Accounting standards matter: the company’s obligation

Australian accounting standards (Accounting Standards) are often considered solely the domain of auditors and accountants.  However, they are a crucial aspect of corporate law and governance in Australia.  For directors, officers, and their professional advisers, the key issue is not the technical details of the Accounting Standards, but rather their legal enforceability.  A failure to comply with Accounting Standards can lead to enforcement action by the regulator.

What is an Accounting Standard?

The Australian Accounting Standards Board (AASB), a federal government agency authorised by the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), develops, issues, and maintains Accounting Standards by legislative instrument under the Corporations Act 2001 (Cth) (Corporations Act).  The ASIC Act empowers the Australian Securities and Investments Commission (ASIC) to ensure that financial reports received meet Accounting Standards.

As legislative instruments, the Accounting Standards set out the required accounting treatment for transactions and events, including the presentation of an entity’s financial statements.  They provide an objective benchmark for assessing whether directors have properly discharged their duties in relation to a company’s financial report and determine whether those reports comply with the law. 

Requirement to prepare financial reports

Under Chapter 2M of the Corporations Act, small proprietary companies, small companies limited by guarantee, and other larger companies must prepare financial statements each financial year.  This includes disclosing entities, large proprietary companies, entities that are publicly listed or are a registered scheme, or entities that are a small proprietary company but are directed to report under the Corporations Act.  When reporting pursuant to an obligation contained in the Corporations Act, these entities must comply with Accounting Standards when preparing financial statements.

Part 2M.3 of the Corporations Act imposes financial reporting obligations on companies and registered managed investment schemes.  These financial reporting obligations broadly consist of:

• preparing financial reports (financial statements, notes, directors’ declaration and directors’ reports); and
• auditing the financial reports.

Depending on the type of entity, the specifics of those financial reporting obligations vary.  Certain entities (public companies and disclosing entities) must have audited financial reports prepared annually (and/or half-yearly) but other entities (for example, small proprietary companies) need only do so in limited circumstances, such as where they are directed by their members or ASIC or if they are foreign-controlled entities and not consolidated for reporting purposes.  

Where financial reports are required they must be lodged with ASIC and given to members.^[1]  Section 292 of the Corporations Act sets out the entities that are required to prepare financial reports for a financial year (Financial Report).^[2]  These include:

(a) all mandatory reporting entities^[3];

(b) all disclosing entities;

(c) all public companies;

(d) all large proprietary companies;

(e) all registered schemes;

(f) all registrable superannuation entities;

(g) any small proprietary company that:

(i) has been validly directed to do so^[4];

(ii) has any crowd funding shareholders^[5]; or

(iii) is a foreign controlled company whose consolidated financials have not been lodged with ASIC^[6]; and

(h) any small company limited by guarantee that is directed to do so^[7].

If the entity preparing a Financial Report controls other entities, then it must prepare a consolidated financial report (Consolidated Report) in compliance with the Accounting Standards.^[8]

Obligation to comply with Accounting Standards

Section 296 of the Corporations Act requires that Financial Reports comply with Accounting Standards.^[9]  If a small proprietary company without crowd funding shareholders^[10] or small company limited by guarantee has been directed by a shareholder^[11] or member^[12] to prepare a Financial Report, this direction may expressly dispense the need to comply with Accounting Standards.^[13]  ASIC has power under sections 340, 340A, 341 and 341A to exempt or modify compliance with particular Accounting Standards.

Statutory breaches and consequences of non-compliance

The failure of a company to prepare and lodge financial reports in accordance with the Corporations Act is not a technical oversight, rather a statutory breach that can attract legal consequences.^[14]

Lodgement obligations

Under section 319 of the Corporations Act,^[15] Reporting Entities must lodge their Financial Report to ASIC within three (3) months of the end of the financial year.  Failure to lodge a compliant Financial Report within the prescribed period constitutes a strict breach of the Corporations Act.^[16]

Penalties for non-compliance

Breaches of financial reporting obligations expose the company to civil penalty provisions.  Section 344(1) creates an offence where a company fails to comply.  A director, registered scheme, or disclosing entity contravenes section 344 if they fail to take reasonable steps to comply with Part 2M.2 or 2M.3 of the Corporations Act.  Section 344 is a corporation scheme civil penalty provision.^[17]  This means that, where contravened, a corporation may receive financial penalty.

