How to avoid the audit requirements for a large proprietary company

Reporting requirements for large proprietary companies

A large proprietary company (or a small proprietary company which is controlled by a foreign company) must prepare and lodge with the Australian Securities and Investments Commission (ASIC) a financial report, a directors' report and an auditors report in accordance with Chapter 2M of the Corporations Act 2001 (Cth) (Act) within 4 months after the end of the company's financial year (Audit Requirements).

Complying with the Audit Requirements is generally acknowledged to be lengthy and expensive. However, an exemption (Audit Relief) from the Audit Requirements in any given financial year (Relevant Financial Year) may be available.

What is a large proprietary company?

A company is a large proprietary company if it satisfies at least 2 of the following:

the consolidated revenue for the financial year of the company and the entities it controls (if any) is $25 million;
the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is $12.5 million; or
the company and the entities it controls (if any) have 50 or more employees at the end of the financial year.

Large proprietary companies that are not entitled to an Audit Exemption

Generally, such companies include the following:

"grandfathered" large proprietary companies;
companies with shares listed on a regulated exchange;
borrowing corporations;
guarantors of borrowing entities; or
licensed securities dealers or futures brokers.

Procedure for obtaining Audit Relief

A large proprietary company may obtain Audit Relief by:

meeting the requirements of ASIC Class Order [CO 98/1417] (Class Order) and the Act and as part of that process lodge a Form 382 application with ASIC; or
if the company is not exempted from the Audit Requirements, by virtue of meeting all of the requirements in the Class Order set out in (1) above it may also apply for Audit Relief by making an application in writing to ASIC in accordance with a resolution of the directors and a statement of the reasons for seeking relief which would usually contain most of the requirements of the Class Order.

An application for Audit Relief under either (1) or (2) above must be made no later than one month after the commencement of the Relevant Financial Year.

Requirements of the Class Order and the Act for Audit Relief

The Class Order stipulates a number of requirements which must be met (or waived by ASIC) in order to obtain Audit Relief. The key requirements of the Class Order are set out below:

A resolution must be passed by the company's directors and its shareholders to the effect that the financial report of the Company in a given year should not be audited. For example, for Audit Relief for the financial year ending 30 June 2011, such resolutions must be passed between 1 April 2010 and 31 July 2010.
Confirmation that shareholders are provided with materials which include a statement by the directors that the cost of having the financial statements audited outweighs the expected benefits.
The company's directors must make solvency declarations in respect of each financial year ended on or after 1 July 1998 up to and including the Relevant Financial Year and must confirm that the company has adequate procedures in place to enable the directors to make such an assessment.
The directors have considered monthly management accounts and resolved that at the end of each quarter the total liabilities of the company did not exceed 70% of the total tangible assets and that the company was able to pay its debts as and when they became due and payable.
The financial report and directors' report for the Relevant Financial Year and the year immediately preceding the Relevant Financial Year must have been lodged with ASIC within 4 months of each applicable financial year end.
Other requirements may also prove to be significant on a case by case basis.

In accordance with the Act, ASIC must also be satisfied that complying with the Audit Requirements of the Act would not:

make the financial report or other reports misleading; or
be inappropriate in the circumstances; or
impose unreasonable burdens (eg the expected costs of otherwise having to comply with the Audit Requirements).

How can Talbot Olivier help?

Talbot Olivier has recent experience in assisting clients in obtaining Audit Relief. If you are already preparing audited accounts or believe you may have to, Talbot Olivier can assist with advising fully on whether your company meets the Class Order requirements and, if applicable, can make the application for Audit Relief.

For further information or advice on this topic, please contact Paul Kordic, Principal, by email at pkordic@talbotolivier.com.au or Louis van Aardt, Senior Lawyer, by email at Lvanaardt@talbotolivier.com.au.