Review by the Chairman

Background and Function of the Financial Reporting Panel (FRP)

Over several years, the Federal Government embarked on a comprehensive program of Corporate Law reform, known as the Corporate Law Economic Program. The objective of this program was to ‘ensure that Australian Corporate Regulatory Framework remains effective and helps define world’s best practice’. Significant reforms to the financial reporting and auditing framework resulted from the enactment of the Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) Act on 30 June 2004.

Known as CLERP 9, these measures in the act included a number of reforms to strengthen the financial reporting framework within Australia, improve audit regulation and the wider corporate disclosure framework including:

  1. changes to the continuous disclosure offence provisions;
  2. a Management Discussion and Analysis disclosure in the Annual Report;
  3. new provisions regarding auditor independence;
  4. a requirement for both the Chief Executive Officer and Chief Financial Officer of a listed entity to make a declaration that:
    • the entity’s financial records have been properly maintained in accordance with the Act;
    • the financial statements for the financial year comply with the accounting standards; and
    • the financial statements present a true and fair view of the financial position and performance of the entity.
  5. the expansion of Financial Reporting Council’s (FRC) responsibilities to oversee auditor independence requirements in Australia; and
  6. the establishment of the Financial Reporting Panel (FRP).

Whilst the original CLERP 9 discussion paper did not make any recommendations regarding a Financial Reporting Panel, there was substantial support from stakeholders for a dispute resolution body to resolve disputes between ASIC and companies on whether a company’s financial statements have been prepared in accordance with the accounting standards and represent a true and fair view.

The rationale for the creation of the FRP was to allow for disputes about the accounting treatment in the company’s financial report to be resolved quickly and cost effectively in relation to accounting related disputes.

Prior to the Panel’s existence, unresolved disputes on accounting between ASIC and corporations could only be referred to the judicial system for resolution. This was generally thought to be an unsatisfactory situation due to:

  1. Judicial proceedings can be slow. This means that the market can be misinformed about the company’s financial system for some time.
  2. Judicial proceedings are costly for both disputants.
  3. Courts may lack expertise to determine disputes dealing with the application of accounting standards, because they hear such matters infrequently. This may involve considerable time and expense for a court to assemble the necessary resources and decipher different expert opinions.

Purpose and role of the FRP

The purpose of the FRP is to provide a forum where disputes between ASIC and an entity (listed and unlisted) that has lodged a financial report with ASIC can be reviewed.

The role of the FRP is to consider a financial report that has been referred to it, and prepare a report that states whether, in FRP’s opinion, the financial report complies with the relevant financial reporting requirements.

Referral to the FRP

Disputes between ASIC and an entity concerning a financial report can be referred to the FRP by:

  1. ASIC, after giving the entity whose financial report is considered deficient 14 days to respond to a notice stating ASIC’s intention to refer the matter to the FRP and the reason for doing so and any changes necessary to correct the financial report; or
  2. an entity, where ASIC has informed the entity that its financial report does not comply with the Corporations Act and ASIC has consented to the referral to the FRP.

The FRP also has the power to dismiss a referral at any stage.

Status of an FRP report

A report of the FRP on whether a financial report complies with the financial reporting requirements of the Corporations Act is not binding. However, ASIC has publicly stated that it will support the findings of the FRP and a Court may have regard to the FRP’s report in determining whether the entity’s financial report complied with the Corporations Act.

The FRP is required to give a copy of its report to ASIC and the entity. If the entity is listed, a copy must also be given to the relevant market operator (usually the Australian Securities Exchange — the ASX). ASIC also ‘must take such steps as it considers reasonable and appropriate’ to publicise the FRP’s report and whether the entity has made the changes to its financial report (if any) recommended by the FRP.

Constituency of the FRP (The Panel)

The Panel is comprised of part time members with knowledge or experience in one or more of the fields of:

  1. accounting;
  2. auditing;
  3. business;
  4. the administration of companies; or
  5. law

Members of the Panel are appointed by the Minister.

Inaugural appointments

In May 2006, Mr Paul Shannon was appointed as the inaugural Chairman of the FRP along with eight other inaugural members.

In July 2006, Mr Paul Power was appointed as Executive Director and the FRP formally commenced operations.

