.

Response

The Government did not consider that the CLERP 9 Act was an appropriate vehicle to progress this recommendation, as it did not allow sufficient time for consultation and consideration. The exposure draft Corporations Amendment Bill (No.2) 2005 proposes to remove the 100 member rule from section 249D of the Corporations Act. The draft Bill was exposed for public consultation on 7 February 2005 and submissions will be accepted on proposals up until 1 April 2005.

Recommendation 25

The Committee recommends that the Government examine carefully ASIC’s submission to Treasury and its surveillance report on research analyst independence with a view to amending the provisions on managing conflicts of interest to provide clearer direction on circumstances that must be avoided and activities that must not be undertaken because of conflicts of interest.

Response

The Government does not accept this recommendation.

The CLERP 9 Act inserted an additional licensing requirement on financial services licensees to have adequate arrangements for managing conflicts of interest. The licensing requirement should ensure that there is adequate disclosure of conflicts to investors, who can then consider their impact before making investment decisions. This requirement takes effect from 1 January 2005 and will be monitored by ASIC.

On 30 August 2004, ASIC released Policy Statement 181 Licensing: Managing conflicts of interest, which provides guidance on the steps that ASIC expects licensees to take in order to comply with the licensing obligation. ASIC is currently finalising guidance on research report providers and will release this as a separate document in the near future.

The additional licensing obligation will require internal policies and procedures for preventing and addressing potential conflicts of interest that are robust and effective.

This will include ensuring that there is adequate disclosure of conflicts to investors, who can then consider their impact before making investment decisions.

It is considered that the licensing obligation to manage conflicts, along with ASIC guidance, should be sufficient to deal with any analyst conflicts of interest without the need to expressly prohibit trading by an analyst, or mandating disclosure in analyst research reports of their remuneration, interest or associations.

Recommendation 26

The Committee recommends that provisions be inserted in the Corporations Act that would require the annual report of listed companies to include a discussion of the board's policy on making political donations.

Response

The Government does not accept this recommendation.

Issues regarding political donations would be more appropriately regulated by the current electoral legislative framework (the Commonwealth Electoral Act 1918) rather than the Corporations Act.

Information regarding political donations by companies is already publicly available from the Australian Electoral Commission.

The decision by a company to donate money to political parties, or to any recipient, is one of a commercial nature. Unless the amount to be donated is of such a scale that it may be classified as an extraordinary transaction, it will generally not be a matter for the shareholders of the company, but rather a matter for the company’s management.

Recommendation 27

The Committee recommends that the Government reinstate in the Act the requirement for listed companies to keep a public register of notices of beneficial ownership.

Response

The Government accepts this recommendation.

The PJC proposal involves reinstating a provision (as closely as possible) that was in the Corporations Law until 1996 (and before that in the Companies ([name of State]) Code), which required listed companies to include responses they receive to tracing notices in a public register. That provision was repealed by the First Corporate Law Simplification Act 1995 on the basis that the information was available from other sources, which have subsequently discontinued providing the information.

Reinserting this provision will not require the listed company or responsible entity to seek any further information (since it relates only to material already collected) and a transition period of six months is intended to give adequate time to establish the register.

This recommendation was implemented by Government amendments moved to the bill. The relevant provisions commenced on 1 January 2005.

Part 2—Financial Reporting and Audit Reform

Recommendation 1

The Committee recommends that the Chief Executive Officer (CEO) and Chief Finance Officer (CFO) sign-off requirement should be amended to accommodate practical contingencies and allow for the CEO’s and CFO’s reasonable reliance on information provided by others when making the certification.

Response

The Government does not accept this recommendation.

It is considered that the present formulation of the requirement is appropriate and that there is no need for an amendment along the lines suggested by the Committee.

To comply with the CEO/CFO sign-off requirement, it is expected that the officers occupying these positions will undertake the level of “due diligence” needed to enable them to sign the declaration to the directors. This approach is in keeping with that adopted in the ASX Corporate Governance Council guidelines.

