Company
formalities:
financial reports
Corporate Law: Law principles and practice
What purpose do financial reports serve?
A system of books and records is important for providing
information to:
•
•
•
•
the company itself
the members
the regulatory authorities
the public.
Corporate Law: Law principles and practice
What purpose do financial reports serve?
The books of the company show an overview of:
•
•
•
the assets of the company
how much the company owes
the trading performance of the company
Corporate Law: Law principles and practice
What purpose do financial reports serve?
Reports allow members to make a judgement on the
effectiveness of the company’s management (e.g.
corporate governance).
The requirement to produce financial reports is also a
regulatory tool available to authorities and to members.
Other interested parties are unions, employees and
creditors.
Corporate Law: Law principles and practice
Which entities must prepare reports?
All large entities, particularly those who offer securities
to the public, must prepare financial reports and a
director’s report each financial year. Section 292(1) of the
Corporations Act 2001 (Cth) requires the following
entities to do so:
•
•
•
•
all disclosing entities
all public companies
all large proprietary companies
all registered schemes.
Corporate Law: Law principles and practice
Lodging financial reports
A company, registered scheme or disclosing entity that has
to prepare or obtain a report for a financial year must lodge
the report with ASIC (Corporations Act 2001 (Cth) s
319(1)).
The time for lodgement is determined according to s 319(3):
•
•
for a disclosing entity or registered scheme, within three
months after the end of the financial year
for all other entities, within four months after the end of
the financial year.
Lodgement also applies to an entity that produces a concise
report for members (s 314).
Corporate Law: Law principles and practice
Lodging financial reports cont …
Financial reports must still be lodged even if no profits are
made.
ASIC can order a company to lodge a copy of specific
reports, and will specify the period for lodgements
(Corporations Act 2001 (Cth) s 321). The forms may be
lodged in hard copy or online.
Corporate Law: Law principles and practice
Exemptions from lodgement
Some companies are exempt from having to lodge
financial reports.
The requirement to lodge does not extend to small
proprietary companies (Corporations Act 2001 (Cth) s
319(2)) or small companies limited by guarantee that have
produced a report as a result of a direction from a member
(s 293) or from ASIC (s 294).
Corporate Law: Law principles and practice
Exemptions from lodgement cont …
ASIC can exempt an entity or modify the requirements to
report or keep records (Corporations Act 2001 (Cth) ss
340, 341).
ASIC must be satisfied that forcing financial reports to
comply with the absolute accounting standards of pts
2M.2, 2M.3 and 2M.4 of the Act would:
•
•
•
result in a misleading financial (or other) report
be inappropriate in the circumstances
impose an unreasonable burden on the entity.
Corporate Law: Law principles and practice
Financial reporting law reform
Corporate Law Economic Reform Program (Audit Reform
and Corporate Disclosure) Act 2004 (Cth)
Note the collapse of HIH in 2001.
CLERP 9 made further notable changes to financial
reporting requirements, including requirements that the
chief executive officer (CEO) and the chief financial
officer (CFO) sign off on reports as ‘true and fair’.
Corporate Law: Law principles and practice
Financial reporting law reform cont …
Directors are required to state in their annual declaration
that they have received a ‘true and fair’ declaration from
the CEO and CFO.
Directors must further ensure that reports include a
management discussion and analysis (MD&A) disclosure
in the company’s annual report.
There must be disclosure of executive remuneration at the
annual general meeting (AGM) and members allowed a
discussion and a (non-binding) vote on the remuneration
report.
Corporate Law: Law principles and practice
Reporting requirements for different entities
General requirements
Some entities are compelled by the legislation to prepare
(annual) reports (Corporations Act 2001 (Cth) s 292).
If an entity is required to prepare financial reports then,
under s 295, they must prepare:
•
•
•
balance sheets
profit and loss statements
cash flow statements.
The financial statements should include various
disclosures and notes of explanation.
Corporate Law: Law principles and practice
Reporting requirements for different entities cont …
A company (registered scheme or disclosing entity) must
prepare a directors’ report for each financial year
(Corporations Act 2001 (Cth) s 298(1)).
The financial reports must be audited and an auditor’s report
prepared (ss 301, 307, 308), with some special requirements:
•
•
•
Small proprietary companies need only prepare a financial
report if the request to do so includes a request for an audit
(s 293).
Section 312 requires an officer of a company to assist the
auditor in the conduct of the audit.
ASIC can use its exemption powers under ss 340 and 341
to relieve large proprietary companies from the audit
requirements in appropriate cases (ss 342(2) and (3).