If a Court is satisfied that a person has contravened section 344(1), it must make a declaration of contravention under s 1317E(1).  If a declaration of contravention has been made, the Court may order the person to pay a pecuniary penalty if the contravention:^[18]

• materially prejudices the interests of the corporation or scheme or fund or its members;
• materially prejudices the corporation’s ability to pay its creditors; or
• is serious.

The pecuniary penalty applicable for an individual’s contravention is the greater of 5000 penalty units, and if the Court can determine the benefit derived and detriment avoided because of the contravention, that amount multiplied by three (3).^[19]  For a body corporate, the pecuniary penalty is the greatest of:

• “50,000 penalty units; and
• if the Court can determine the benefit derived and detriment avoided because of the contravention, that amount multiplied by three; and
• 10% of the annual turnover of the body corporate for the 12-month period ending at the end of the month in which the body corporate contravened the civil penalty provision, up to an amount of 2.5 million penalty units”.^[20]

However, where section 344 has been contravened, the Court can also grant relief under section 1322 if the requirements of that section are made out.  Where a company fails to do an act before the legislatively required time, then the obligation to do the act continues, after that time has passed, and whether or not a person is or has been convicted of a primary substantive offence in relation to failure to do the act, until the act is done.^[21]  Where the failure results in a conviction, the failure continues until the act is done.^[22]  This continuing failure amounts to a further offence,^[23] of which the penalty is the amount obtained by multiplying half a penalty unit by the number of days for which the contravention continues.^[24]

Case law

The principle that financial reporting obligations are not optional was underscored in ASIC v Sino Australia Oil and Gas Ltd [2016] FCA 42.  In that case, the Federal Court of Australia found that the company failed to provide a financial report that complied with Accounting Standards, amounting to a breach of Chapter 2M of the Corps Act.

The Court emphasised that compliance is integral to shareholder protection and market transparency, not a mere formality.  No maximum penalty is stated, but where no penalty is specific, the default penalty is 20 penalty units.^[25]  Where a provision is contravened by a body corporate, this penalty is multiplied by 10.^[26]

Links and further references

Legislation

Australian Securities and Investments Commission Act 2001 (Cth)

Corporations Act 2001 (Cth)

Cases

ASIC v Sino Australia Oil and Gas Ltd [2016] FCA 42

Further information about corporate law

If you need advice on the financial reporting obligations for a company, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstance

[1] Corporations Act 2001 (Cth) s 292(1).

[2] Corporations Act 2001 (Cth) s 292(1).

[3] Corporations Act 2001 (Cth) s 292(1).

[4] Corporations Act 2001 (Cth) s 292(2)(a).

[5] Corporations Act 2001 (Cth) s 292(2)(c).

[6] Corporations Act 2001 (Cth) s 292(2)(b).

[7] Corporations Act 2001 (Cth) s 292(3).

[8] Corporations Act 2001 (Cth) s 295(2).

[9] Corporations Act 2001 (Cth) s 296(1).

[10] Corporations Act 2001 (Cth) s 296(1A)(c).

[11] Corporations Act 2001 (Cth) s 293.

[12] Corporations Act 2001 (Cth) s 294A.

[13] Corporations Act 2001 (Cth) ss 296(1A), 296(1B).

[14] Corporations Act 2001 (Cth) s 319.

[15] Corporations Act 2001 (Cth) s 319.

[16] Corporations Act 2001 (Cth) s 314(1A).

[17] Corporations Act 2001 (Cth) s 1317E.

[18] Corporations Act 2001 (Cth) s 1317G(1).

[19] Corporations Act 2001 (Cth) s 1317G(3).

[20] Corporations Act 2001 (Cth) s 1317G(4).

[21] Corporations Act 2001 (Cth) s 1314(1).

[22] Corporations Act 2001 (Cth) s 1314(2).

[23] Corporations Act 2001 (Cth) s 1314(3).

[24] Corporations Act 2001 (Cth) s 1314(5).

[25] Corporations Act 2001 (Cth) s 1311F.

[26] Corporations Act 2001 (Cth) s 1311C.

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