|
Navigation: Previous Page | Contents | Next Page
Labor Senators' and Members' Minority Report
The terms of reference required the Committee to examine:
- the small/large criteria in section 45A of the
Corporations Law;
- the appropriateness of having requirements for audit and
the lodgement of financial statements for some classes of proprietary
companies;
- the appropriateness of the criteria for the exercise of
ASIC’s discretion to provide relief from the accounting provisions in
subsections 342(2) and (3) of the Corporations Law;
- the manner in which ASIC has exercised that discretion;
and
- the effectiveness and costs of the process of ASIC
providing exemptions from the audit requirements in Chapter 2M of the
Corporations Law through the exercise of an administrative power.
The Labor members of the Committee wish to comment on the
first two terms of reference.
1. APPROPRIATENESS OF HAVING REPORTING REQUIREMENTS
The objective of requiring companies to lodge and audit
financial accounts must be to ensure that all relevant end-users have access to
that information and that information is accurate.
While the Labor members acknowledge that for some
proprietary companies the only relevant end-users are the shareholders[1],
the Labor members do not believe that is true for all proprietary companies.
Financial accounts provide information to shareholders, creditors, employees
and others in order to enable those people to make decisions concerning their
dealings with a company.
These considerations make it appropriate for there to be
requirements for the audit and lodgement of financial accounts for some classes
of proprietary companies.
2. SMALL/LARGE CRITERIA
2.1 Small/Large Criteria
As discussed at paragraph 2.2 of the Committee’s report, the
previous classification of proprietary companies as exempt and non-exempt
reflected the status of the company but was not a consistent rationale for
identifying companies in which there was a public interest. Financial accounts
provide important information to a range of people and is necessary to assist
them in their dealings with a company.
Further, as ASIC suggested, in determining reporting
requirements for proprietary companies regard must be had to recent legislative
changes to the Corporations Law which facilitate their fundraising from the
public and to the current focus of Parliament on employee entitlements,
including the Corporations Law Amendment (Employee Entitlements) Act.[2]
Regard must also be had to the cost to companies of
complying with reporting requirements.
All of these considerations confirm the need for the
reporting requirements of proprietary requirements to be linked to the public
interest and the economic significance of the company.
Submissions from Bentleys MRI, Institute of Chartered
Accountants and CPA Australia, Mr Ian Langfield Smith and Incat Pty Ltd
suggested the above objective would best be achieved by adopting a “reporting
entity” concept. However, as the Committee has previously concluded the
reporting entity concept “does not provide a test of sufficient certainty to
enable an objective assessment to be made of whether a company falls within the
entity test.”[3]
Reverting to the previous exempt-proprietary rule, as
suggested by the Australian Institute of Company Directors (AICD) and Atkinson
Gibson would also not achieve the desired objective. Further, as suggested by
the AICD in evidence it gave to the Committee, the definition of “exempt
proprietary company” is “somewhat convoluted” and should be refined and
simplified, with an emphasis on family-owned companies[4].
The Labor members of the Committee also note that claims of
a loss of commercial privacy must be balanced against the benefits of limited
liability which companies enjoy. Since shareholders are only liable for the
amount of capital they have contributed to a company, creditors need to be able
to reassure themselves that the company has sufficient capital to pay their
debts. One way of obtaining this reassurance is to review the accounts of the
company.
The AICD has suggested that all companies be required to
lodge a solvency declaration. The limitations of this suggestion are that if it
is a representation as to solvency, it is only at a particular point in time
and, without additional financial information, stakeholders cannot determine
the level of solvency or changes in the level of solvency from time to time.
Without change to the Corporations Law, such a declaration would also not
assist in determining liability, or rebutting defences, under the insolvent
trading provisions.
Retaining the current small/large test is favoured by ASIC,
PricewaterhouseCoopers and the National Institute of Accountants. The Labor
members of the Committee agree it provides the best approximate of the economic
significance of, and public interest in, a company.
This is supported by statistics from ASIC as to the number
of time lodged accounts of large proprietary companies are accessed. ASIC
concluded in the 1988 report that there is a significant level of use of the
accounts of proprietary companies which lodge accounts.
Accordingly, the Labor members believe that the small/large
test best meets the objectives of reporting requirements for proprietary
companies.
2.2. Simplicity
An additional objective of the small/large test, is to
simplify and clarify the law and to reduce reporting requirements for most
proprietary companies.
As previously discussed, the “reporting entity” concept
would not achieve this objective. Mr Agland from the National Institute of
Accountants told the Committee:
“Definition 45A has the advantage
of having three criteria and these criteria are easy to understand and easy to
apply....The reporting entity concept, on the other hand, relies too heavily on
subjective decision making of the directors who may, for one reason or another,
not wish to report, even though they should. It is a difficult test to police
and one that is dependent on expert knowledge to make an accurate decision.”
