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1st Interim Report - Accounts and Audit (1970)

No. 143

1969-70

PARLIAMENT OF NEW SOUTH WALES

COMPANY LAW ADVISORY COMMITTEE

REPORT

TO THE

STANDING COMMITTEE

OF ATTORNEYS-GENERAL

ACCOUNTS AND AUDIT

Ordered to be printed, 24 March, 1970

BY AUTHORITY

V. C. N. BLIGHT. GOVERNMENT PRINTER, NEW SOUTH WALES - 1970

P101171-1

1969-70-245

[85c]

TABLE OF CONTENTS

Section A	..	Introduction.
Section B	..	Disclosure of Information in Accounts and Reports of Directors.
Section C	..	The Powers, Duties, and Responsibilities of Auditors.
Section D	..	Proposal for a Companies Commission.
Section E	..	Future Work of the Committee.
Appendix A	..	Detailed Comments and Recommendations on Part II of the General Revision Bill.
Appendix B	..	List of Proposals in General Revision Bill Requiring Further Consideration.
Appendix C	..	Accounts and Audit Provisions of General Revision Bill.

(Note: References to "the Act" are to the Victorian Companies Act, 1961 (as amended to date) on which the General Revision Bill is based.

References to "the Ordinance" are to the Papua-New Guinea Ordinance (as amended to date) on which the Accounts and Audit Draft was based.

"G.R.B." refers to the Rough Draft General Revision Bill of 20th February, 1968, prepared for the Company Law Advisory Committee.)

SECTION A - INTRODUCTION

1. In August, 1967, we were appointed by the Standing Committee with the following terms of reference:

"To enquire into and report on the extent of the protection afforded to the investing public by the existing provisions of the Uniform Companies Acts and to recommend what additional provisions (if any) are reasonably necessary to increase that protection."

2. The Committee has met on numerous occasions and has reviewed the considerable body of material supplied to it by the Standing Committee, together with some 74 submissions received in answer to advertisements published by the Committee and much other material assembled by the Committee itself.

3. Having regard to the fact that the bulk of the material supplied related to the Accounts and Audit Draft considered by the Standing Committee in 1967, and that the disclosure of financial information appeared to be an obvious starting point for any study of the protection of the investing public, the Committee commenced its task by considering the Accounts and Audit Draft and the redraft of those provisions contained in Part II of the General Revision Bill prepared by the Victorian draftsman and dated 20th February, 1968. The redrafted provisions are set out in Appendix C. The Committee has now completed its review of those provisions and although some of its recommendations may require modification in the light of its consideration of other parts of the Act, it feels that the section thus dealt with is sufficiently self-contained to enable it to present an interim report covering Part VI, Divisions 1 and 2, of the Uniform Acts and Part II of the General Revision Bill.

4. The main body of this Report is confined to those matters in respect of which the Committee feels that the Ministers would wish to have a full statement of the Committee's reasons for making a particular recommendation. In some cases this is because the Committee has taken a different view from that embodied in the drafts submitted to it, or because the Committee's proposals do not emanate from any of the official material. Even in these cases, the Committee has not necessarily included its recommendation in the body of this Report, where the recommendation related only to drafting detail or did not raise any important question of policy. Conversely, where the Committee agreed with a draft proposal submitted but felt that it raised questions to which the attention of Ministers should be specifically directed, it has discussed the matter in the body of this Report. In other cases, the Committee's comments will be found in Appendix A.

5. The Committee desires to state that in view of the nature of the material submitted to it, it has been impossible to make a complete separation between those drafting proposals which relate directly to the protection of investors, and other proposals which are concerned with the general administration of the Companies Acts and Ordinances. For example, many of the provisions of tile accounts and audit sections of the General Revision Bill have only a very indirect bearing on the protection of investors, but it would obviously have been undesirable, if not impossible, for the Committee to consider only those sections of the draft which bore on the protection of investors, since consideration of the form which other sections of Part VI should take was essential to the consideration of those sections which directly concerned the Committee. Accordingly, we have not hesitated to express our views on these other sections where we thought they needed modification, even if those views might be considered, on a strict construction of the terms of reference, to lie outside them.

6. To some extent the views of the Committee as to the most desirable form which provisions of the Acts should take is dependent on a question to which reference is made later in this Report, viz., the question of the establishment of a "Companies Commission" on the lines there indicated. For reasons set out in section D, below, we think that such a body should be established, and we have indicated in various places the way in which we would modify our recommendations if such a body existed. We believe, however, that the recommendations made in this Interim Report can be carried into effect without making provision for a body of the kind we recommend, although, as stated in section D of this Report, it is impossible to be certain that some of the requirements will not impose burdens in particular cases, against which we think there should be power to relieve.

SECTION B - DISCLOSURE OF INFORMATION IN ACCOUNTS AND REPORTS OF DIRECTORS

7. "Undoubtedly one of the most potent weapons available for the protection of investors is the compulsory disclosure of information as to the past performance of the company, coupled with the safeguard against mis-statement provided by audit requirements. The report of the Jenkins Committee, the comments thereon by interested bodies in Australia, the Accounts and Audit Draft of 18th February, 1967, and the comments of interested bodies thereon, and the U.K. Companies Act 1967 have been distilled by the Officers Committee and by the Registrars, and the result is embodied in Part II of the Rough Draft General Revision Bill of 20th February, 1968, prepared for our Committee. We have considered the provisions of Part II in detail, together with the comments referred to above and such comments of the Officers and Registrars as are available from the documents furnished to us. Generally speaking, we would not regard our recommendations with respect to these provisions as involving problems of policy, and accordingly most of our recommendations will be found in Appendix A. The following matters, however, do involve questions of policy.

8. Annual Accounts and the Directors' Report: The proposals embodied in the General Revision Bill would greatly expand the information which directors are required to give to shareholders in the accounts and in their annual report. In general, we agree with this extension 'of the directors' obligations, although in Appendix A we have recommended some deletions and some additions, for reasons there stated.

9. Our study of the provisions relating to annual accounts and the directors' report persuaded us that something more was needed than mere verbal changes to individual clauses or paragraphs, in particular, we felt that the following considerations needed to be kept firmly in mind:

(a) the different functions performed by the annual accounts and the directors' reports;

(b) the need to ensure that, so far as the figures for the financial year are concerned, the accounts (including the notes thereto) are complete in themselves;

(c) the need to determine what the obligations of directors should be, and to define those obligations in express terms and not by implication;

(d) the desirability of flexibility in the annual accounts, to enable companies to present them in the most convenient way, without sacrificing any requirement of disclosure.

Our detailed recommendations in Appendix A have been framed to take account of these considerations, and it is sufficient here to explain and illustrate the way in which they have been applied.

(a) The Functions of Annual Accounts and Directors' Reports

In general, the function of the annual accounts should be to present a complete picture of the result of the year's operations and the state of affairs at the end of the year. The auditor's report is concerned with the accounts and not with the directors' report. The directors' report, on the other hand, should have two functions. In the first place, it should give the shareholders a description of the years activities and results, and in it the directors should be required to draw various specific matters to the shareholders attention. In the second place, it should be the means of bringing the shareholders' knowledge of the company's affairs up to date, and, within limits, of warning them of changes of fortune which are not reflected in the accounts;. Although it is possible to find recognition of these principles in the existing legislation, one cannot always be sure that the draftsmen of the Acts kept them in mind. For example, in section 162 (6) (d) of the Victorian Act, "where the directors are of the opinion that any current assets would not realize at least the value at which they are shown in the accounts of the company" they must give an opinion as to the amount that they might reasonably be expected to realize. The question arises whether the draftsman was thinking of the amount of the current assets as shown in the balance-sheet (a figure which would almost certainly have changed in the meantime through turnover of

stock and collection of debts), or whether he was thinking of the current assets as shown in the books of account at the date of the directors' report. If the former, the opinion would presumably be one to be formed as at the end of the financial year, and if it were held, the current assets should have been written down. If the latter, it assumed, without expressly requiring, that the directors would or might make a fresh assessment of the value of current assets as at the date on which they made their report, and the question arose whether the directors were under an implied obligation to form an opinion. As indicated above, in considering these proposals we have endeavoured to produce a consistent scheme which has regard to the functions performed by the accounts and the report, and we have endeavoured to be specific, wherever any doubt could exist, as to the time (whether end of financial year, or date of report) to which an obligation refers.