Corporate Law: Law principles and practice
Reporting requirements for different entities cont …
If a company must prepare financial reports, these must be
in a format prescribed by the Corporations Act 2001 (Cth).
Section 9 defines a financial report as ‘an annual financial
report’ or ‘half-year financial report’, prepared according to
the requirements of ch 2M. Section 295(1) states that the
basic contents of the annual financial report are:
•
•
•
the financial statements for the year
the notes to the financial statements
the directors’ declaration about the statements and notes.
The financial statements must comply with appropriate
accounting standards (s 295(2)).
Corporate Law: Law principles and practice
Reporting requirements for different entities cont …
The company must prepare a profit and loss statement, a
balance sheet and a cash flow statement Corporations Act
2001 (Cth) s 295).
The AASB may also require preparation of a consolidated
profit and loss statement, balance sheet and statement of
cash flows (if a group of companies).
Corporate Law: Law principles and practice
Reporting requirements for different entities cont …
Annual financial reports must be in the required format
and contain particular information, in a specific format, as
per the accounting regulations.
Specific information required in reports includes
information on the principal activities of the company, the
capital of the company, any dividends and bad debts.
Corporate Law: Law principles and practice
Reporting requirements for different entities cont …
The Corporations Act 2001 (Cth) also requires
explanatory notes to be provided in the statements (s
295(4)), including certain disclosures as to accounting
standards and any information that gives a true and fair
view of the reports.
Financial reports should include a director’s declaration (s
295(4)) that they believe on reasonable grounds that the
company will be able to pay its debts as and when they
become due and payable.
The directors must declare that the accounting standards
are in compliance with international financial reporting
standards.
Corporate Law: Law principles and practice
Reporting requirements of guarantee companies
Small guarantee companies may be exempt from any
requirement to prepare audited financial reports, unless
required to do so by a member or ASIC (Corporations Act
2001 (Cth) ss 292, 301, 316A).
Companies limited by guarantee have certain obligations (s
285A):
•
•
If the company has an annual revenue of less than $1
million consolidated revenue, a financial report and a
directors’ report must be prepared but with less detail. If the
financial report is not audited, it must at least be reviewed.
If the company has an annual revenue (or consolidated
revenue) of more than $1 million, it must prepare a
financial report and a directors’ report, although they can be
less detailed than those required of other companies.
Corporate Law: Law principles and practice
Reporting requirements of guarantee companies cont …
If a guarantee company is required to provide a directors’
report, it must provide specific information under ss
300B, 300B (1)(a)–(e) of the Corporations Act 2001
(Cth), and:
•
•
•
•
•
contain a description of the short- and long-term
objectives of the company
set out the company’s strategy for achieving those
objectives
state the company’s principal activities during the year
state how those activities assisted in achieving the
company’s objectives
state how the company measures its performance,
including any key performance indicators it uses.
Corporate Law: Law principles and practice
Australian financial services licensees
Australian financial services (AFS) entities that hold a
licence are required to prepare audited financial reports
under ss 989B(1), (2) and (3) of the Corporations Act
2001 (Cth).
AFS licensees must prepare and lodge audited financial
statements and an audit report as a condition for holding a
licence.
Corporate Law: Law principles and practice
Small proprietary companies
Small proprietary companies are defined under s 45A of
the Corporations Act 2001 (Cth) and do not have to
prepare and lodge annual financial reports.
A small proprietary company may be required to prepare
an annual financial report and directors’ report if:
•
•
it is directed to do so under s 293 or 294, or
it was controlled by a foreign company for all or part
of the year and was not consolidated for that period in
financial statements for that year lodged with ASIC
by:
• a registered foreign company, or
• a company, registered scheme or disclosing entity.
Corporate Law: Law principles and practice
Small proprietary companies cont …
A small proprietary company must prepare financial
reports and a directors’ report within 12 months after the
end of the financial year if required by five per cent of
members (Corporations Act 2001 (Cth) s 293(1)).
The members may determine that directors are not
required to comply with accounting standards or to
prepare financial reports.
A small proprietary company may be ordered by ASIC to
prepare reports (s 294(1)).
Corporate Law: Law principles and practice
Small proprietary companies cont …
Small proprietary companies normally prepare reports
both for tax purposes and in order to know what is
happening within the company.
Small proprietary companies that are controlled by a
foreign company must prepare financial reports if the
parent company does not lodge financial reports with
ASIC (Corporations Act 2001 (Cth) ss 292(1), (2)).
Corporate Law: Law principles and practice
The responsibilities of the director
Directors must ensure that the reports comply with
accounting standards (Corporations Act 2001 (Cth) s
296), and that they are true and fair (s 297).
Directors have the right to inspect the company’s financial
records in order to ensure the accuracy of reports.
Directors are required to supply further information (s
297) if reports appear not to be true and fair (s 295(3)(c)).
Corporate Law: Law principles and practice
Liability for non-compliance
Directors commit offences (criminal and civil) if they fail
to take reasonable steps in complying with their duty to
prepare financial reports in accordance with the law
(Corporations Act 2001 (Cth) s 344(1)).
Directors who do not comply with the financial provisions
may be fined or removed from managing the corporation.
Corporate Law: Law principles and practice
Required information
The directors of a company must prepare an annual
directors’ report for each financial year (Corporations Act
2001 (Cth) s 298(1)). With the exception of a company
limited by guarantee, the report must present information
in a specified manner, with some entities such as listed
companies having to satisfy further stringent
requirements.
Directors’ reports must contain certain specific
information (ss 300, 300A), with additional information
required for listed companies, along with a copy of the
auditor’s declaration.
Corporate Law: Law principles and practice
Required information cont …
As set out in s 299(1) of the Corporations Act 2001 (Cth),
directors must provide:
•
•
•
•
•
•
a review of the results and operations during the year
details of significant changes that occurred during the
year
a statement of the entity’s principal activities
details of any significant changes since balance day
likely future developments
details of the entity’s performance in relation to
environmental legislation.
Corporate Law: Law principles and practice
Required information cont …
Specific information required in the directors’ annual report is
listed in s 300 of the Corporations Act 2001 (Cth).
The directors’ report must contain details (s 300(1)) including:
•
•
•
•
•
•
•
who is or has been a director
any dividends paid and/or recommended
any options over unissued shares granted to directors and
certain senior officers
any unissued shares under option
any share issue following the exercise of options
non-audit services provided by auditors (s 300(11)-(11E))
and a statement as to their independence
indemnities given and insurance premiums paid during or
since the end of the year to an officer or auditor.
Corporate Law: Law principles and practice
Required information cont …
A public company that is not a wholly owned subsidiary
must disclose information about each director
(Corporations Act 2001 (Cth) s 300(10)); i.e. each
director’s qualifications, experience and special
responsibilities, the shares they own in the company or in
related companies, and how many meetings each director
attended.
Corporate Law: Law principles and practice
Determining that reports are true and fair
Directors must determine that the financial reports are true
and fair (Corporations Act 2001 (Cth) s 295(4)).
There is no definition of ‘true and fair’; the emphasis is
placed on directors’ compliance with accounting
standards.
Australian Securities and Investments Commission v
Healey [2011] FCA 717
Corporate Law: Law principles and practice
Solvency declarations
Directors of a company are required to make a solvency
declaration. Section 295(4) of the Corporations Act 2001
(Cth) defines the declaration as ‘a declaration by directors’
as to whether:
•
•
in the directors’ opinion, there are reasonable grounds
to believe that the company will be able to pay its
debts as and when they become due and payable (s
295(4)(c))
the company has included in the notes to the financial
statements, an explicit and unreserved statement of
compliance with international financial reporting
standards
Corporate Law: Law principles and practice
Solvency declarations cont …
•
•
in the directors’ opinion, the financial statement and
notes are in accordance with the Act, including s
295(4)(c) of the Corporations Act 2001 (Cth)
if the company is listed, that the directors, the CFO
and CEO have been given the written declarations
required by ss 295A and 295(4)(c).
Australian Securities and Investments Commission v
Healey [2011] FCA 717
Corporate Law: Law principles and practice
Presentation of financial reports at the AGM
The financial reports of a public company must be
presented before the AGM (Corporations Act 2001 (Cth) s
317), unless it has only one member (s 250N).
Directors are required to present to the meeting for the
previous financial year:
•
•
•
the financial report
the directors’ report
the auditor’s report.
Corporate Law: Law principles and practice
Presentation of financial reports at the AGM cont …
Except for a guarantee company, a directors’ report must
include:
•
•
•
general information required by ss 299 of the Corporations
Act 2001 (Cth) (all entities) and 299A (additional
requirements for listed entities)
the specific information required by ss 300 and 300A
a copy of the auditor’s declaration of independence under s
307C in relation to the audit for the financial year.
The directors must know what the financial reports contain.