Recommendation 2

The Committee draws the Government’s attention to the apparent inconsistency between the proposed Operating and Financial Review requirements, concise reports and AASB 1039 and recommends that the necessary amendments be made to avoid a duplication of requirements.

Response

The Government notes that the AASB announced in December 2004 that it intends to exempt listed companies from providing discussion and analysis information pursuant to AASB 1039.

Recommendation 3

The Committee recommends that where alternative accounting treatments are possible in an accounting standard, and where the alternative/s not selected could have resulted in the company recording a loss for the financial year, or substantial losses rather than gains, or have materially affected its solvency, then the reason for the choice of the more favourable alternative over the less favourable alternative must be disclosed by the external auditor.

Response

The Government does not accept this recommendation.

Disclosure of alternative accounting treatments has the potential to inject a significant degree of complexity into financial reports and has the danger of losing the key message to shareholders.

The Government notes that AASB 101 Presentation of Financial Statements will require the preparers of financial reports to disclose key decisions that are fundamental to the accounts. While these disclosures might not be as detailed as those envisaged by the Committee, they will be included in the financial statements, thus making the directors responsible for them, and they will be subject to audit, thus providing an independent assessment of the directors’ explanations.

Recommendation 4

The Committee recommends that the bill should insert a definition of “true and fair view” into the Corporations Act 2001 to clarify that its purpose is to ensure that the financial reports of a disclosing entity or consolidated entity represent a view that users of the reports (including investors, shareholders and creditors) would reasonably require to make an informed assessment of matters such as investment in the entity or the transaction of business with the entity.

Response

The Government does not accept this recommendation.

In the area of financial reporting, the expression “true and fair view” is now regarded as a term of art.

The need for a definition of the expression has been considered on a number of occasions over an extended period of time. However, there has generally been a lack of agreement on the scope of the definition.

In addition, the inclusion of a unique Australian definition of the expression (other jurisdictions also use equivalent expressions) could result in international accounting standards applying differently in Australia to the way they apply in other jurisdictions.

Recommendation 5

The Committee recommends that sections 297 and 305 of the Corporations Act should be amended:

  • to provide that, in undertaking the assessment of a true and fair view, directors must consider the objectives contained in subsection 224(a) of the ASIC Act and must include a statement in the financial report that they have done so;
  • to delete the footnote that states: If the financial statements and notes prepared in compliance with the accounting standards would not give a true and fair view, additional information must be included in the notes to the financial statements under paragraph 295(3)(c);
  • to add new subsections for the following:

   -       In the case of conflict between sections 296 (compliance with accounting standards) and 297 (true and fair view), the notes to the financial statements must indicate why, in the opinion of the directors, compliance with the accounting standards would not give a true and fair view of the financial performance and position of the company;

   -       The notes to the financial statements must include a reconciliation to provide additional information necessary to give a true and fair view.

Response

The Government accepts the substance of this recommendation, and amended the CLERP 9 Bill prior to its passage through the Parliament.

Recommendation 6

The Committee recommends that the Government explore ways in which the administrative functions and statutory obligations of the Australian Accounting Standards Board and the Auditing & Assurance Standards Board can be managed so as to avoid duplication of costs and effort.

Response

The Government accepts the general intent of this recommendation.

The need to integrate the administrative functions and statutory obligations of the Australian Accounting Standards Board (AASB) and the Auditing and Assurance Standards Board (AUASB) to the maximum extent possible and to provide for the interchange of the technical staff has been noted.

Initially, it is envisaged that the administrative staff of the AASB will also provide administrative support for the AUASB. It is also envisaged that the statutory reporting obligations of the AUASB will be covered by the preparation of a single report covering the FRC, AASB and AUASB.

More comprehensive changes to the existing administrative structures should be considered once the AASB has fully completed the transition to international accounting standards and the AUASB has reviewed the profession’s auditing standards and remade them as disallowable instruments.

Any changes to the existing administrative structures should be undertaken in consultation with the Chairmen of the FRC, AASB and AUASB and representatives of other interested stakeholder groups.