(b) Ensuring the Completeness of the Accounts

The same illustration can be taken to show the significance of this principle. On the first interpretation of the existing Act referred to above, the accounts would be incomplete without reference to the directors' report; that is to say, the directors would have assigned a value to current assets as at the end of the financial year which they did not regard as realizable in the ordinary course of business. In the G.R.B. the reference is clearly to the value shown in the accounts (as defined) and not to the accounting records of the company, so that the same difficulty applies. Similar considerations apply to section 162A (1) (i) of the G.R.B., which deals with provision for doubtful debts. We have endeavoured to ensure that the accounts are complete in themselves, and that any necessary adjustments in respect of such matters as bad debts, doubtful debts, or current assets, are made before the account's are submitted to the auditors.

We can pursue the same illustration for the purposes of this subject. Section 162 (6) (d) of the existing Act commences with the words "where the directors are of opinion" but does not require the directors to form an opinion, at least not in express terms. Section 162A (1) (j) of the G.R.B. uses the phrase "whether in the opinion of the directors ..." which may perhaps more easily support an implication that it is the duty of directors to form an opinion, but does not indicate whether they are bound to take any positive measures to enable them to form a sound opinion. We have taken the view that before the directors approve the accounts, they should take reasonable steps to inform themselves about certain matters, but that, on the other hand, when they are bringing the shareholders up to date, they should not be required to go through the same process again, but merely to disclose anything known to them at the date of the report which would make the figures given in the accounts misleading or inappropriate. Our recommendations have been framed with a view to ensuring that the nature of the directors' obligation is defined, both in respect of the preparation of the accounts, and in respect of their report.

(d) Flexibility in the Accounts

The detailed provisions of the Ninth Schedule of the G.R.B. are subdivided on the assumption that some items of information which must be disclosed are appropriately disclosed in or in relation to the profit and loss account, and others in or in relation to the balance-sheet. Some submissions were made to us on the assumption that the separation of profit and loss items between clauses 3 and 4 of the Ninth Schedule reflected an implied requirement that there should be a profit and loss account and a profit and loss appropriation account, and that the items referred to in clause 4 must be shown in the profit and loss appropriation account, and not elsewhere. This assumption is not, we think, justified, but the fact that it was made indicated that the headings of the Ninth Schedule could lead to confusion, and to the omission of some items on the ground that it was not necessary to disclose them because they had not been brought into the profit or loss for the year. In our view the Ninth Schedule should list tit: matters which are required to be disclosed in or in a note to the accounts without specifying in what part of the accounts they are to be shown. The obligation to produce a profit and loss account and a balance-sheet is created by section 162 (1) and (3), and is unaffected by our proposed amendments to the Ninth Schedule, but it will be left to the directors, with the assistance of their accounting staff, to

produce accounts complying with section 162 which best reflect the position of the company, and the risk of misinterpretation which results from the division of the Ninth Schedule into parts will be avoided.

10. Group Accounts. - The General Revision Bill proposes that the directors of a holding company should be required to vouch for the group accounts and to deal with the affairs of the group in their report. We regard this as a most desirable reform, but we would not regard it as reasonable to require the directors of a holding company to prepare and vouch for group accounts without some machinery to enable them to obtain the information required for their preparation, nor without some protection where they rely on such information and have no reason to suspect its accuracy. Moreover, some awkward problems have to be faced. If the directors have to make statements as to the state of affairs at the date of their report, their obligation to get up-to-date information from the subsidiaries should be defined, and they should be covered in some way against the inevitable time lag between the receipt of that information and the dating of their own report. Secondly, there may be cases in which the directors of the holding company have no control of a company which is in law a subsidiary. It may be a foreign corporation operating abroad, or it may possibly be a company in which the "parent" holds a majority of the ordinary shares but not a majority of the votes. If the directors, having taken all reasonable steps, are unable to procure the information required for group accounts, they should be empowered to issue their accounts without including the missing information, but with such explanations and qualifications as may be required. We have also recommended a provision requiring them to furnish the missing information when it comes to hand. We have endeavoured to provide a workable system for all these matters in our proposed section 162B.

11. The Valuation of Non-current Assets. - Amongst the submissions we have received have been a number dealing with the problem of valuation of assets, including suggestions for the adoption of current price level accounting, for the inclusion of municipal valuations of real estate, and for the periodic revaluation of fixed assets. The proposals in the General Revision Bill require certain information to be given where fixed assets or investments are taken into account on a basis other than cost, and we have discussed these provisions in Appendix A and recommended certain amendments. There is nothing to prevent a company, if it so desires, from revaluing its assets every year in accordance with current price levels, and some large international companies in fact adopt the system of "current price level accounting". We do not think, however, that it should be compulsory to do so, nor do we think it would be feasible to require all companies to revalue their fixed assets at periodic intervals. We have, therefore, proceeded on the basis that the "historical cost" system will continue to operate for the great majority of companies. There is, however, one difficulty which arises where the historical cost system is used, which has never been expressly resolved. If an asset is shown in the books at cost, or at cost less amounts written off, the question arises whether the directors are making any representation as to its present value. Section 162 (6) (d) of the present Act requires the directors in certain circumstances to disclose that current assets are in their opinion overvalued in the books. This provision, undervalued by implication, supports the view that there is no obligation to write down "non-current" assets. Logically, there should be no difference between cases in which the assets are undervalued and those in which they are overvalued, though it has sometimes been said that it is misleading to show assets at an amount higher than their true value. It has certainly never been regarded as untrue or unfair to show assets at a figure below their true value.

12. The matter is complicated by the consideration that in the case of fixed assets and investments the value of the asset to the company as a going concern may be far above its "break-up" value if it had to be separately sold. For this reason we do not think it is appropriate to treat fixed assets and unquoted investments in the same way as current assets, since current assets are expected to be realized "in the ordinary course of business" while fixed assets and unquoted investments are not. Nevertheless, the problem cannot be dealt with merely by inaction, for there have been many cases in which directors have shown an investment in a subsidiary, or a parcel of real estate, at cost, when to their knowledge events since the acquisition of the asset have shown that there is no hope of obtaining a reasonable return for the amount invested. Although it is not uncommon to find the view expressed that in such a case the accounts are not "true and fair", we believe many auditors would take the view that a statement that the asset is shown at cost involves no representation as to current value (whether higher or lower).

13. In our view, the directors should be under an obligation to take reasonable steps to ascertain whether any non-current asset stands in the books at an amount which, having regard to its value to the company as a going concern, exceeds the amount which it would have been reasonable for the directors to spend to acquire that asset. If the amount is so in excess, the directors should not be bound to write down the asset, provided they include in the accounts such explanation as is necessary to prevent them from being misleading by reason of the over-statement of the amount of that asset. Although we originally envisaged this provision as applying only to fixed assets and unquoted investments, we think it can also be applied to all non-current assets, including such intangibles as goodwill.

14. In order to give effect to these proposals, we have drafted a new subsection (6c) to be inserted in section 162. The text of the draft will be found in Appendix A. Debtors and current assets are separately dealt with in Appendix A, in connection with the discussion of section 162A (1) (i) and (j).

15. Responsibility of Directors for Failure to Comply with Part VI, Division 1. - The provisions of the existing Acts and Ordinances dealing with the liability of directors in respect of non-compliance with Part VI of the Act give rise to considerable difficulty. Section 163, which purports to impose liability on directors, refers only to "compliance by the company" and "default by the company' in respect of the "foregoing provisions of this Division". But the foregoing provisions also impose obligations on the directors themselves, as to the form and contents of accounts and the directors' report to shareholders. The provisions of section 163 of the G.R.B. are much more comprehensive, but in our view go too far, since they make it an offence for a director to "fail to comply with" the preceding provisions, and they contain expressions which might imply that a director is (prima facie at least) guilty of an offence if the accounts contain a false statement, even where the director has acted in good faith on the word of an officer whose honesty he had no reason to doubt. The detailed analysis of these provisions is contained in Appendix A, where our recommendations for amendment will be found. It is sufficient to point out here that in our view it is inappropriate to impose on each individual director liability for the failure of the directors to comply with the obligations imposed on them collectively by the provisions of the preceding sections of Part VI, Division I. What is required is that each director should be under an individual liability to take all reasonable steps to comply with the provisions, or to secure compliance with them. If he has taken such steps, he will not, and in our view should not, be liable if, for example, his co-directors issue a false report or misleading accounts, or if he is misled by the officers of the company into taking a course which unknown to him results in non-compliance with the Act.