Commonwealth Bank v Friedrich (1991) 9 ACLC 946
In a publicly listed company, the auditor is required to attend
the AGM, or arrange to be represented by a person who is
suitably qualified to answer questions on the audit (s 250RA).
Corporate Law: Law principles and practice
Reporting duties of controlled entities
Under AASB rules (AASB 127) a parent company is
required to prepare consolidated and separate financial
statements on the group of companies.
Corporate Law: Law principles and practice
Reporting duties of listed companies
Under ASX listing rules, a listed company must respond
and report on any market rumours or speculation.
Under s 299A of the Corporations Act 2001 (Cth), listed
companies must include in their director’s report pertinent
management discussion and analysis.
Directors interests must be disclosed, as must any other
directorships held by directors.
Corporate Law: Law principles and practice
Reporting duties of listed companies cont …
Section 299A(3) of the Corporations Act 2001 (Cth) allows
for the omission of material from the directors’ report if it is
likely to result in unreasonable prejudice to the company,
although the report must state that the omission has been
made.
The CFO and CEO must declare that, in their opinion, under
s 295A (the solvency declaration) the listed company’s
financial statements and notes:
•
•
•
•
have been prepared from financial records that have
been properly maintained in accordance with s 286
comply with the accounting standards
give a true and fair view (s 297)
comply with all other prescribed regulations.
Corporate Law: Law principles and practice
Reporting duties of listed companies cont …
The CFO’s and CEO’s declaration must be in writing and
dated, and state the status of the parties making the
declaration (Corporations Act 2001 (Cth) s 299A(3)).
A directors’ report must also include comments and
details about the board’s policy of remuneration for
directors
and officers, discussing the relationship between
remuneration and performance of officers (s 300A).
Corporate Law: Law principles and practice
Reporting duties of listed companies cont …
ASX also requires certain matters to be addressed,
including:
•
•
•
•
a statement about any differences between the annual
and half-year reports (with explanations)
whether it has an audit committee (and if not, why)
a statement of corporate governance principles
names of substantial members and the securities they
hold, the class of shares, the 20 largest holders and the
number and percentage of shares held.
Jubilee Mines NL v Riley [2009] WASCA 62.
Corporate Law: Law principles and practice
Companies operating on foreign exchanges
Companies listed on foreign stock exchanges are required
to disclose certain information to ASIC
A registered foreign company must lodge:
•
•
financial statements (Form 405) once each calendar
year and at intervals of not more than 15 months
(Corporations Act 2001 (Cth) s 601CK(1))
for exempted registered foreign companies, an annual
return (Form 406) within one month after the date it is
made up to, but also within each calendar year (ss
601CK(9), (10)).
Corporate Law: Law principles and practice
Reporting to members
A company, registered scheme or disclosing entity (not a
company limited by guarantee) must prepare reports and
provide members with a copy (Corporations Act 2001
(Cth) s 314).
A company must provide either of all of the reports listed
below or a concise report for the year that complies with s
314(2):
•
•
•
the financial report for the year
the directors’ report for the year (ss 298 to 300A)
the auditor’s report on the financial report.
Corporate Law: Law principles and practice
Reporting to members cont …
Under s 314(1AA) of the Corporations Act 2001 (Cth), a
company may provide the reports, or the concise report,
for a financial year by doing all of the following:
•
•
•
sending to each member who has elected to receive the
report (see s 314(1AB))
• a hard copy of the reports, or the concise report
• an electronic copy, if the member has elected to
receive the reports, or the concise report
making a copy of the reports, or the concise report,
readily accessible on a website
directly notifying, in writing, all members who did not
elect to receive the reports that a copy is available on
the website.
Corporate Law: Law principles and practice
Reporting to members cont …
Under s 314(1AB) of the Corporations Act 2001 (Cth), a
company must, on at least one occasion, directly notify in
writing each member that:
•
•
•
the member may elect to receive, free of charge, a
copy of the reports, or the concise report, for each
financial year
a member can access reports on a specified website
a member may elect to receive the copy as either a
hard copy or an electronic copy.
Members can always call for a full report, free of charge,
where the concise report is sent out. They can also elect
not to receive a report altogether (s 316(1)(b)).
Corporate Law: Law principles and practice
Continuous disclosure
Entities listed on the ASX have obligations to both ASIC
and the ASX itself in terms of how reports are prepared,
the content of the reports and the timing of their
preparation and lodgement.
