Corporate Finance Update - Issue 18

Issue 18, September 2024

Robust internal controls, technical expert oversight critical for proper IER engagements

ASIC recently accepted a court enforceable undertaking from Australian financial services (AFS) licensee PKF Melbourne Corporate Pty Ltd (PKF). This follows an investigation where ASIC reviewed three independent expert review (IER) engagements and identified concerns that PKF failed to maintain documented internal policies and procedures demonstrating compliance with: 

• licensee obligations and regulatory guidance 
• valuation methodology selection and application  
• assessment of the competence of technical specialists and review of their reports, and  
• conflict management procedures.  

Under the terms of the undertaking, PKF will cease providing IERs until an independent expert completes a review of PKF’s policies and procedures for IER engagements and PKF has implemented all recommendations of this review.   

We expect all AFS licensees undertaking IER engagements to have in place comprehensive systems and controls to ensure the quality and reliability of their reports.  

Failure to comply with these expectations may result in regulatory action. We will continue to monitor the conduct of AFS licensees and IERs and take enforcement action where necessary.    

• Read the media release. 

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Australians can be confident in the integrity of our equity markets: ASIC report  

ASIC’s latest market cleanliness report has shown Australia’s equity markets continue to operate with a high level of integrity and remain consistently among the cleanest in the world.  

Report 786 Equity market cleanliness snapshot report (REP 786) found, in the five-year period up to 30 April 2024, there were two periods of temporary deterioration in market cleanliness – the first during the COVID-19 pandemic when global markets experienced high market volatility and trading, and again in late 2023 as corporate activity increased. In both instances ASIC acted quickly to address the harmful conduct.  

Our regulatory interventions to address the deteriorations included targeting ‘pump and dump’ activity, intervening on chat rooms, reviewing ‘finfluencer’ activity and undertaking targeted reviews where we observed leaks ahead of market announcements.  

To protect market integrity, ASIC uses a combination of real-time trade surveillance data, award winning analytical tools and human expertise to seek out and identify potential misconduct. All entities – including listed companies, investors, bankers, brokers and other advisers – have a key role to play to support market cleanliness and should be pursuing fair and appropriate outcomes for all participants in equity markets. 

At the same time, ASIC is committed to understanding the growth in private markets and decline in initial public offers (IPOs), including whether the current regulatory settings are contributing to this trend and, if so, how these settings could be improved.   

We know Australia is competing against the world for IPOs. Other financial markets are also looking to attract listings – and considering changes to their capital markets to achieve this. For companies to continue raising capital efficiently, it is important that investors have confidence in the regulation of IPOs. We support confidence in capital markets by closely reviewing IPO disclosure and conduct. We also monitor developments in other markets to determine if our current settings remain globally competitive.

• Read the media release.    

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Lodging replacement bidder’s statements

ASIC reminds bidders that in September 2023 we removed the requirement to lodge a supplementary bidder’s statement in order to lodge and dispatch a replacement bidder’s statement: see ASIC Corporations (Replacement Bidder’s and Target’s Statements) Instrument 2023/688. 

We have noticed that some bidders continue lodging supplementary statements when lodging replacement statements, although that is unnecessary and incurs a fee (which is presently $802).   

The requirement to have lodged a supplementary statement was removed from notional sections 633A(1) and 635A(1) of the Corporations Act 2001, following our proposal in Consultation Paper 365 Remaking ASIC class orders on takeovers, compulsory acquisitions and relevant interests (CP 365), when we remade superseded Class Order [CO 13/528] in ASIC Instrument 2023/688. When lodging a replacement statement, bidders are still required to lodge a marked version, showing all changes from the original bidder’s statement.   

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Public companies must disclose information about subsidiaries in annual financial reports 

We recently published Information Sheet 284 Public companies to include a consolidated entity disclosure statement in their annual financial report to provide guidance for preparers of financial reports on the new requirements to include a consolidated entity disclosure statement (CEDS) in their annual financial reports.  

The new requirements aim to increase tax transparency by requiring Australian public companies to disclose the tax residency of each entity in the consolidated group. For information about the background, refer to the media release from the Hon Dr Andrew Leigh MP. 

The new requirements apply to each financial year commencing on or after 1 July 2023 and require all public companies (listed and unlisted) to prepare a CEDS. If the accounting standards do not require the public company to prepare consolidated financial statements, no CEDS is required, just a statement to that effect. In addition, directors must include an opinion on whether the CEDS is ‘true and correct’.  

The Auditing and Assurance Standards Board recently released an AUASB Bulletin providing guidance on the audit implications of the CEDS. 

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Blackout period for members’ meetings

We recommend companies avoid holding members’ meetings between Monday 16 December 2024 and Friday 10 January 2025 (inclusive). 

This view is based on the requirements in section 249S of the Corporations Act 2001 that companies must give members ‘a reasonable opportunity to participate in the meeting’ and hold the meeting ‘at a time that is reasonable’.  

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Failure to comply with legislative instrument requirements

Companies who intend to rely on financial reporting relief under an ASIC legislative instrument must ensure they comply with the requirements of the relevant legislative instrument, or the relief will be unavailable.  

A company will need to comply with its financial reporting obligations under Part 2M.3 of the Corporations Act 2001 in full for the relevant financial year unless it has satisfied all the requirements of the relevant ASIC legislative instrument or obtained individual relief and complied with the requirements for relief before the statutory deadlines. 