16. Materiality. - In discussing the proposed section 163 (4) of the G.R.B. in Appendix A we have pointed out that in some cases the Act requires disclosure of an item only if it is material, and in others the obligation to disclose is unqualified. Representations have been made by various bodies that there should be a general permission given by the Act to omit items which are not material, or that it should be made a matter of defence to prove that the item omitted was not material. It is our view that no such general permission should be given, and that the defence should be confined to unintentional omissions. We have considered some of the somewhat sparse literature on the meaning of materiality, and it is obvious that in any particular case there may be widely divergent views as to whether an item is material or not, and that mere magnitude or relative magnitude is not the only determinant. Indeed in some cases the fact that an amount is unusually small may make disclosure desirable, where a larger amount would be of no special significance. In general, therefore, we have taken the view that where a specific item is considered by the Legislature to be sufficiently important to require special mention in the Act or the Ninth Schedule, the amount of that item should be shown in or in a note to the accounts, whatever its magnitude. In some cases, however, such as those provided for in section 162A (1) (o), we have thought it desirable to retain the reference to materiality.

17. We are conscious that the policy we propose may have the effect of increasing the bulk of the material required to be disclosed beyond what would be necessary if a general permission to omit immaterial items were given, but in our opinion the advantages outweigh the disadvantages. In particular, we do not think it is desirable that directors should be in a position to justify the omission of embarrassing details by pleading that the item omitted was only a little one (cf. the maidservant's plea in Mr. Midshipman Easy). An additional factor in our recommendation is that much time will be saved by eliminating discussion between directors and auditors as to whether particular items are material or not.

18. Disclosure of Turnover. - The Accounts and Audit Draft required disclosure of "gross revenue or gross sales" and also a statement of the "method and basis of calculation". It also required that business done with related corporations be shown separately. Clause 3 (a) of the Ninth Schedule of the G.R.B. requires that there be shown: "the gross revenue including gross sales, showing separately the amount arising from business done with related corporations and the amount arising from business done with other persons". The requirement to state "the method and basis of calculation" was omitted on the ground that clause 14 of the G.R.B. requires a statement of the method used "where the accounts could be misleading by reason of a failure to explain the method used ..." The reason for the omission is in our view inadequate. Failure to explain the method will not necessarily mislead, but it may leave the reader quite unenlightened.

19. On the general question of disclosure of turnover, it is to be noted that the U.K. Act of 1967 requires a statement of turnover (except in so far as it is attributable to the business of banking or discounting or to some other prescribed class of business) and the method by which the turnover stated is arrived at. There is an exception where turnover does not exceed £50,000 and the company is not one of a group. In the U.S.A., the Securities and Exchange Commission not only required a figure of global sales or turnover, but where the business consists of the production or distribution of different kinds of products, or the rendering of different kinds of services, the company must indicate, so far as practicable, the relative importance of each product or service, or class of similar products or services, which contribute 15 per cent or more to the gross volume of business done during the last fiscal year. This requirement, of course, does not extend to all companies but only to those subject to the directives of the Securities and Exchange Commission.

20. The Committee considers that the question of compelling disclosure of turnover is a major question of policy on which the final decision must rest with the Ministers. The Committee's own views are as follows:

(a) That while we do not regard such disclosure as a major weapon for the protection of investors, we feel that as such disclosure has not proved harmful where adopted, and may in many cases be helpful in enabling investors to exercise sounder judgment as to the value of investments, the balance is in favour of introducing some such requirement.

(b) That we consider that the present G.R.B. draft (which appears to assume that there is no problem in requiring a statement of "gross revenue", and that the figure so stated will be a suitable yardstick for the measurement of activity in all cases) is unsatisfactory.

(c) That we would favour a flexible provision, requiring the company to give a figure of the money amount of turnover, gross revenue or gross income, or such other figure as will give a true and fair view of the gross money value of the company's activities for the year, together with an explanation of the method adopted in arriving at the figure.

(d) We would also favour the existence of a power to dispense with the requirement or to permit the substitution of some other approved measure of the level of the company's activity. This recommendation for a dispensing power is dependent on the acceptance of our proposals for a "Companies Commission".

21. Disclosure of Ownership of Companies. - Two parts of the G.R.B. deal with the question of ownership of companies. Section 7 (e) proposes the addition of new sections 69A to 69H whereby, in effect, a holder of I0 per cent or more of the voting power must disclose his interest, even though the shares may be held by a nominee or trustee. These proposals follow closely the provisions of the U.K. Act of 1967, although the pattern of drafting is different. One important difference, however, lies in the fact that the U.K. Act contains provisions (section 34 (5), section 3 (3) and section 4 (3)) exempting certain companies (subject to the approval of the Board of Trade) from disclosure. These proposals are amongst those which we have suggested should be deferred until we have had an opportunity of dealing with them (see Appendix B).

22. The other provision dealing with this matter is the proposed section 162A (5) (G.R.B. p. 60) which requires a company which is a subsidiary to disclose in or in a note to the accounts the name of the corporation regarded by the directors as being the company's ultimate holding company, and, if known to them, the country in which it is incorporated. This provision derives from a recommendation in the Jenkins Report (paragraphs 376 and 380 (i)) which was carried into effect in section 5 of the U.K. Act of 1967. There is, however, a provision in subsection (2) of the U.K. Act exempting the company from disclosure (if it carries on business outside the U.K.) if the disclosure would in the opinion of the directors be harmful to the business of any corporation in the group, and the Board of Trade agrees that the information need not be disclosed. This exemption is similar to that provided under sections 3 (3) and 4 (3) (see paragraph 21 above) and presumably is designed to enable concealment of the British ownership of companies which carry on business abroad, where that information might be harmful to the company's business. The proposal embodied in section 162A (5) does not contain any such exemption. If we are right as to the reason for the exemption in the U.K. Act (which was not mentioned in the Jenkins Report, though the exemptions now embodied in sections 3 (3) and 4 (3) were recommended in it) one case which might call for its exercise would be that in which a company incorporated in this country, and apparently a subsidiary of a foreign-owned company, had as its ultimate holding company an Australian company. While, normally, the disclosure that the Australian business was Australian-owned should not prove harmful, the company's trading abroad could be affected by knowledge that an apparently foreign parent, perhaps enjoying some local loyalty in its country of incorporation, was in reality itself a subsidiary of an Australian company. Such a case would probably be sufficiently rare at present not to require special exemption; and it could easily be avoided in the case of companies incorporated after the new provision came into force.

23. There might also, however, be cases in which the trade of a company incorporated in Australia, having a substantial Australian shareholding, and earning profits in Asian or Pacific areas, might be adversely affected by the disclosure of the fact that it was a subsidiary of a foreign corporation.

24. So far as the main provision requiring disclosure is concerned, we think that the fact that a company is a subsidiary of another company is generally speaking, material to an investor, and more so if the ultimate holding company is incorporated abroad, since questions of competition in overseas markets may result in decisions being taken abroad to curtail the activities of the Australian subsidiary. If the ultimate holding company is incorporated in Australia, it will have to disclose its subsidiaries in its own accounts, and the question whether the subsidiary must also reveal the link is a relatively, minor one. So that the desirability of the amendment mainly depends on whether it ~s thought to be desirable to compel a locally incorporated company, which is in fact a subsidiary of an overseas corporation, to disclose the name and country of incorporation of its ultimate holding company. While, as we have said, we think that the information is of value to investors, there may be reasons of policy unconnected with the protection of investors which would weigh against the proposed amendment. We have, therefore, thought it appropriate to bring the question to the notice of the Ministers for them to make a final decision.