Entities specified as continuous disclosing bodies are:
•
•
entities listed on the ASX with quoted securities
(Corporations Act 2001 (Cth) s 111AE(1))
securities (other than debentures and managed
investment products) that are covered by the ch 6D
disclosure document, with a minimum of 100 investors
who hold this class of securities
Corporate Law: Law principles and practice
Continuous disclosing cont …
•
•
•
•
managed investment schemes with 100 or more
persons participating (s 111AFA)
securities (other than debentures) issued as
consideration for an off-market takeover bid when 100
or more persons hold those securities
securities issued under a pt 5.1 scheme of arrangement
when 100 or more persons hold securities (s
111AG(2))
debentures, when a trustee is required to be appointed
(s 111AT).
Corporate Law: Law principles and practice
Continuous disclosure cont …
Disclosing entities are required to prepare half-year
reports, which must be lodged with ASIC within 75 days
of the end of the year (Corporations Act 2001 (Cth) s 320).
Listed companies generally must provide the ASX with an
annual report, a half-year report, a preliminary final report,
half-year ASIC accounts, annual audited financial
statements, quarterly cash flows, and activities reports.
Listed companies must also provide information that a
reasonable person would consider would have a material
effect on the price or value of their securities if it is not
generally available (s 675). This rule is designed to prevent
a ‘false market’.
Corporate Law: Law principles and practice
Continuous disclosure cont …
Note the exceptions to disclosure whereby a reasonable
person would not expect the information to be disclosed,
the information is confidential and one of the following
exceptions applies (ASX LR 3.1A):
•
•
•
•
•
It would be a breach of the law to disclose the
information.
The information concerns an incomplete proposal or
negotiation.
The information comprises matters of supposition or is
insufficiently definite to warrant disclosure.
The information is generated for the internal
management purposes of the entity.
The information is a trade secret.
Corporate Law: Law principles and practice
Continuous disclosure cont …
Non-disclosure of important information may lead ASX to
suspend trading in that entity’s securities and remove it from
the ASX register.
The ASX can enforce further orders by applying to a court
for enforcement of ASX rules (Corporations Act 201 (Cth) s
793C & s 1101B).
ASX rules impose additional reporting obligations, such as
providing the company’s annual and half-year reports, and
corporate governance practices on listed companies (ASX
LR 4.10.3).
If a company fails to comply, it might be an offence if it can
be proved it was deliberate and intentional as a crime.
Corporate Law: Law principles and practice
The role of ASIC and associated regulatory bodies
Financial Reporting Council (FRC)
Advises and regulates on behalf of ASIC. It oversees the
accounting and auditing standards, setting processes for
the public and private sectors, monitoring the
effectiveness of the auditor independence regime, and
advising the minister on these matters.
International Accounting Standards Board (IASB)
Corporate Law: Law principles and practice
Regulatory bodies cont …
Australian Accounting Standards Board (AASB)
The AASB:
•
•
•
develops the conceptual standards for evaluating
proposed accounting and international standards;
creates and promotes accounting standards under the
Corporations Act 2001 (Cth) to Australian and
international requirements; and
in turn, contributes to the international development of
accounting standards.
Corporate Law: Law principles and practice
The role of ASIC in monitoring financial reports
ASIC takes samples from listed and unlisted companies.
ASIC provides guidance to companies regarding their
reporting.
Corporate Law: Law principles and practice
Auditing financial reports
An audit committee is required to report on its board of
directors in order for it to be listed on the ASX.
ASX Corporate Governance Council’s best-practice
guidelines outline how the audit committee should be
composed and the duties it must carry out.
Corporate Law: Law principles and practice
The role of auditors
The role of an auditor is to provide independent and
professional probing into the company’s financial records
to ensure they are true and fair.
Corporate Law: Law principles and practice
Who must be audited?
All companies except small proprietary companies
(Corporations Act 2001 (Cth) s 301(2)) must have an
audit of their annual financial reports s 301).
Small proprietary companies may require an audit if
shareholders with at least five per cent of the votes require
it, or ASIC requires it (ss 293–294).
Corporate Law: Law principles and practice
What is an audit?
An auditor forms an opinion on whether:
•
•
•
the financial reports are in accordance with the
Corporations Act 2001 (Cth), comply with appropriate
accounting standards and give a true and fair view
the auditor has been given all information, explanation
and assistance necessary for the conduct of the audit
the company has kept the financial and other records
and registers required under the Act.
The auditor also has the responsibility of reporting to
ASIC on breaches of the Act and on any part of the audit
that has not been appropriately dealt with.
Corporate Law: Law principles and practice
Qualifications of an auditor
An auditor must be a qualified accountant who has
achieved qualifications in auditing with sufficient
proficiency to conduct an audit, as prescribed by ASIC
(Corporations Act 2001 (Cth) ss 1280(2A), (2B)).
An auditor must be a fit and proper person (s 1280A), and
must be registered with ASIC (s 324BA) unless ASIC
grants an exemption under one of the exceptions (s 324B).
An auditor must be a natural person (s 1279).
Corporate Law: Law principles and practice
Appointing an auditor
A public company must appoint an auditor within one
month of the company registration, unless the members
have done so already at a general meeting (Corporations
Act 2001 (Cth) s 327A(1)).
The auditor holds office until the next AGM, when it is up
to the members to make an appointment (s 327B).
An AGM fixes the auditor’s remuneration (s 250R).
The directors of a proprietary company can appoint an
auditor if the members have not done this (ss 325, 327B).
Corporate Law: Law principles and practice
Removing an auditor
An auditor, once appointed, can only resign from office
with the permission of ASIC, although liquidation of a
company may end the auditor’s role.
An auditor may be removed if deregistered or disqualified
(perhaps for conflict of interest).
Corporate Law: Law principles and practice
Powers of the auditor
The audit must be comply with legislation, which gives
the auditor power to demand information when
conducting an audit.
An auditor has a right to access at all reasonable times the
books of the company and may require any officer to give
them information, explanations or other assistance for the
purposes of the audit or review (Corporations Act 2001
(Cth) s 310).
An officer of a company must allow the auditor access to
the books and give the auditor any information,
explanation or assistance required (s 312).
Corporate Law: Law principles and practice
Duties and rights of the auditor
An auditor ensures that the audit is conducted to
appropriate auditing standards (Corporations Act 2001
(Cth) s 307A).
The auditor must act independently and verify the
financial reports of the company (ss 674, 675).
An auditor who conducts an audit of the financial reports
must form an opinion about whether the financial report is
in accordance with the Act (s 307)—that is, with
appropriate accounting standards (ss 296 or s 304)—and
that it gives a true and fair view (ss 297, 305).
Corporate Law: Law principles and practice
Duties and rights of the auditor cont …
The auditor must determine whether they require
additional information in order to assess whether:
•
•
•
the financial reports are true and fair
they have been given all information and assistance
necessary to conduct the audit
the company has kept appropriate financial records to
enable a financial report to be prepared and audited.
Corporate Law: Law principles and practice
Duties and rights of the auditor cont …
An auditor of a listed company must attend the AGM
Corporations Act 2001 (Cth) s 307). The auditor has the
right to be given notice of any meeting of members (s
249K), and the right to attend any AGM (s 250RA).
The auditor also has the right to appoint a representative to
attend a meeting and to be heard at the meeting on any
business concerning their role as auditor.
Corporate Law: Law principles and practice
The duty to act independently
Auditors have a duty to avoid a ‘conflict of interest’. If an
auditor is aware of a conflict of interest, they must take all
reasonable steps to end the conflict, or notify ASIC; if
they do not, it is an offence Corporations Act 2001 (Cth)
(ss 324(1A), 324CA(1)).
A conflict of interest is arises when a reasonable person in
their position would not be capable of exercising
‘objective and impartial judgment’ (s 324CD).
Corporate Law: Law principles and practice
The liability of an auditor
Auditors have both statutory and common law duties when
conducting an audit.
Contract liability
An auditor has a contract with the company but is under a
professional duty to complete the audit with appropriate
skill and care (Corporations Act 2001 (Cth) ss 307A,
336)(e.g. to detect fraud).
Frankston and Hastings Corporation v Cohen (1960) 102
CLR 607
An auditor must demonstrate skills of a professional
standard.
Pacific Acceptance Corp Ltd v Forsyth (1970) 92 WN
(NSW) 29
Corporate Law: Law principles and practice
The liability of an auditor cont …
Tortious liability
Auditors have a duty of care and skill at common law and
reasonable skill and care according to the professions
standards.
Re Thomas Gerrard and Son Ltd [1968] Ch 445; [1967] 2
All ER 525
Daniels v Anderson (1995) 37 NSWLR 438
Corporate Law: Law principles and practice
Reviewing and supervising the audit process
ASIC’s annual reviews
ASIC conducts an annual audit inspection program to
promote high-quality external audits of financial reports
of listed and other public-interest entities in Australia so
that users can have greater confidence in financial reports.
Supervision by the FRC to ensure auditor independence
The FRC supervises the activities, independence and
standards of auditors in Australia.