Accounting Standards

Accounting Standards in Australia are issued by the Australian Accounting Standards Board (AASB). International Accounting Standards are collectively referred to as International Financial Reporting Standards (IFRS) and are set by the International Accounting Standards Board (IASB). In 2002, the FRC announced that Australia would adopt International Accounting Standards by 2005. This has occurred and for many reporting entities, 2007 will represent their second year of reporting under IFRS standards.

The AASB’s overall approach is to adopt all of the content and wording of the IFRS. However, some amendments are made for the purpose of allowing adoption by not-for-profit entities, to remove options within IFRS that are considered as not appropriate for the Australian environment or to promote a higher standard of disclosure.

Part 2M.3 of the Corporations Act 2001 sets out the requirement that all disclosing entities, public companies, large proprietary companies and registered schemes must prepare a report annually and that financial report must comply with the accounting standards and give a true and fair view of the entities financial position.

The Australian Securities and Investments Corporation (ASIC) administers the Corporations Act 2001 and if it believes the financial report not to be in compliance with the accounting standards and failing to achieve agreement on the requested modifications may refer the matter to the Panel.

Panel activity

The commencement of operation of the Panel was timely, with the adoption of IFRS having taken place, any regulatory disputes referred would be expected to involve the application of the new standards rather than the replaced Australian Accounting Standards.

The focus of the Panel has been the establishment and trial of its procedures, communication of its role within the business community and the professions.

During the year a number of potential disputes were settled by negotiation between ASIC and the disputants and in some cases the existence of the FRP may have assisted in hastening resolution of the matter.

The executive and membership of the Panel has been kept to a modest size until such time as a steady flow of cases occurs. It is considered that the buoyant economic conditions, the newness of the standards and the high level of compliance of Australian companies have all contributed to the lack of referrals during 2006-07. Based on both Australian and overseas experience regarding disputes on accounting standards it is reasonable to expect a significant increase in case referrals over time.

The year ahead

In July 2007 the Panel received its first case referral. A sitting Panel was formed, research undertaken and preliminary meetings held but prior to a determination the matter was successfully resolved. In this instance the disputant chose to comply with ASIC’s preferred approach with respect to the application of an accounting standard and the Panel dismissed the case. The Panel considers this to be a successful outcome and foresees that in a number of instances the matters will be resolved prior to the issuance of a determination. As no determination was issued, the disputant and details of the matter remain confidential.

The Panel will expand upon its activities in liaison and communication with the business community and the profession in order to improve awareness of the FRP and to facilitate the identification of any industry concerns in relation to the application of accounting standards.

The Panel will maintain its preparation and readiness to address any referrals it may receive in a timely and effective manner.

The Financial Reporting Panel’s place in the Financial Reporting Framework

ASIC is an independent Commonwealth Government body which administers the Corporations Act 2001 and other legislation. It is responsible for enforcing and regulating company and financial services and the laws designed to protect consumers, investors and creditors. ASIC undertakes a surveillance program to ensure that companies and registered schemes that are required to lodge their financial accounts have prepared their accounts in compliance with applicable accounting standards. ASIC may seek further information from the entities concerned to obtain clarification of information in the accounts. If ASIC believes that there is non compliance with the accounting standards it will discuss how the accounts should be amended. If ASIC and the entity concerned fail to reach agreement then the matter may be referred to the FRP.

Financial Reporting Framework

A brief description of the role of other institutions that play an important part in financial reporting in Australia are as follows:

The FRC has broad oversight of the accounting and auditing standard setting process and for monitoring auditing independence.

The AASB has responsibility for standard setting in the private and public sectors. The AASB issues Australian equivalent standards of the International Financial Reporting Standards provided by the IASB and undertakes joint research projects on specialist areas of accounting.

The Australian Auditing and Assurance Standards Board (AUASB) sets enforceable auditing standards and wherever possible uses International Standards on Auditing as a base for proposed auditing standards.

The International Accounting Standards Board (IASB) is an independent privately-funded accounting standard setter based in London, UK. It is responsible for developing a single set of enforceable global Accounting Standards and coordinates an initiative to achieve global convergence on Accounting Standards.

The International Financial Reporting Interpretations Committee (IFRIC) is the interpretive body of the IASB and provides guidance and interpretations on divergent or emerging accounting issues that are considered to have widespread importance.