25. Disclosure of Director's Remuneration. - In the discussion which follows, it is convenient to omit reference to commissions for subscribing or procuring subscriptions for shares and debentures, which we agree should form part of any disclosure required, and are required to be disclosed under the present Ninth Schedule clause 1 (l), and the G.R.B. clause 3 (b) (xiii). Under the existing Ninth Schedule the accounts must show the total remuneration of all directors, including all fees percentages bonuses commissions and other emoluments, but excluding salaries, bonuses and commissions paid by way of salary to full-time directors. The result is to show, in effect, the total amount of directors' fees and emoluments, but not the salary component of the remuneration of full-time directors. The G.R.B. proposes that all emoluments of directors, including bonuses and commissions of full-time directors, but not their salaries, be shown as an aggregate amount. We do not propose that the basic salaries of full-time directors should be disclosed. On the other hand, to include bonuses and commissions of full-time directors in the aggregate of all

directors' fees may, where the amount is substantial, destroy the significance of the information given. The Committee, therefore, recommends that clause 3 (b) (xiii) be redrawn to provide for disclosure of two aggregate amounts, viz. -

(a) the aggregate of all emoluments of part-time directors;

(b) the aggregate of all emoluments of directors engaged in the full-time employment of the company, including all fees, bonuses and commissions, but excluding the amount paid to them by way of fixed salary as an employee of the company.

26. It is to be observed that the expression "emoluments" has been used. The statutory definition of "emoluments" in section 5 is as follows:

"Emoluments" includes fees, percentages and other payments made or consideration given, directly or indirectly to a director or auditor of a company or of any holding company or subsidiary of that company, whether as a director or auditor or otherwise in connection with the affairs of such company, and the money value of any allowances or perquisites.'

The definition in the Papua-New Guinea Ordinance is slightly different in form, but we prefer the Victorian and New South Wales form set out above. Clause 3 (b) (xiii) refers to "the total of the amounts paid or due and payable, as emoluments to directors". As the money value of allowances and perquisites is not paid or payable to directors, we think it would be preferable to substitute the words "received, or due and receivable", for "paid, or due and payable".

27. A further question to be considered in relation to directors' remuneration is the question of remuneration for professional services received by directors who are professional men. The existing Act does not require separate disclosure of fees paid to professional directors, although the amount so received must be included in the total figure, as being a "payment made or consideration given, directly or indirectly, to a director... whether as a director... or otherwise in connection with the affairs of such company" (see the definition of "emoluments" quoted above). The G.R.B. proposes that the professional remuneration of a director who, or whose firm, acts for or advises the company in a professional capacity, should be excluded from the total figure of emoluments, and that there should be a separate disclosure of the amounts paid or payable to directors (of the company or related corporations) and to any firm of which such a director is a member, for acting for or advising the company in a professional capacity (clause 3 (b) (xiv)). This provision singles out professional directors for special treatment. If a director, for example, is a cartage contractor or a building contractor, either individually or as a member of a firm, the consideration he receives forms part of his emoluments, and will be included in the total figure, but need not be separately disclosed. If such a director carries on his business through a company, as is normally the case, no disclosure at all would be required under either (xiii) or (xiv) of clause 3 (b).

28. The disclosure required by 3 (b) (xiv) is misleading in any event. The better view is that it is the directors' share of the gross amount received by his firm which must be disclosed. The net benefit to a solicitor or accountant is likely to be only 30 per cent to 40 per cent of the gross amount. Some lawyers take the view under the existing Act that the amount to be disclosed is not the director's share of the amount received by his firm, but the total amount received by the firm, which would be even more misleading. As 3 (b) (xiv) is now drafted, it seems clear that the total amount paid to the firm must be shown.

29. In any case, considerable difficulty arises in practice in ascertaining the amount to be brought to account. Presumably out-of-pocket expenses are not included, and these must, therefore, be separated (e.g., counsel's fees and filing fees).

30. On the other hand, if 3 (b) (xiv) were omitted altogether, and subparagraph (xiii) remained unchanged, the aggregate of emoluments would not have to include professional fees, but would have to include the benefits received by the cartage contractor or builder, unless he was incorporated.

31. On the whole, we think the best solution is to confine the disclosure of directors' emoluments to the amounts received by them in connection with "the management of the affairs of the company" (borrowing the expression used in section 196 of the U.K. Act of 1948) but to make other provisions for disclosure of other benefits received, as indicated below. We, therefore, propose:

(1) that in the definition of "emoluments" the words "in connection with the management of the affairs" should be substituted for the words "in connection with the affairs";

(2) that subparagraph (B) be omitted from clause 3 (b) (xiii);

(3) that clause 3 (b) (xiv) be deleted;

(4) that a provision (say, section 123B) be introduced, similar to section 166 of the present Act, requiring disclosure on requisition of all benefits received or receivable by any directors, otherwise than as emoluments;

(5) that directors be required to state in their report whether any of them receive benefits other than emoluments, and the general nature of those benefits. This provision will take the place of section 162A (9), which we have recommended should be omitted.

32. Redrafts of section 162A (9) and of clause 3 (b) (xiii) of the Ninth Schedule, embodying the foregoing recommendations are included in Appendix A. We have not made any draft of the proposed section 123B, which we have suggested should require disclosure of such benefits on requisition by a specified percentage of shareholders, in the same way as is now provided by section 166 of the Act in relation to the emoluments of auditors. As the insertion of the words "the management of" in the definition of "emoluments" would make the definition inappropriate in its application to auditors, we have redrafted the provisions of clause 3 (b) (xv) to omit the reference to emoluments and propose the omission of any reference to auditors in the definition of emoluments.

SECTION C - THE POWERS DUTIES AND RESPONSIBILITIES OF AUDITORS

33. We have considered the detailed proposals for amendment of the audit provisions of the Acts, and our comments on individual provisions will for the most part be found in Appendix A. We have noted that auditors have been given wider powers, especially in relation to holding companies and subsidiaries, and in general we approve of the extension of the functions of the auditor implied in these amendments. We feel however, that the history of the company failures of recent years, as recounted in the reports of inspectors, reveals a necessity for strengthening the position of auditors which may help to ameliorate, even if it cannot entirely remove, the weaknesses disclosed in the system as a whole. We say at the outset that, in our view, the public discussion which has followed these company failures has itself had a salutary effect on the current conduct of auditors, who have manifested a greater readiness to insist on proper standards and to qualify their reports if they are unable to secure observance of these standards. Nevertheless, we feel that there are two ways in which the situation can be improved. We have noted that occasions have arisen in which fears have been expressed as to the risk of actions for defamation in respect of adverse comments in the auditor's report. There seems to be no doubt that an auditor exercising his statutory function has a qualified privilege in respect of statements which he makes in the course of the performance of his duty. It has been suggested that this privilege should be made absolute, so that an auditor might be free from the fear that a jury would find that he had been actuated by malice, and indeed free from the fear that, even where there was no real evidence of malice, he might be subjected to the trouble and expense of an action brought by an over-optimistic plaintiff. We do not agree with this suggestion. There are many classes of persons who are under a duty to make statements which are the subject of a privilege which is only qualified, and the risk of being sued by a plaintiff who has no case is only one of the hazards to which every citizen is subject in greater or less degree. We do think, however, that there should be an express declaration in the Act that an auditor has a qualified privilege, and, where the statement which he is required to make is one which will in due course become a public document by being lodged with the Registrar, protection should be expressly given to those who give wider circulation to the auditor's

report, similar to the protection which would exist if it had become a public document by being so lodged. We think it is important that the express declaration should be contained in the Companies Acts themselves and not in some other statute dealing with the law of defamation. Whilst we recognize that legal practitioners ought to be familiar with the law of defamation, we are bound to say that it is a relatively specialized field, and that decisions in these matters often have to be taken at short notice. We think that if an express statement is made in that part of the Act which deals with auditors, there will be no occasion for lawyers to advise their clients that the matter is so doubtful that they should not take the risk of a libel action.

