The panel, which was set up to settle disputes between ASIC and companies, started operations in 2006. It was legislated as a part of the suite of reforms that formed the ninth tranche of the then Federal Government’s Corporate Law Economic Reform Program (CLERP). This suite of changes brought the setting of auditing standards into the remit of a government body as well as giving life to the FRP.
It is important, however, before we talk about the significance of the removal of the FRP to today’s environment to provide some background.
Why a panel in the first place?
The notion of introducing a panel to settle disputes between a company and a regulator had its beginnings as a part of the aftermath of a case that the Australian Securities and Investments Commission lost in 2002. At that time, ASIC took software developer MYOB Ltd to court following a major dispute between the two parties over the company’s use of an accounting treatment that had been disallowed by the Federal Parliament. It was the first disallowance of an accounting standard to have taken place.
The software company had adopted provisions of an accounting standard on accounting for assets, known also as AASB 1015, which allowed it to avoid the revaluation of certain assets. The court case centred on the differences between the interpretations by ASIC and MYOB Ltd of an accounting standard related to the acquisition of assets. ASIC contended that MYOB Ltd had failed to appropriately value assets when a corporate reorganisation took place. This resulted in $90 million not being booked by MYOB Ltd and therefore resulted in lower write-offs to the bottom line in future years.
The case was lost by the regulator on the interpretation of the standard as it stood after the parliamentary disallowance. While the Federal Parliament deleted a provision from the body of the standard it failed to delete the transitional paragraphs that referred to the elements of the standard that were missing. The reasons for the regulator’s loss were understood but there was some anxiety in regulatory ranks to ensure that the same kind of issue would not recur.
One of the issues to emerge during the court case was that the accounting experts were concerned about the tone of the legal debate. While accounting standards were clearly law they were written in a manner that differs from other legislation. There were those on both sides of the debate that preferred another mode of dispute resolution that did not depend on the outcome in a court.
The reality
The FRP came into being with much fanfare but it was a regulatory function that was seldom used. Over a six-year period, the panel heard four cases. Two cases were found in favour of ASIC and two in favour of the entities that were the targets of ASIC’s attention. The four companies were Sing Strategic International Limited, ING Real Estate Entertainment Fund, Oaks Hotels & Resorts Limited and BBX Property Investment Fund Limited.
In the case of one matter that may have been referred to the panel by ASIC, the entity decided to change its accounting to the methods preferred by the regulator. This would have made it five organisations over six years.
A problem faced by the Federal Government was justifying the existence of a body that was so poorly utilised. There was an intention within Government prior to the four cases that emerged late in 2010 to get rid of the FRP. The four cases provided the impetus for a review of the panel’s effectiveness and also whether there was merit in continuing to have the panel exist. This review took place in order to see whether there was any benefit in keeping the entity alive.
In December 2011, the professional accounting bodies sent a response to a Federal Treasury consultation paper on the role of the FRP arguing for its retention. Among the reasons advanced in support of the FRP was the fact that the existence of the body provided a place for the regulator and a company to resolve issues. There were also suggestions made that the FRP could have its remit extended to determining matters that were the result of disputes between auditors and ASIC. This was suggested in order to broaden the remit of the body and also place a layer of appeal before ASIC assessments of audit firm compliance with auditing standards. These suggestions failed to achieve sufficient appeal. The FRP was shut down.
What have we lost?
One of the most important things that have disappeared is a process of inquiry that involved accounting experts and business leaders that is not a court of law. The FRP provided an arena where the issues related to accounting disputes could be aired and a written opinion of the panel provided to the community. The process was fast and – to the extent permitted by its rules of engagement – transparent.
This meant that the panel’s decisions could be used to educate the profession and the broader community on the applicability of accounting standards in certain circumstances. In this sense the panel functioned as an interpretative body. Some representatives of major accounting firms objected to the panel’s existence for this reason. It was felt that any panel decision was bound to create a precedent which in turn could be used as an endorsement or condemnation of a specific practice depending on the panel’s findings. This is an important point given that there are few sources of generic interpretation available to the small to medium-sized practice using International Financial Reporting Standards (IFRS). The Big Four firms and the larger second tier practices have sophisticated global databases that are closely guarded resources. The FRP at least provided another source of material that could be used to educate the community on matters related to IFRS. It could be said, however, that the opportunity for the general populace to get an education on some accounting matters ended up being a shorter library than might otherwise be envisaged.
A body such as the FRP also provides an opportunity for the community to continue using the experienced accountants who have retired from firms or companies. These individuals still have a body of knowledge that is useful and can be employed in situations where a mature outlook is required. The accounting profession needs to be in a position to use the knowledge of these ‘grey hairs’ wherever possible.
We have also lost the ability to have a matter heard in a pure accounting context. ASIC will need to consider carefully how it next deals with a company that refuses to change its accounting treatment in an initial discussion with the regulator. There is the costly option of taking an entity to court. This will subject the regulator and the entity to a higher level of public scrutiny, but it comes with the risk of misinterpretation throughout the litigation.
Would ASIC consider another option rather than a court case? The regulator has used enforceable undertakings in a range of circumstances. There is no reason why the corporate regulator could not use enforceable undertakings in the context of financial reporting compliance where there is a compelling case. There was a prominent enforceable undertaking involving Leighton Holdings, relating to Leighton’s continuous disclosure. The company is bound by the undertaking to ensure that for a period of time it complies with the continuous disclosure requirements. This is one method of ensuring a regulatory outcome without taking a matter through a court case.
Word of caution
Another issue that must be borne in mind in this discussion is that there still needs to be a right for the regulator to deal with issues as it wants to call them. The FRP was there for the disputes to be resolved. This does not mean that every difference a company has with ASIC becomes a dispute over interpretation. The regulator has the right to insist a company change its treatment. Sometimes it is easy for criticisms to be made of the regulator for not referring more to the FRP. While this may be a legitimate issue to raise, only those close to the regulator’s activity would be able to make a judgment on what issues could be referred to the FRP.
From the vaults
Accounting historians will remember that the firm Arthur Andersen was a prolific publisher of advocacy materials over the 1940s, 1950s and 1960s. One of the seminal articles written by a former managing partner, Leonard Spacek, dealt with the notion of establishing an ‘accounting court’ where interpretations can be challenged and debated. Spacek foresaw that such a body could summarise all the arguments in detail and for those arguments to be kept in posterity. Spacek was right. We still need an accounting court of some description.