Companies who intend to rely on financial reporting relief under an ASIC legislative instrument do not need to apply for individual relief via the ASIC Regulatory Portal, as long as they satisfy all the requirements of the legislative instrument. 

For further information, see ASIC legislative instruments. 

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Financial reporting contraventions: Applications for no-action letters

We continue to receive applications for no-action letters for contraventions of financial reporting obligations in Part 2M.3 of the Corporations Act 2001 (Corporations Act), in some cases going back several years.  

We remind companies and directors that failure to lodge reports with ASIC or report to members in accordance with statutory deadlines are strict liability offences and may result in criminal and civil liability: see sections 314(1A) and 319(1A) of the Corporations Act.  

We will not generally consider granting a no-action letter for past financial reporting contraventions unless we are satisfied that: 

• any non-compliance has been remedied 
• the non-compliance is not indicative of systemic failures 
• the non-compliance is inadvertent 
• the directors had not failed to fully apprise themselves of the company’s financial reporting obligations, including by seeking appropriate legal or accounting advice at the relevant time, and 
• the no-action letter is required for business facilitation purposes (e.g. in relation to a transaction or because of some other legal obligation). 

For further information, see Regulatory Guide No-action letters (RG 108). 

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Financial reporting relief for wholly-owned companies following a merger or acquisition

We have granted individual financial reporting relief (in similar terms to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785) to companies that have been disclosing entities for all or part of a financial year and have been acquired by another reporting entity, typically by way of a scheme of arrangement. A company that has been a disclosing entity for all or part of a financial year is otherwise excluded from relief under ASIC Instrument 2016/785.  

We have granted this relief in circumstances where the acquiree and acquirer have the same financial year end and where the acquiree becomes a party to a deed of cross guarantee with the acquirer before the end of the financial year after the acquisition. In most cases, the acquiree and acquirer have existing deeds of cross guarantee in place in relation to their respective corporate groups. 

When considering this relief, we generally consider the position of creditors of both companies before and after the acquisition and whether the acquiree has any corporate bonds on issue. We will also consider, among other things, when the acquiree last prepared and lodged either annual reports or half-year reports and the date of acquisition. In some cases, we may impose a condition that the acquirer include additional information in the notes to its consolidated financial statements comprising: 

• a statement of comprehensive income of the acquiree setting out the information specified by paragraphs 82–87 of Australian Accounting Standard AASB 101 Presentation of Financial Statements in force at the end of the relevant financial year, and 
• opening and closing retained earnings, dividends provided for or paid, and transfers to and from reserves of the acquiree. 

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Financial reporting relief and AGM extensions for companies undertaking schemes of arrangement 

We have previously granted extensions of time for reporting to members and/or holding an annual general meeting (AGM) when these obligations coincide with a proposed scheme of arrangement either shortly before or after the scheme meeting, second court hearing or scheme implementation. These extensions were granted because of the scheme timetable and the logistics and costs of distributing annual reports to members and convening AGMs.  

Although we may provide a decision in principle before a first court hearing or scheme meeting, we may not provide relief until the outcome of the scheme meeting is known.  

Where there is sufficient time for the outcome of a scheme of arrangement to be known and implementation to occur before the relevant obligations are due, we will generally refuse relief on the basis that it is unnecessary: see Regulatory Guide 51 Applications for relief (RG 51) at RG 51.63. Practitioners should not apply for this relief unless there are significant burdens and timing constraints with the relevant statutory deadlines and the scheme timetable. 

We generally refuse relief to enable companies to delay or defer lodgement of their annual reports because the company has entered into a scheme implementation deed, or because the scheme is still to be implemented. This is because annual reporting by the statutory deadline is relevant to all users of the reports including creditors.

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Financial reporting compliance history

We are not obliged to grant individual financial reporting relief even if the statutory preconditions and our policy settings in Regulatory Guide 43 Financial reports and audit relief (RG 43) or Regulatory Guide 115 Audit relief for proprietary companies (RG 115) for relief have been met.  

We will consider all the relevant circumstances of the application when deciding whether to exercise our discretion to grant individual relief. We may refuse to grant individual relief if the company has failed to comply with its financial reporting obligations under the Corporations Act 2001 (Corporations Act) in previous financial years.  

In some cases, we may require a company that has failed to comply with the financial reporting obligations under the Corporations Act in previous financial years to demonstrate two years of ‘on-time’ financial reporting compliance before we consider granting individual relief.  

For more information, see RG 43, RG 115 and our previous discussion about audit relief in the ASIC Corporate Finance Update.  

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AFS licensee and auditor forms: Lodgement of FS06 and FS08 

We remind Australian financial services (AFS) licensees and their auditors that lodgement of Form FS06 Appointment of an auditor of an Australian financial services licensee may be by paper lodgement or electronic lodgement using the AFS licensee online access. Form FS08 Application for consent from ASIC to resign as an auditor of an Australian financial services licensee is a paper lodgement only.  

The ‘Notify ASIC or apply to ASIC about company auditor appointments’ transaction on the ASIC Regulatory Portal does not permit electronic lodgement of Form FS06 or Form FS08. Any FS06 or FS08 forms submitted to us through this process will be returned to the submitting party.

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