34. The other way in which we think that the position of the auditors can be strengthened is by a provision placing the auditor under a duty, in certain cases, to report breaches of the Act to the Registrar. We believe that one of the weaknesses of the present system is that an auditor who discovers some infringement of the Act during the financial year, has, in effect, no means of dealing with the situation, in the last resort, until the time comes for him to make his report on the accounts. It is true that he can take the matter up with management, or with the chairman of directors, or with the Board, but if these steps are unproductive or inappropriate he must either act as an informer against the company or wait until his statutory duty enables him to communicate his comments to the shareholders, who by this time may be unable to repair the damage. We think, therefore, that a section should be included in the Acts obliging the auditor, in the circumstances we have described, to report the matter to the Registrar. His obligation will be dependent on his being of opinion that the matter has not been or will not be adequately dealt with by bringing the matter to the notice of the directors or by comment in his annual report on the accounts. It should be pointed out that except in the case of felony, the law imposes no obligation on a private citizen to take any action in respect of criminal offences which come to his attention. In appropriate cases, the auditor will be able to secure compliance with the Act by merely indicating that he will have to report the matter to the shareholders if the accounts are not in order. But we think that his hand will be greatly strengthened if he is able to say to the management or the directorate that he is under an obligation to report the matter to the Registrar if the matter is not rectified. Accordingly, although the section we propose will impose additional obligations on auditors, we think that in the long run it will make their task easier. Upon a report being made to the Registrar, his course of action will be determined by the circumstances. Section 7 (6) gives him power to inspect books and records; the facts disclosed by the auditor may in themselves justify a prosecution; or he may regard the matter as serious enough to warrant an application for the appointment of an inspector. A draft of the proposed provision, which we would insert as section 167 subsection (8A) will be found in Appendix A.

35. A further matter which has engaged our attention is that of registration of auditors. The existing Act and the G.R.B. draft appear to contemplate that the appointment of a firm is recognized as equivalent to the appointment of all members of the firm, whether resident in Australia (including the Territories) or not. The requirement that all members of the firm so resident shall be registered company auditors implies that non-residents need not be so registered, and it would appear that under tile existing Act it is possible to appoint a firm which has no resident members. It is proposed in the G.R.B. to alter this by requiring that at least one member of the firm shall be ordinarily resident in a State or Territory of the Commonwealth, and we agree with this proposal. We think, however, that there should be an express statement in the Act that the appointment of a firm is equivalent to the appointment of all members of the firm, whether resident in Australia or not, and we also think that the provision for changes in the firm (section 165 (19) of the G.R.B.) requires some amendment. The details of these recommendations are to be found in Appendix A.

36. A subsidiary question is whether each Australian resident should be required to be registered in every State in which companies of which the firm is auditor are incorporated. The present situation is anomalous, since a non-resident partner need not be registered at all, but interstate partners (or partners resident in a Territory) must be registered company auditors in the State or Territory of incorporation of each company of which the firm is to be appointed auditor. In our view, it would greatly reduce the burdens of auditors, with a consequential saving in their administrative costs, if an auditor registered in any one State or Territory were deemed in law to be registered in every other State or Territory, and hence subject to control by the Companies Auditors Board of each State or Territory. This could be done by an amendment of section 9. It would also be necessary to amend the definition of

"registered company auditor" in section 5 (i.e., by inserting after the words "person registered" the words "or deemed to be registered"). This would save the necessity of separate annual applications for registration m each State or Territory. No doubt some adjustment of fees would be required to protect the revenue of each State or Territory, but a system of distribution of total fees could be devised.

37. Although we agree that non-resident members of a firm should be entitled to act as auditor, we think that a provision should be inserted in the Act that any consent to act and any report requiring signature by the firm should be signed by a member of the firm registered in a State or Territory of the Commonwealth, and also that the form of signature should be prescribed, viz., signature in the name of the firm with the addition of the name of the person signing.

38. Another matter which the Committee considered was whether an auditor should be disqualified from being appointed as auditor of a company of which he is a member. Many auditors already take the view that as a matter of principle they should not accept appointment in respect of such a company, but there may be cases in which the enactment of such a provision would create difficulty. In our view it would not be appropriate to legislate on this matter at the present time, but we feel that the situation should be a matter of public discussion, in which professional bodies of accountants might be expected to take a leading part. We have not had brought to our attention any actual case in which the interests of investors have been prejudiced by the fact that an auditor has also been a shareholder, and in view of the possible complications we would prefer that the question be deferred until more exhaustive investigation and discussion has taken place.

39. Tenure of Auditors. - The G.R.B. proposes an important change in the provisions relating to tenure of auditors. At present, auditors must be re-elected annually, but the G.R.B. proposes that they should hold office until death, removal or resignation. In general, we are in sympathy with the desire to strengthen the position of the auditor which is implicit in this proposal for increased security of tenure. We have had some doubt as to whether the requirement of a resolution for removal at a general meeting of which special notice has been given (G.R.B. section 165 (4)) may not create a tenure of such permanency that a company would be reluctant to replace an auditor who turns out to be inefficient or insufficiently equipped to cope with an expanding business. We have considered the position in the United Kingdom, where an auditor is automatically reappointed unless he is not qualified, or unless a resolution is passed appointing someone instead of him or providing expressly that he shall not be reappointed, or unless he has given notice of unwillingness to be reappointed (U.K. Act 1948 section 159 (2)). The Jenkins Committee (paragraph 427) recommended that an annual resolution for reappointment be passed, but this was apparently for the purpose of overcoming difficulties which would arise in relation to changes in firms, as to which they recommended that appointment of a firm should lapse where the turnover of partners, speaking generally, amounted to more than half the members of the firm. We do not think it is necessary to make such a provision, but in any event the recommendations of the Jenkins Committee have not been adopted in the U.K. Act of 1967. On the whole, we think there is little to choose between the existing U.K. procedure for removal and that provided in the G.R.B. Either system provides the auditor with greater security of tenure, which we think desirable, and we are prepared to accept the G.R.B. draft in this respect.

40. Remuneration of Auditors. - In dealing with section 165 (14) of the G.R.B. (see Appendix A) we have, for reasons there stated, recommended the deletion of the provision for fixation of the audit fee by the company in general meeting or by the directors. We think the deletion of this provision should result in the auditor's remuneration bearing a closer relationship to the work required to be done for an effective audit in the circumstances of each case. Our recommendation in this respect accords with our view that the position of the auditor should be strengthened.

SECTION D--PROPOSAL FOR A COMPANIES COMMISSION

41. As a result of its investigations the Committee has reached the conclusion that an authority should be established with power to grant relief in appropriate circumstances from compliance with the statutory requirements relating to accounts and with power also to add to or vary those requirements. In paragraph 52 we have detailed the powers which

we recommend should now be given to such an authority and we have also listed in that paragraph those other functions which in our view could appropriately be carried out by that body. We have also given consideration to the method of setting up the authority and the manner in which it should be constituted. Our observations and recommendations on these aspects are contained in paragraph 51. For ease of reference we refer to the proposed authority as the Companies Commission and our reasons for recommending its establishment are set out below.

42. There are inherent difficulties in formulating statutory requirements which will at all times and in all circumstances be properly and fairly applicable to all companies and groups of companies regardless of their size, the nature of their operations or the number and character of their shareholders. This applies particularly to accounts requirements and the Committee has considered a number of differing views and recommendations as to methods of company accounting and as to the extent and method of reporting, on a company's accounts and affairs. That these matters are at present under critical review by members of the accountancy profession and others accentuates the problem of deciding what should now be required by legislative enactment. It is particularly difficult at the present time to anticipate what new and improved concepts will later become generally accepted by accountants and the business community and it is more than likely that some requirements at present regarded as essential matters for legislation will in the future prove to be unnecessary or, having regard to the burdens they impose, undesirable.

43. While the prime objective of the Committee's recommendations is to ensure adequate protection for the investing public it has given due consideration to the effect of these recommendations on companies and on their directors and other officers. But, no matter how far it pursued its enquiries the Committee could never be assured that the statutory requirements would not in some circumstances operate harshly or prove impossible of performance. An illustration may be drawn from the existing legislation, in which there are requirements which cannot always be met; for example, the requirement of section 162 (6) (bb) as to the amount of certain contingent liabilities (see our comments on section 162A (1)(k) in Appendix A). Moreover, there will be cases under the proposed legislation where it will be desirable to provide from its inception for the possible substitution of an alternative similar requirement - see for example our proposal as to turnover in paragraph 20 (d) of this Report. Indeed, in the case of a diversified company, if turnover figures are to be fully informative, they should be subdivided according to major fields of activity, but whatever view is taken on this point, we could not in any event recommend a requirement for such disclosure in the absence of some flexible machinery for adjusting the obligation to the circumstances of particular companies or types of company.

44. As mentioned earlier, the Committee considers that the disclosure and reporting obligations should not be qualified by any general reference to materiality. We are in no doubt as to the desirability of legislating in unqualified terms even if, as at present, there is no machinery for relief. There will be cases, however, where exemption from a particular requirement will not diminish the protection of the investing public, and at the same time will save the companies concerned considerable expense. In our view the proper method of dealing with these cases is by application to a competent and independent authority.

45. One example of the possible need for relief from strict compliance with the statutory requirements arises in relation to group accounts. Representations have been made to the Committee for alteration of these requirements to allow for inclusion in the group accounts of figures relating to a company which may not come within the definition of "subsidiary" in circumstances where the shareholding in that company comprises one of the principal assets of the holding company. In these circumstances it may be as appropriate to include in the group accounts certain information relating to a substantial company in which, say, only 50 per cent of the ordinary shares are held as it would be to incorporate the accounts of an unimportant company which happened to come within the definition. The Committee does not feel that the proposed statutory provisions relating to group accounts should be altered to provide for particular cases. However, it does consider that power should be given to an outside authority so that it could where appropriate allow a holding company to include in its group accounts information relating to another company which may not be a subsidiary within the meaning of that term as defined in the Act.

46. There may also be cases where a requirement to disclose particular information should for reasons of policy include provision for exemption on application to an in-dependent authority. The following are examples arising from provisions proposed to be enacted by the General Revision Bill:

Disclosure of holding company - the proposal in section 162n (5) (see section 24 of the General Revision Bill) for disclosure in or in a note to the accounts of the name of the company's ultimate holding company and its country of incorporation. While the proposed section contains no provision for exemption (cf. section 5 (2) of the U.K. Act of 1967) it may be decided that this is desirable (see paragraphs 22-24 above).

Disclosure of subsidiaries - this is required under the proposed paragraph 11 (l) (a) of the Ninth Schedule and in this instance also it may be decided that there should be some provision for exemption (cf. section 3 (3) of the U.K. Act of 1967).

Substantial shareholdings - disclosure is required under proposed Division 3^ contained in section 7 (e) of the G.R.B. Sections 698 to 69H do not include any provision for exemption such as is found in the U.K. Act of 1967. If it is decided to enact these provisions it may also be decided that it is appropriate to include some provision for exemption.

In paragraph 21 of this Report we have referred to the question of exemption. We consider that if there is to be any provision in this regard the power to exempt should be exercised by a single body which will apply uniform standards for all companies wheresoever incorporated in Australia. The appropriate authority for this purpose would be the Companies Commission.

47. While the Committee has not yet examined in detail all the other provisions of the existing legislation there are other cases where the inevitable rigidity of the legislative requirements will in its view require some provision for the grant of relief by the Companies Commission. This applies particularly to the requirements relating to prospectuses and takeovers. An example can be found in clause 10 (1) (c) of the Fifth Schedule of the existing Act. The information required under that provision is often not available and not discoverable.

48. The Committee is also of opinion for the reasons given above that the Companies Commission should have power to alter or add to the provisions of the Act as to the form and content of a company's accounts (including group accounts) and as to the matters to be stated in the directors' report. While some reasonable limitations would need to be imposed on the exercise of this power (e.g., by requiring that it should only be exercised after due inquiry and after giving interested persons an opportunity of being heard by the Companies Commission) we regard it as important in the interests of the investing public that the statutory requirements should keep pace with modern developments in accounting and reporting to shareholders. This can be achieved by giving appropriate authority to an informed and responsible body which will be in a position to act with the minimum of delay.

49. One very important advantage which will flow from the establishment of a Companies Commission is that there will exist for the first time in this country a permanent and responsible organization, which will develop a fund of knowledge on the practical operation of the legislation and be in a position to give prompt and authoritative advice to governments as to desirable amendments in the future. The cumulative experience of an authoritative body which is regularly dealing with problems arising under the legislation will be of very material assistance in the essential task of continual review of the statutory requirements.

50. It would also be advantageous in our view if the authority now given to the various Companies Auditors Boards were to be vested in the Companies Commission. This should not only achieve some saving in the cost of operating a number of Boards but would also facilitate registrations on an Australia-wide basis and ensure uniform operation of the provisions of the legislation relating to auditors and liquidators. Disciplinary functions in relation to auditors and liquidators may still need to be exercised locally - by delegation from the Companies Commission - but the principal tasks of registration will be more economically undertaken on a centralized basis. Also we consider it may be possible

to relieve the Registrars of some of their present tasks following the establishment of the Commission. It should, for instance, be possible to arrange for prospectuses requiring registration in more than one State to be cleared for registration by the Companies Commission. We would propose to deal with this aspect in more detail at a later stage of our work.

51. The Committee has considered the manner of constituting the independent authority. The Committee regards it as essential that a single body should be constituted and that it be empowered by each of the Companies Acts and Ordinances to grant relief from and to alter or add to particular legislative requirements. A single body is essential to ensure that the powers proposed to be given, including the power of relief, are uniformly exercised. Having regard to the important nature of its functions, the Companies Commission would need to have a permanent chairman of high standing and it should include a representative from each State and Territory. Thus constituted, all the States and Territories would have the benefit of a body of high status. Each representative could also act within his State or Territory as a delegate of the full Commission on matters entrusted to him; specifically, matters which were only of local interest or which required urgent attention. Decisions on such matters would be reported back to the full Commission and would assist it to formulate any changes in the terms of the delegation which appeared to be necessary, and to formulate also general rulings. General rulings would be given by the full Commission which would also deal with matters of major importance. The functions of the Commission would be such that they could not appropriately be carried out by the Registrars, although it may be found appropriate in some States or Territories to appoint the Registrar as the local delegate of the Commission to act under the general framework established by the Commission. Clearly also the various Companies Auditors Boards would not be appropriate for a task which could only be effectively performed by a single body. The Commission would be set up for the essential and limited purposes which we propose. It would be an authority set up co-operatively by the States and Territories to avoid placing unnecessary burdens on companies and to keep the detailed accounts requirements in line with modern practice.

52. Summarized, the functions of the Companies Commission would be:

(a) to grant exemptions from:

(i) the legislative provisions as to accounts in cases where compliance would impose unreasonable burdens or result in the supply of misleading or inappropriate information;

(ii) specific requirements such as those referred to in paragraph 46 of this Report;

(iii) such other statutory requirements (e.g., as to prospectuses) in cases where on further examination of the legislation this is considered necessary;

(b) to issue general orders giving companies of a defined class power to omit specified information required by the Act or to present their accounts in a different form from that required;

(d) to perform the duties at present carried out by the Companies Auditors Boards;

(e) to undertake tasks at present carried out by the Registrars in cases where they could more conveniently be performed by a single body.

To indicate in detail the authority which we recommend should be granted to the Companies Commission in relation to (a) (i) above, we have set out in Appendix A the text of a proposed sub-section (8n) of section 162.

53. The Committee's recommendations as to the accounts and audit provisions are based primarily on the need for fuller disclosure and more extensive reporting, it considers that the statutory requirements should be definite and, within the existing legislative framework, inescapable. At the same time, it is conscious that the decision to implement these recommendations will impose substantial additional burdens on companies and their officers. As stated in paragraph 6 of this Report we believe that our recommendations can

be carried into effect without making provision for such a body as we have recommended in this section of the Report. But we are in no doubt that the establishment of a Companies Commission would make the legislation operate more fairly to all concerned, and that its establishment would be amply justified by the savings effected, and by the improvement in the operation of the legislation which would result from its creation.

SECTION E - FUTURE WORK OF THE COMMITTEE

54. The present Report completes the work of the Committee so far as relates to the Accounts and Audit Draft and Part II of the General Revision Bill, which is substantially based on the Accounts and Audit Draft. Although in parts of this Report we have necessarily followed the arrangement of the General Revision Bill, it will be obvious that we have applied our minds independently to the problems arising in this field, and where we have approved proposals made in the Bill we have only done so after independent review of the problems involved.

55. The following topics which we would regard as falling within the scope of our terms of reference, have not been dealt with:

(1) Investigations (with special reference to the Investigations Draft).

(2) The Control of Fund Raising (New Capital and Borrowings).

(3) Take-over Bids.

(4) Disclosure of Substantial Shareholdings.

(5) Enforcement of the Act.

(6) The Protection of Minorities.

(7) The Protection of Shareholders against abuses of power by Directors.

(8) The Misuse of Confidential Information.

(9) The Duties and Responsibilities of Directors (so far as not already dealt with).

56. It is obvious that if we are to complete a programme which includes the topics listed above, it will be a considerable time before our final Report can be completed. The question arises whether and to what extent the Standing Committee is minded to carry into legislation our recommendations in this Interim Report without awaiting a further report, or to set limits to the topics with which we should deal. Although it is possible that our consideration of these other topics might cause us to modify our recommendations in the present Report, we think it is unlikely that this would occur; nor do we think that if it did, any great disadvantage would result from the enactment of the Accounts and Audit provisions before any further report was received from us. We would add that although we have been able to complete this Interim Report in what we believe is a reasonable time, having regard to the magnitude of, the task, if all action on our recommendations is to be suspended until our final report, the pressure to complete that report will become extremely heavy.

57. We would, therefore, propose that the Standing Committee should give serious consideration to the adoption of the proposals contained in our Interim Report without waiting for a further report covering the topics mentioned in paragraph 55 above. If this course is taken we would propose to proceed to consider those topics and to present a further report or reports.

58. If it is decided to proceed with the enactment of the measures recommended in this Interim Report, the question would arise, how far should other provision of the General Revision Bill be carried into legislation at the same time ? Some of these provisions have no relationship with our terms of reference. Others are either directly or indirectly connected with them. In Appendix B, we have listed those provisions of tile G.R.B. which we would wish to have reserved for further consideration because of their bearing on topics with which this Committee proposes to deal in a further report.

59. So far as Topic No. 4 (Disclosure of Substantial Shareholdings) is concerned, we are aware that, at a time when this Report was almost completed, events arose which may result in decisions being taken by the Standing Committee in relation to overseas investment, and that those decisions may involve the determination of a pattern of legislation in relation to disclosure of substantial shareholdings. We, of course, recognize that our request that consideration of the relevant provisions of the G.R.B. be deferred may be affected by a decision that the subject is to be dealt with as a matter of urgency.

60. It will be realized that it has been necessary to consider the whole of Parts I and II of the G.R.B. in order to see how our recommendations might be affected by other proposed amendments. In the course of this consideration a memorandum has been prepared by the Chairman, drawing attention to a number of drafting points observed in relation to provisions not falling within our purview. This memorandum forms no part of the Committee's recommendations and is being forwarded as a separate document.

61. We would appreciate an early indication of the views of the Standing Committee on the following matters:

(1) The proposal contained in Section D, of this Report for the establishment of a Companies Commission.

(2) Whether the proposals in this Report relating to Accounts and Audit (Sections B and C) are to be proceeded with, without waiting for a further report from us.

(3) Whether our proposed future programme outlined in Section E of this Report is acceptable to the Standing Committee.

62. In conclusion we desire to say that with the single exception of our recommendation with regard to subsections (4) and (5) of section 164A of the G.R.B., the recommendations in this Interim Report represent the unanimous view of the Committee.

R.M. EGGLESTON,

J.M. RODD,

P.C.E. COX.

17th October, 1968.

INTERIM REPORT

APPENDIX A

DETAILED COMMENTS AND RECOMMENDATIONS ON PART II OF THE GENERAL REVISION BILL

A. Sections 18-23 of the General Revision Bill

These sections deal with amendments of the Principal Act consequential on or related to the proposed amendments of Part VI and the Ninth Schedule.

Section 18 (a) proposes to insert or amend the following interpretations in section 5 of the Act: "Accounts" - Approved.

"Books" - Approved.

"Current Asset" - We recommend the omission of this interpretation, which originally appeared in the Ninth Schedule in the Accounts and Audit Draft. In that draft, the term was defined for the purposes of the Ninth Schedule only. It was used in clause 3 (b) (iii) of the Schedule with reference to sales of assets other than current assets during the financial year. Since the term "current asset" is defined as an asset which would in the ordinary course of events be realizable or receivable within twelve months after the end of the financial year to which the accounts relate, there could never be a sale of current assets before the end of the financial year, and the definition is quite inappropriate for purposes of clause 3 (b) (iii). In any event, the choice of a period of twelve months from the end of the financial year is arbitrary and unsuited to the requirements of many businesses. Amongst other things, it would allow a turnover period in respect of assets of the same kind of from twelve months to two years according to the date of acquisition. Thus, in the case of a finance company making loans with a currency of eighteen months, those made in the first half of the financial year would be current assets, those made in the second half would not. Similarly, stocks of spare parts would have to be subdivided according to the expected date of realization. After careful consideration we have concluded that no satisfactory alternative definition can be suggested and that the definition should be omitted altogether, leaving the classification to be determined as a matter of accounting principle, it being noted that if it change in the method of treatment occurred, and might be misleading, there will be a duty of explanation under clause 14, and also that safeguards in relation to the treatment of current assets will be contained in the proposed section 162 (6B).

"Current liability" - Approved.

"Exempt proprietary company" - This interpretation is not considered to be a matter for our consideration.

"Group accounts" - Approved.

"Group of companies" - Approved.

"Non-current liability" - Approved.

"Profit and loss account" - Approved.

(Note. - Elsewhere in this Report we have suggested amendments of the following interpretations:

"Emoluments" - see Main Report, paragraphs 31 and 32, and Appendix A, notes on Ninth

Schedule, clause 3 (b) (xiii) and (xv).

"Registered company auditor"-r-see Main Report, paragraph 36.)

Section 18 (b) deals with the definition of "Exempt proprietary company" and is not considered to be a matter for our consideration.

Section 19 repeals subsections (I) to (6) of section 9. These are to be replaced by the provisions of the proposed section 164A on which we comment below.

Section 20 is primarily a drafting amendment necessitated by rearrangement and changes in numbering of sections of Part VI of the Act. We have not yet considered the substantive provisions of Division 4 of Part IV of the Act, and may at a later stage in our deliberations decide to recommend alterations in the application by reference of the provisions of Part VI. In the meantime, it is necessary to provide, as has been done in section 20 of the G.R.B., for the altered numbering and some further changes in numbering may result from our recommendations. We would suggest, however, that if section 162A (1) is applied, then section 162A (2) should also be applied, and that it is unnecessary to apply subsections (5) (6) (7), and (8) of section 162n to half-yearly accounts. Consideration should also be given to the question whether section 167B of the G.R.B. draft should also be applied to half-yearly accounts under section 74F.

Section 21 makes amendments consequential on the provisions requiring exempt proprietary companies to have an auditor in all cases.

Section 22 amends section 136 of the Act, which deals with the obligation to hold an annual general meeting. The amendments are approved.

Section 23 requires an auditor's certificate to be lodged with the annual return under section 158 or section 159, in cases where the accounts are not required to be lodged. Approved.

B. Section 24 of the General Revision Bill

This section substitutes new Divisions 1, 2, and 3 for Divisions 1 and 2 of Part VI of the Act. In the (t commentary which follows we have used the numbering of sections as they appear in the G.R.B., and have numbered new sections and subsections proposed by us so as to indicate where we think they should be inserted.

Section 161 (1): Approved.

Section 161 (2), (3), and (4): Subsection (1) having imposed the requirement of keeping records, subsection (2) specifies certain kinds of records which are to be taken as included in the class mentioned in subsection (1). These are:

(a) day to day cash records;

(b) records of sales and purchases which sufficiently identify the other party;

(c) a miscellaneous list of what are called "subsidiary records" some of which are "working papers", others of which (e.g., "subsidiary records ... of ... material assets or groups of assets") are presumably among the normal records which a company would keep on a more or less permanent basis.

With the exception of working papers (e.g., "determinations or estimates of unearned income") all the documents specified in subsection (2) seem to us to be of a kind which would have to be kept for audit purposes under subsection (1), and it is undesirable in our view to specify particular items and so perhaps weaken the auditor's claim to insist that some other kind of record should be kept. We think, however, that it is important to specify working papers, as these may not strictly fall within the terms of subsection (1), but their retention is often essential to the allocation of responsibility for misstatements in the accounts.

We, therefore, recommend that subsection (2) be amended to read:

"(2) In subsection (1), without affecting the generality of the expression 'accounting and other records' that expression includes such working papers and other documents as are required to explain the methods and the calculations by which the accounts have been made up from the accounting and other records of the company."

Subsections (3) and (4) create a problem. The object of subsection (3) is no doubt to require the retention of records for a long enough period to enable an adequate investigation to be made if fraud is discovered after the accounts have been audited. But subsection (4) enables the company to destroy any of the records referred to in subsection (2) (including daily cash records, records of purchases and sales, and the working papers referred to in (c) if they are no longer required for the purposes referred to in subsection (l). The purposes referred to in subsection (1) are "to enable true and fair accounts ... to be prepared from time to time" and "to enable them to be conveniently and properly audited". It would seem, therefore, that once the audit is complete, the documents referred to in subsection (2) of the G.R.B. could be destroyed. If the purpose of subsection (3) is as we have stated it, the documents referred to in subsection (2) of the G.R.B should be retained, just as much as the other records of the company, since for any such investigation the detailed records are just as important, if not more important, than the aggregate figures derived from them. The reason for the inclusion of subsection (4) is perhaps that in the Accounts and Audit Draft the words "and the documents on which those records were based" were introduced into subsection (3), and it was objected that this would impose an undue burden on companies. We think that these words should be omitted' from
subsection (3) (so that documents not required to be kept for making up the accounts, or for auditing them will not be covered by the subsection) and that subsection (4) should be omitted altogether. We should add however, that (despite the amendments to subsection (1) which envisage the compiling recording or storage of records "by electronic processes or any means other than in written or printed form") the Act does not provide that a company can, after the audit is complete, make microfilm copies of records with a view to the destruction of the originals. However, section 53Q of the Evidence Act (Victoria) (inserted by the Evidence (Reproductions) Act, 1965) provides, in effect, that after three years a microfilm copy may be kept in lieu of the original. We would suggest that section 161 (3) of the Victorian Companies Act should be expressly made subject to section 53Q of the Evidence Act, and similarly in other States and Territories where legislation similar to section 53Q exists. If there is any jurisdiction in which such a provision is not in force, a subsection should be inserted to permit microfilm copies to be substituted for the originals after three years.

Section 161 (5), (6), and (7): Approved. For reasons stated below, when dealing with section 163, we think that section 161 (6) of the existing Act should be restored as section 161 (8), but with the same penalty as that provided under section 163.

Section 161A: Approved.

Section 162: (1) For "make out and lay" read "cause to be made out and laid".

(2) Approved.

(3) For "shall lay" read "laid".

(4) For "shall lay" read "laid".

(5) (a) For "account" read "accounts".

(b) For "another company" read "another corporation incorporated in any State or Territory of the Commonwealth". This was the form of the Accounts and Audit Draft, and we think it should be retained. In the case of a wholly owned subsidiary it seems unnecessary to impose the burden of making up consolidated accounts, when a further (and different) set of consolidated accounts will have to be prepared by a holding company incorporated in another State or Territory.

(6) For "company" (when second occurring) and "company's" read "corporation" and "corporation's" (to conform with (5) (b) above).

(6A) For reasons stated below in dealing with section 162A (1) (i) we propose the insertion of a new subsection (6A) in section 162, in the terms there set out.

(6B) For reasons stated below in dealing with section 162B (1) (j), we propose the insertion of a new subsection (6B) in section 162, in the terms there set out.

(6c) The question of valuation of non-current assets is discussed in paragraphs 23 to 26 of the Main Report. In accordance with the principles there stated, we propose the following draft of a new subsection (6c):

"(6c) The directors shall (before the profit and loss account and balance-sheet referred to in subsections (1) and (3) hereof are made out) take reasonable steps to ascertain whether any non-current asset stands in the books of the company at an amount which, having regard to its value to the company as a going concern, exceeds the amount which it would have been reasonable for the directors to spend on behalf of the company as at the end of the financial year to acquire that asset, and in the case of any such asset (unless adequate provision for writing down such asset is made in the accounts) shall take reasonable steps to ensure that the accounts contain such information and explanations (whether by way of note or otherwise) as may be necessary to prevent the accounts from being misleading by reason of the overstatement of the amount of that asset."

(7) For "such auditors' reports as are required" read "the auditor's report required". Section 167 (1) only requires one auditor's report for each company. If the company is a holding company the auditor must draw attention to any qualifications in the auditor's report on a subsidiary, but the report itself need not be attached and indeed would not add anything if it were. Section 164 (3) appears to require the auditors' reports on subsidiaries to be attached to the parent company's accounts when they are sent to shareholders, but for reasons given below we think that section 164 (3) should be omitted, and in any event, section 162 (7) does not refer to section 164 (3).

(8) We suggest the following redraft:

"(8) Without affecting the generality of the preceding provisions of this section, all accounts shall comply with the requirements of the Ninth Schedule so far as that schedule is applicable thereto, but where accounts prepared in accordance with those requirements would not of themselves give the true and fair views required by this section, it shall be the duty of the directors to add such notes or explanations as are required to give such true and fair views."

Note on Section 162 (8):

The General Revision Bill form of this subsection in terms allows a company to ignore the Ninth Schedule if preparation of accounts in compliance therewith would not give a true and fair view. In our view the clause should be framed to require compliance with the Ninth Schedule with the additional requirement to add such notes, etc., as are required to give a true and fair view. In addition, if our recommendation for the establishment of a Companies Commission, with dispensing power, is accepted, we would recommend an additional clause (8A) in some such form as the following:

"(8A) The directors of any company may apply to the Companies Commission for an order relieving them from any requirement of the Act relating to the form and content of accounts or to the form and content of the report required by subsection (I) or subsection (2) of section 162s and the Companies Commission may make such an order either unconditionally or conditionally upon the substitution for the information required by the Act of such other information or material as the Commission thinks fit. The Commission shall not grant any such application unless it is of opinion that compliance with the Act would render the accounts or report (as the case may be) misleading or inappropriate to the circumstances of the company, or would impose unreasonable burdens on the company or any officer thereof. The Commission may make such order for an indefinite period or for a fixed period and may from time to time on application by the directors or without any such application (but after giving them an opportunity of being heard) revoke or suspend the operation of any such order."

We think it would also be appropriate to give the Companies Commission power to issue general orders giving companies of a defined class power to omit specified information required by the Act, or to present their accounts in a different form from that required. The matter is fully discussed in Section D of the main report.

Section 162 (9): Approved, subject to the following:

(1) If the proposed amendment of section 114 of the Act is adopted (General Revision Bill section 11 (d)), the words "(or in the case of a proprietary company having one director only, by that director)" and the words "or of the director, as the case may be" should be omitted.

(2) Subparagraph (c) of section 162 (9) imposes a new obligation on holding company directors to certify as to group accounts. The Committee is prepared to accept this proposal provided that certain consequential amendments are made for the protection of holding company directors. These are discussed below.

Section 162 (10): We suggest the following redraft'

"(10) The directors of a company shall cause to be attached to any accounts of the company to be laid before the company in annual general meeting, before the auditor reports thereon under this part, a statement signed by the principal accounting officer of the company or other person or persons in charge of the preparation of the company's accounts stating that to the best of his knowledge and belief such accounts give the true and fair views required by this section."

This draft involves three changes from the General Revision Bill:

(1) The reference to the secretary has been omitted. In our view it is sufficient to require the person or persons responsible for preparing the company's accounts to make the statement, as a certificate by the secretary will add very little by way of safeguard.

(2) It is sufficient to require a statement rather than a statutory declaration. There is always the difficulty of finding a person authorized to take statutory declarations, and, in addition, we think it unreasonable that a subordinate officer (whose employment is at stake if he refuses to sign) should face the penalties of perjury, while directors who have knowingly adopted the same accounts will only be liable under section 375 (2) for making a false statement. The maximum penalty for perjury is fifteen years, in Victoria, whereas under section 375 (2) it is $1,000 or two years or both.

(3) The General Revision Bill draft requires the officer to declare to the best of his knowledge and belief "the correctness or otherwise of the accounts". We suggest that he should be required to make the same statement as to truth and fairness as is required of the directors. There may be known areas of uncertainty (stock missing or cash not accounted for) which have been adequately provided for in the accounts, and to require the officer to state that they are "correct", or if incorrect to give some explanation, may impose an unreasonable burden.

Section 162A (1) (introductory words): in lines 6 and 7 the words "(or in the case of a proprietary company having one director only, by him)" should be omitted if section 114 is amended as proposed.

Section 162A (a) (b) (c): Approved.

Section 162A (1) (d): We think this paragraph should be omitted. It will impose a heavy burden on companies and raise difficult problems of construction. (What is a change in the nature of the fixed assets? What is a change in their character? Is the change material? