Minimal red tape reduction in change of auditor

ASIC recently announced that it will reduce the red tape involved in the process of a change of auditor. It will now consent to the resignation of an auditor at any time of the year, subject to conditions, when in the past such consent would only be granted if the auditor was resigning at the company’s AGM, other than in ‘exceptional circumstances’.

ASIC’s recently released final version of Regulatory Guide 26 shows that the regulator will now consent to the resignation of an auditor at any time of the year if:

  • ASIC has no concerns in connection with the resignation of the auditor, for example, if there is a disagreement between management and the auditor over an accounting treatment, and
  • the change of auditor and the reasons for the change are communicated to members or in a disclosure notice, unless the change occurs at an AGM.

The greater flexibility on when the resignation of an auditor can receive consent from ASIC is welcome news for companies. ASIC’s draft Regulatory Guide 26 specifically excluded the result of an audit tender from its list of exceptional circumstances. This was going to create very practical difficulties for companies, as the timing of the tender process frequently does not accord with the timing of the AGM. It was simply not realistic to assume that companies will always be able to undertake the tender process just prior to the AGM, and be able to obtain ASIC consent prior to the AGM. Now the timing of the tender and external auditor transition need no longer be tied to the AGM.

It’s also good news from a risk mitigation point of view, as the running of a tender process in the lead-up to an AGM would coincide with the preparation of year-end accounts and the busiest time of the year in an auditor’s work program. It is prudent that companies can conduct external audit tenders well outside the timing for key audit deliverables.

However, despite the increased flexibility on this front, the mechanism for notifying the appointment or cessation of an auditor does not currently operate efficiently and effectively and the final Regulatory Guide 26 does not address all of the challenges, despite calls for change. For public companies, there is no requirement to advise ASIC of the name of a new auditor at the time of appointment. This information is advised to ASIC on Form 388, Copy of Financial Statements and Reports, which is lodged together with the annual report. However, public listed companies have relief whereby accounts lodged with Australian Securities Exchange (ASX) do not also need to be lodged with ASIC with Form 388. So while the relief is welcome, it can also create problems. For example, when an auditor seeks permission from ASIC to resign, ASIC has been known to refuse permission because it does not have that auditor noted on its records. This arises as ASIC does not insist that a listed public company lodge a Form 388 each year.

The inefficiency of the process in relation to the absence of a form to notify ASIC of the appointment of an auditor can also create difficulties in the following situations:

  • when incorporating a public company or converting from a private company to a public company, and
  • when a small proprietary company becomes a large proprietary company.

Furthermore, directors of a public company must within one month of registration appoint an auditor who holds office until the company’s first AGM (s 327A of the Corporations Act). Under s 327B, a public company must appoint an auditor at its first AGM. At that first AGM, it is the right of shareholders to appoint the auditor. It may be that the shareholders appoint a different auditor than was originally appointed by the directors. There is no provision on ASIC’s Form 315 — cessation of auditor — to show that the auditor is not resigning (which requires ASIC approval) but ceased to hold office at the first AGM. This means that there is no provision on the form to allow for the process as set out in the Corporations Act.

At present, some public listed companies that have taken advantage of the relief whereby accounts lodged with ASX are deemed to be lodged with ASIC attach a covering letter to Form 315 or send in a stand-alone letter notifying ASIC of the appointment of the auditor.

There are a number of problems associated with attaching a covering letter or sending a stand-alone letter:

  • It is not commonly known that a covering letter attached to Form 315 or a stand-alone letter could be required to ensure that ASIC has a record of the appointment of the auditor as this is an informal process that has been arrived at by trial and error on the part of companies.
  • Large public listed companies are familiar with regulatory challenges and frequently have the resources to manage them, and thus may well arrive at the solution of attaching a covering letter or sending in a stand-alone letter after contact with ASIC. However, newly listed and start-up companies may not understand that a covering letter should be attached to a form or why a stand-alone letter that is not requested should be sent in.

A company that has not lodged a Form 388 or provided a covering letter attached to Form 315 or a stand-alone letter notifying ASIC of the appointment of an auditor can face considerable time and effort in remedying the problems arising from the current situation. Indeed, the time and effort devoted to remedying the situation, which can run into many hours of extended correspondence and contact with ASIC by company secretaries or other officers, is considerably greater than the time and effort that would be involved in filling out a one-page form notifying ASIC of the appointment of an auditor.

Furthermore, the costs attached to the current situation extend to the relief granted to listed public companies whereby accounts lodged with ASX do not also need to be lodged with ASIC with Form 388, as that relief is rendered null and void, given that companies are advised that it is preferable that they lodge Form 388 with ASIC to avoid the problem of ASIC being unaware of the appointment of an auditor.

The upshot? The announced red tape relief is minimal. The change of auditor remains an area of bureaucratic challenge and complexity.

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