Chart 1: Overview of the institutional relationships in the setting, regulation and adjudication of Accounting Standards

Chart 1: Overview of the institutional relationships in the setting, regulation and adjudication of Accounting Standards

Alternate Dispute Resolution

The FRP provides an Alternative Dispute Resolution (ADR) Service. ADR is about resolving disputes other than by court litigation. It has become an integral element of dispute resolution in the community, workplace and in business. Unlike the adversarial nature of court proceedings, ADR processes often provide the opportunity for resolution by consensus. There are a number of different types of ADR processes, ranging from prevention and mediation through to arbitration and administrative hearings. ADR processes can involve a third party providing facilitation such as mediation, advice such as to the range of outcomes or be determinative such as by adjudication from a tribunal or an expert determination. ADR processes are invariably faster and cheaper than court action and can provide greater satisfaction to the proponents.

It can be argued that there is a fundamental difference between disputes that are resolved through consensus of disputants and those where a third party provides adjudication. However, where the process involves adjudication it can still encompass a consensus-orientated philosophy where the decision maker seeks to lead the disputants to accept the validity of the decision. The FRP is a key player in the ADR landscape and as a body charged with the responsibility to adjudicate disputes over financial accounts of Australian companies, the FRP provides an expert determination in relation to the existing accounting standards. The dispute would arise where ASIC and a company fail to agree on the application of an accounting standard in the company’s set of accounts. The matter would normally be heard by the FRP after negotiation between ASIC and the company has failed to reach a consensus. In the past, prior to FRP’s existence, this dispute, if unresolved, would lead to an expensive foray into litigation for both parties. Whilst the FRP assesses the facts of the matter and interprets how they fit with the existing accounting standards, the FRP recognises the importance of the disputants being comfortable with the process and readily accepting the validity of its determination.

ADR processes are cheaper and faster.

Arbitration and other ADR processes have been an integral element of dispute resolution in Australia for a long time, have served the community well and are increasing in popularity. Tribunals such as the Commonwealth Administrative Appeals Tribunal have been functioning for many years and provide a valuable service to disputants who may not otherwise have the resources to access the court system. The existence of Tribunals and the increased use of mediation have undoubtedly lowered the pressure on the court system. ADRs are allied to traditional court processes and should be used when it is cheaper or where they provide a more effective outcome. Even if ultimately unsuccessful in resolving a dispute, the mediation or specialist adjudication can often reduce or refine the issues involved so that less court time and cost needs to be expended on the dispute.

Whilst the cost of legal action may be prohibitive to some parts of the community, for the corporation there is also the opportunity cost of management resource time and the risk of the market being uncertain about the company’s financial position whilst a matter is being considered. The complexity of particular matters can be very taxing for a court. Accounting standards and sophisticated financial transactions and their application may be matters that a Judge considers only infrequently and which will undoubtedly involve the engagement of expert witnesses who may have reasonable but divergent views that need to be deciphered. The possible focus on highly technical points in specialist fields might best be resolved outside a court setting.

With the advent of the FRP the process of dealing with a dispute on financial accounting standards represents world’s best practice. The FRP comprises a panel of industry experts on financial accounting. This specialisation allows for points of a technical nature to be dealt with expeditiously and authoritatively. The matter is heard in private and the Panel must determine the matter quickly, thus minimising unnecessary delay and concern of the company’s public reporting. The Panel’s findings are not binding on the company which therefore maintains its rights to legal process and appeal.

Differing interpretations and obtaining clarity of the Law are two examples of situations that are often best addressed outside of court action.

Undertaking action to clarify the law is risky. There will always need to be an acknowledgement of the rights of the individual firm and the costly imposition that a legal case imposes. The engagement of relevant experts in the field in a more informal forum such as a tribunal would provide a faster, cheaper and more private conclusion to many such matters.

For the business sector and economy to thrive, company directors need to be confident that they can make sound business decisions without undue concern that the accounting treatment that may result from a transaction may not fully reflect its substance. The facility of an expert determination that the FRP provides over a dispute on the application of accounting standards should give some comfort in this regard.

The adoption of International Accounting Standards appears to have assisted in minimizing the number of potential disputes in relation to accounting standards in Australia. However, the principles based nature of the standards and some practices and industries which are peculiar or more prevalent in Australia could give rise to different interpretations or disputes.

There is always the danger that ADR processes will adopt more of the trappings of formal court process than are needed particularly when it involves complex disputes and the review of legal documentation. The FRP model is designed to be informal although rules and processes need to be followed in order to ensure fairness to all parties involved.

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