On its face, the definition of exempt proprietary company
seems simple. However, the Labor members note the comments from the AICD discussed
above. Further, the transition to the small/large test has meant that 99.4% of
all proprietary companies which would have been required to prepare financial
statements prior to the First Corporate Law Simplification Act now have
no financial reporting requirements.[5]
2.3. Areas of Concern
The Labor members of the Committee however, are not blind to
the concerns raised in the submissions in regard to the small/large test.
One issue raised was the inconsistency between the
small/large test and the reporting entity concept, with the result that lodged
accounts are not prepared in accordance with the full requirements of
accounting standards.
However, as ASIC advised the Committee, the reports of
companies must still give a true and fair view of its financial position and
the Labor members support the view of ASIC that this would require all large
proprietary companies to observe the recognition and measurement provisions of
accounting standards. Accordingly, this is a regulatory matter, rather than a
factor supporting a change in the small/large test.
A second issue raised was that non-grandfathered proprietary
companies are at a competitive disadvantage to grandfathered proprietary
companies and that a market has been created in grandfathered proprietary
companies.
In its submission, ASIC suggested that the unlevel playing
field created by grandfathering could be addressed by:
- removing grandfathering or making it subject to a
sunsetting provision;
- extending grandfathering to all companies which would have
met the previous exempt proprietary company definition; or
- not requiring any proprietary company to lodge accounts
but have their accounts audited.
The Labor members would recommend that the consequences of
removing grandfathering or making it subject to a sunsetting provisions be
examined by the Government.
A third issue raised was that a proprietary company could
reorganise their affairs such that they cease to be large and are no longer
subject to the reporting requirements of the Corporations Law.
It should be noted that section 45A already refers to
entities that the company “controls” in calculating the gross operating revenue
and gross assets of the company. Any attempt to modify and extend this concept
would need to be balanced against the loss of simplicity in the definition of a
small proprietary company.
A fourth issue raised was that ASIC could not identify those
companies which are large proprietary companies but not complying with
reporting companies. The Labor members of the Committee acknowledge that it
would be easier to identify which companies are non-exempt proprietary
companies from information on shareholders already lodged with ASIC. However,
for the reasons outlined above, the Labor members prefer to retain the small/large
test.
The Labor members also note that no estimate was provided of
the extent of this problem, and would hope that most proprietary companies
would want to comply with the Law.
ASIC has recommended that the problem could be partially
addressed by requiring each proprietary company to report annually to ASIC that
the directors have considered whether the company is large or small for its
last financial year, and requiring the company to state whether it was small or
large.[6]
The final issue raised was that companies can be
re-classified as a small or large company each year depending on seasonal
factors and exceptional events, such as asset sales.
The Labor members of the Committee note however, that
statistics collected by ASIC indicate that the majority of companies lodging
accounts exceeded all the criteria, not just the two criteria necessary to be
classified as a large proprietary company, and that the majority of the
companies were well above the criteria comprising the large/small test. This is
discussed more fully at paragraph 2.12 of the Committee’s Report.
The Labor members also note that ASIC has a discretion to
make exemption orders and class orders under section 342 of the Corporations
Law.
3. RECOMMENDATIONS
The Labor members are not
convinced that there is sufficient impetus for another legislative change to
the reporting requirements of proprietary companies, nor that it would be
desirable to revert back to the previous exempt and non-exempt proprietary
company classification. Of all the options examined, we believe that the
small/large test best meets the objectives of reporting requirements for
proprietary companies. While the small/large test has some problems, all the
other suggested alternatives also have shortcomings.
The Labor members of the Committee recommend that the
existing small/large test continue for the time being.
The Labor members of the Committee recommend that the
Government examine the consequences of removing the grandfathering provisions
or making it subject to a sunsetting provision.
The Labor members of the Committee recommend that the
Corporations Law be amended to require each proprietary company to report
annually to ASIC that the directors have considered whether the company is
large or small for its last financial year, and to state whether the company
was small or large.
The Labor members recommend that ASIC continue to collect
and review, to the best of its resources, the statistics of the kind presented
by it to the Committee and also, if the previous recommendation is adopted, the
number of companies which state they are large or small each year. The Labor
members recommend that ASIC report to the Committee in 2 years on its review.
____________________________ ____________________________
Mr Bob Sercombe, MP Senator
Stephen Conroy
____________________________ ____________________________
Senator Barney Cooney Mr
Kevin Rudd, MP
Navigation: Previous Page | Contents | Next Page
Top
|