Recommendation 7

The Committee recommends that the Government explore ways of combining the administrative and technical teams of the Australian Accounting Standards Board and the Auditing & Assurance Standards Board to provide a working environment that meets the expectations of suitably qualified professionals.

Response

See the response to Recommendation 6.

Recommendation 8

The Committee recommends that Note 2 be deleted from proposed subsection 227B(1) of CLERP 9 so that the Auditing & Assurance Standards Board will not be required to divert resources on unnecessary work.

Response

The Government does not accept this recommendation.

The Government considers that the legislative framework for formulating and making auditing standards, which is based on the framework for making accounting standards, is appropriate.

It is not clear how removal of Note 2 will overcome the need for the AUASB “to divert resources on unnecessary work”, as the note is a “sign-post” pointing to the provisions establishing the framework within which the AUASB is to formulate and make auditing standards.

Recommendation 9

The Committee recommends that the Australian Securities and Investments Commission Act 2001 should be amended to ensure that the Financial Reporting Council:

  • is required to conduct its meetings in public. This should not prevent meetings occasionally being held as closed proceedings where the matters are of such sensitivity that that is appropriate.
  • conducts public consultation on proposals within its functions and responsibilities that have a public interest element.

Response

The Government does not accept this recommendation.

The Government does not consider that legislation should mandate that the FRC hold its meetings in public. The issue of whether the FRC should conduct its meetings in public is a matter for the FRC to determine.

The Council has already taken steps—such as providing detailed bulletins on the FRC website—to increase transparency. Where possible, FRC bulletins are posted on the FRC website within three business days following the FRC meeting.

The FRC is currently conducting a review of its operations, including the need to increase the transparency of its operations, and the outcome of this review is scheduled for discussion at the Council’s February 2005 meeting.

Recommendation 10

The Committee recommends that urgent provision should be made for an adequately staffed and funded secretariat, independent of the Department of the Treasury and other Government departments, for the Financial Reporting Council.

Response

The Government does not accept this recommendation.

The FRC’s work program over the next few years is very full and it would be desirable to consider this issue once the work program has been bedded down.

The establishment by the FRC of its own dedicated Secretariat would require the FRC to be reconstituted as a body corporate. This change of status would be needed to enable the FRC to employ its own staff, engage is own consultants and operate its own bank account. These are significant changes and entail corresponding reporting obligations which would need to be considered.

Recommendation 11

The Committee recommends that the Australian Securities and Investments Commission Act 2001 should be amended so that members appointed to the Financial Reporting Council must have knowledge of, or experience in, business, accounting, auditing or law; or can demonstrate a sufficient involvement in the investment community or interest in corporate reporting to bring a user’s perspective to the Council.

Response

The Government does not accept this recommendation.

The ASIC Act does not prescribe qualifications for members of the FRC. This is in keeping with the Government’s view that the FRC is primarily a representative body.

The members of the FRC are drawn from nominations from:

  • The professional accounting bodies;
  • Users, preparers and analysts of financial statements;
  • Governments and public sector entities; and
  • Bodies, such as the ASIC and the Australian Stock Exchange.

Notwithstanding the absence of legislative requirements concerning qualifications for members of the FRC, when the Government is making appointments to the FRC, the Government has regard to the skills of individuals nominated by the stakeholder groups and the contribution each individual could make to the work of the Council.

Recommendation 12

The Committee recommends that the membership mix of the Financial Reporting Council should be evenly weighted between preparers of financial statements; accountants and auditors; and business and public interest representatives and users.

Response

The Government does not accept this recommendation.

The need for changes to the membership structure of the FRC will be considered by the Government after the new functions introduced by the CLERP 9 Act are fully implemented.

Recommendation 13

The Committee recommends that the Government should confirm that it will provide the funding for the Financial Reporting Council, the Australian Accounting Standards Board and the Auditing & Assurance Standards Board on a permanent basis beyond 2004-05.

Response

The 2004-05 Budget indicated that funding will be reviewed in the 2005-06 Budget context.

Additional funding of $4.8 million per annum for 2005-06 to 2007-08 has been set aside in the contingency reserve pending further consideration being given to the ongoing funding of the FRC and the need for any cost recovery beyond the current Budget year.

Recommendation 14

The Committee recommends that the bill should be amended so that the Financial Reporting Council will not have a function of ’determining the Auditing & Assurance Standards Board's (AUASB's) broad strategic direction‘. Instead, the Financial Reporting Council should produce and make public its critique of the AUASB's strategic direction as part of the Financial Reporting Council's oversight function.

Response

The Government does not accept this recommendation.

The purpose of the FRC is to provide practical business direction to the technical accounting and auditing standard setters.

Users and preparers of financial reports may efficiently critique the strategic direction of the AUASB on their own. The FRC provides a focal point for stakeholders in accounting/auditing standard setting to be directly involved in the priorities of the accounting/auditing standard setter.

Oversight of the AUASB by the FRC has been modelled on the FRC’s oversight of the AASB. The strategic oversight function in respect of the AASB was introduced in the Corporate Law Economic Reform Program Act 1999 (CLERP Act 1999).

Continuing to allow strategic directions issued to the AUASB by the FRC will ensure its long term operational planning is taken from a broad public interest perspective.

Recommendation 15

The Committee recommends that the bill should be amended so that the Financial Reporting Council will not have a function of ‘approving’ the AUASB’s priorities, business plans and budgets. Instead, the Financial Reporting Council should produce and make public its critique of the AUASB's priorities, business plans and budgets.

Response

The Government does not accept this recommendation.

This is out of step with overseas practice (for example, Canadian oversight bodies have similar functions to those proposed for the FRC).

The Australian National Audit Office provides statutory and performance audits of Government instrumentalities. It is unnecessary for the FRC to duplicate this role.

Under the Commonwealth Authorities and Companies Act 1997, the FRC’s members are the board of directors of the AUASB. The FRC cannot function as a board if it does not have authority over the priorities, business plan and budget of that body.

Recommendation 16

The Committee recommends that the Australian Securities and Investments Commission Act 2001 should be amended so that the Financial Reporting Council will no longer have a function of 'determining the Australian Accounting Standards Board's (AASB's) broad strategic direction'. Instead, the Financial Reporting Council should produce and make public its critique of the AASB's strategic direction as part of the Financial Reporting Council's oversight function.

Response

The Government does not accept this recommendation.

The purpose of the FRC is to provide practical business direction to the technical accounting and auditing accounting standard setters.

Users and preparers of financial reports may efficiently critique strategic direction of the AASB on their own. The FRC provides a focal point for stakeholders in accounting standard setting to be directly involved in the priorities of the accounting standard setter.

The strategic oversight function in respect of the AASB was introduced in the CLERP Act 1999.

Continuing to allow strategic directions issued to the AASB by the FRC will ensure its long term operational planning is taken from a broad public interest perspective.

Recommendation 17

The Committee recommends that the Australian Securities and Investments Commission Act 2001 should be amended so that the Financial Reporting Council will no longer have a function of ‘approving’ the Australian Accounting Standards Board’s (AASB's) priorities, business plans and budgets. Instead the Financial Reporting Council should produce and make public its critique of the AASB's priorities, business plans and budgets.

Response

The Government does not accept this recommendation.

This is out of step with overseas practice (for example, Canadian oversight bodies have similar functions to those proposed for the FRC).

The Australian National Audit Office provides statutory and performance audits of Government instrumentalities. It is unnecessary for the FRC to duplicate this role.

Under the Commonwealth Authorities and Companies Act 1997, the FRC’s members are the board of directors of the AASB. The FRC cannot function as a board if it does not have authority over the priorities, business plan and budget of that body.

Recommendation 18

The Committee recommends that the professional accounting bodies should liaise with the Australian Securities and Investments Commission (ASIC) to ensure that their complaints-handling procedures meet benchmarks which ASIC considers are necessary for effective complaints handling.

Response

This is a matter for ASIC and the professional accounting bodies.

The FRC will have a new responsibility to monitor disciplinary procedures of the professional accounting bodies to the extent they apply to auditors and advise Government.

If there are concerns about the practices of the professional bodies regarding their disciplinary arrangements there is always the scope for the FRC to advise the Government or the bodies themselves on how those arrangements could be changed or improved.

ASIC has its own powers to prosecute auditors for breaches of the Corporations Act. These powers include referring matters to the Companies Auditors and Liquidators Disciplinary Board.

Recommendation 19

The Committee recommends that the bill should be amended to ensure that the new responsibilities for the Financial Reporting Council should not come into force until:

  • the Financial Reporting Council has an adequately staffed and funded secretariat that is independent of the Department of the Treasury and other Government departments; and
  • the Government confirms that the Financial Reporting Council will be government-funded beyond 2004-05.

Response

The Government does not accept this recommendation.

The Commonwealth Government contributes $2.5 million per annum to the costs of Australian accounting standard setting. In addition, the 2003-04 Budget allocated an additional $4 million over 4 years. The 2004-05 Budget committed $3.4 million in the current Budget year. Ongoing funding for the FRC will be considered in the 2005-06 Budget, however contingency funding until 2007-08 of $4.8 million per annum for the FRC has been set aside if required.

The current Budget funding arrangements are sufficient for the FRC, AASB and AUASB to carry out their functions pursuant to the Corporations Act and the ASIC Act (as amended by the CLERP 9 Act).

The location and composition of the FRC Secretariat are matters that are appropriately dealt with after the FRC has had an opportunity to fully implement its expanded role under the CLERP 9 Act.

Legislative changes would be required to establish the FRC as a body able to engage its own staff. Any delay in implementation of the FRC’s role in relation to auditor independence or Auditing Standard setting is undesirable.

The FRC’s current work program is extensive; any delays due to restructuring may have a negative impact on the FRC’s access to international networks and relationships with stakeholders.

Recommendation 20

The Committee recommends that an auditor attending the annual general meeting of an entity should be required to answer shareholders’ reasonable questions about:

  • critical accounting policies adopted by management and the basis upon which the financial statements were prepared; and
  • the auditor's independence.

Response

The Government partially accepts this recommendation.

During debate in the Senate, the Government agreed to amendments to subsection 250T(1) moved by the Australian Democrats which requires the chairman of the AGM to allow shareholders to ask the auditor questions “relevant to the conduct of the audit, the preparation and content of the auditor’s report, the accounting policies adopted by the company in relation to the preparation of the financial statements, and the independence of the auditor in relation to the conduct of the audit”. The new paragraph 250T(1)(b) also requires the chairman of the AGM to allow the auditor a reasonable opportunity to answer written questions submitted to the same effect under proposed section 250PA.

The provisions do not place a direct obligation on the auditor of a company but instead maintain the current framework whereby the obligation is placed on the chairman of the AGM to allow the auditor to answer reasonable questions about the subject matter.

Recommendation 21

The Committee recommends that the chairman of an entity should allow shareholders a reasonable opportunity to ask the auditor reasonable questions about:

  • critical accounting policies adopted by management and the basis upon which the financial statements were prepared; and
  • the auditor's independence.

Response

The Government accepts this recommendation.

This recommendation was incorporated into the legislation by an amendment to subsection 250T(1) moved by the Australian Democrats during debate in the Senate. The amendment requires the chairman of the AGM to allow shareholders to ask the auditor questions “relevant to the conduct of the audit, the preparation and content of the auditor’s report, the accounting policies adopted by the company in relation to the preparation of the financial statements, and the independence of the auditor in relation to the conduct of the audit”.

Recommendation 22

The Committee recommends that an auditor attending an annual general meeting should be permitted to table written answers to shareholders' questions which have been lodged in accordance with proposed section 250PA of the bill if the auditor has prepared answers in this form.

Response

The Government does not accept this recommendation.

The Government does not consider that a legislative amendment is required to implement this proposal. The Corporations Act does not prevent the auditor from tabling written answers to shareholders’ questions which have been lodged in accordance with section 250PA.

Recommendation 23

The Committee recommends the deletion of the provision in the bill (proposed section 324CK) prohibiting more than one former audit firm partner or audit company director from becoming an officer of the audited body.

Response

The Government does not accept this recommendation.

Section 324CK implements the recommendation of the HIH Royal Commission that a prohibition be introduced preventing more than one former partner of an audit firm, or director of an audit company, at any time becoming an officer of an audit client while the audit firm or audit company is the auditor of the client.

The Government considers that the multiple former audit partners issue was a major failing in the HIH context which the Royal Commission concluded had led to the perception that the independence of the auditors of HIH was compromised.

Recommendation 24

The Committee recommends that purposive definitions for “lead auditor” and “review auditor” should be adopted to reflect the rationale underlying the rotation requirements. In particular, the Committee recommends that the definition of “review auditor” should be amended to ensure that a rotation obligation will not apply to a review auditor in circumstances where:

  • the review auditor performs a merely technical role in the audit; and
  • the review auditor's contact with the audit client could not be regarded as material to the day-to-day conduct of the audit as a whole.

Response

The Government does not accept this recommendation.

The extent to which a “review auditor” is involved in an audit will vary greatly from case to case and determining where it constitutes “a merely technical role” or where contact with the client is not “material” may be difficult to determine in practice.

Review auditors are a critical part of the audit process and there is the potential for conflicts of interest to arise between the review auditor and the client which may give rise to concerns about independence. The HIH Royal Commission recommended that the rotation provisions be applied not only to the lead and review partners but also to key senior audit personnel. The Act does not extend the rotation requirements to key senior audit personnel due to concerns that it could effectively require audit firm rotation in some circumstances. However the rotation of the review as well as the lead auditor is appropriate as it is these parties who are responsible for forming the final opinion on the financial statements of the client.

ASIC will have the ability to defer the rotation requirement from five to up to seven years in cases where the rotation requirements are onerous on a company or auditor.

Recommendation 25

The Committee recommends that the bill should be amended so that the rotation requirements only apply to the top 300 listed entities by market capitalisation. In arriving at this cut-off point, the Committee took into account the various suggestions made by witnesses and the statistics provided by The Institute of Chartered Accountants in Australia on the auditing market in Australia.

Response

The Government does not accept this recommendation.

Most of the auditor independence requirements are to apply to all listed companies on the basis that such companies are seeking capital from the general public.

Limiting the proposal to the top 300 companies is somewhat arbitrary and there would be “boundary issues” in dealing with companies that move in and out of the top 300 while a particular auditor had responsibility for the audit. The complexity of such a rule would make it difficult to apply in practice.

Recommendation 26

The Committee recommends that amendments should be made to the bill to accommodate short-term postponement of rotation by the Australian Securities and Investments Commission if this is not already provided for elsewhere in the Corporations Act 2001.

Response

The Government does not accept this recommendation.

Subsection 342A of the CLERP 9 Act allows ASIC to postpone the rotation requirements so that rotation will be required after six or seven rather than five successive years, where the auditor or the company makes a written application to ASIC.

Recommendation 27

The Committee recommends that the relevant provisions with respect to the registration of an authorised company auditor be amended to remove the Australian Securities and Investments Commission's power to impose restrictions and conditions retrospectively and to limit the exercise of its discretion in this regard by the prescription of appropriate criteria.

Response

The Government does not accept this recommendation.

Section 1299D of the Corporations Act provides that ASIC may impose conditions on the registration of an authorised audit company at the time the company is registered or subsequent to registration. Any conditions imposed by ASIC on an authorised audit company would only operate prospectively.

It is important that ASIC should have the power to impose conditions on an audit company’s registration to ensure that ASIC can fulfil its regulatory responsibilities. ASIC’s flexibility to impose conditions should not be fettered, having regard to the wide range of circumstances that may apply.

Recommendation 28

The Committee recommends that:

  • Some of the members from the accounting profession should be appointed to the Companies Auditors and Liquidators Disciplinary Board (CALDB) on an individual basis rather than as representatives of a professional association;
  • Auditors and/or liquidators should be included in the selections from the accounting profession; and
  • Consideration should be given to including users of financial reports appointed from the public, private and not-for-profit sectors.

Response

The Government generally does not accept this recommendation.

The CLERP 9 Act amendments looked to address concerns about the CALDB’s operational capacity and perceived independence from the accounting profession by expanding the composition of the Board.

In relation to the proposed structure of appointments involving members of the accounting profession, the current framework already existing within the ASIC Act is generally being retained.

It is understood that many auditors and liquidators would be members of the two primary professional accounting bodies and so would be eligible to be chosen as nominees of those bodies.

Additionally, the CLERP 9 Act’s amendments to the CALDB provisions, which provide for the appointment of business members, would be broad enough to allow for the appointment of users of financial reports where appropriate.

Recommendation 29

The Committee recommends that the role of the Financial Reporting Panel (FRP) should be restricted to making determinations on financial reports after their publication. The Committee does not support proposals for the FRP to have a “pre-publication” jurisdiction.

Response

The Government accepts this recommendation. This position is currently reflected in the CLERP 9 Act.

Recommendation 30

The Committee recommends that lodging entities should be able to refer matters to the FRP without having to obtain the consent of the ASIC.

In particular, the lodging entity should be subject to the same notification procedures (amended as appropriate) that presently apply when ASIC refers a matter to the FRP.

Response

The Government does not accept this recommendation.

Given that a company’s interests will be affected by a decision of the FRP and in light of stakeholders’ submissions, the draft CLERP 9 Bill was amended to provide that once ASIC has informed a company that its financial report does not comply with the financial reporting requirements, the company may, with ASIC’s consent, refer the matter to the FRP.

Requiring ASIC’s consent for a referral will prevent vexatious referrals and ensure that the FRP is not used to frustrate or delay the regulator’s ability to instigate legal proceedings where appropriate.

Recommendation 31

The Committee recommends that CLERP 9 should clarify that the determinations of the FRP should not have a wider application as precedents for the interpretation of financial reporting requirements.

Response

The Government does not accept this recommendation.

The FRP will consider specific matters referred to it on a case by case basis. While the determinations of the FRP will not act as binding precedents for the interpretation of financial reporting requirements, it is expected that the FRP’s determinations will provide useful guidance for the application of accounting standards at a domestic level. Further, in making its determinations, it is expected that the FRP will have regard to any interpretations issued by the International Financial Reporting Interpretations Committee.

Recommendation 32

The Committee recommends that an auditor should be entitled to attend the proceedings of the FRP if the financial reports audited by that auditor are in dispute. The Committee recommends that the auditor should have rights to be notified of a referral, to have its response included with the ASIC's referral and to make submissions to the FRP.

Response

The Government does not accept this recommendation.

The primary purpose of the FRP is to resolve disputes between ASIC and companies concerning the application of accounting standards in companies’ financial reports. Given that it is these entities that are the parties to the dispute, it is appropriate that companies be notified of a referral and be permitted to make submissions in FRP proceedings. It would, however, be open to companies to request the attendance of their auditors at proceedings.

Recommendation 33

The Committee recommends that the Government should amend CLERP 9 to require the FRP to provide a copy of its determinations including reasons for these determinations to the AASB.

Response

The Government does not accept this recommendation.

The CLERP 9 Act states that the FRP must provide its report to ASIC and the company, who are the relevant parties to FRP deliberations. ASIC must then take reasonable steps to publicise the FRP’s report. Additionally, if the disputed financial report is that of a listed company or listed registered scheme, the FRP must also provide its report to the relevant market operator. It is considered that these requirements in the Act provide an adequate avenue for relevant stakeholders to be apprised of the FRP’s decisions.

Recommendation 34

The Committee recommends that the provisions in CLERP 9 under which auditing standards will be disallowable instruments should not be proceeded with until a thorough review determines how legislative backing can be achieved without threatening international convergence and audit quality. Once these issues are resolved, the Committee would support the conferral of legislative backing on auditing standards.

Response

The Government does not accept this recommendation.

The Government considers that this initiative will significantly lift the rigour of auditing in Australia. The FRC is currently considering the strategic direction of audit standard setting and in this context will consider international convergence issues.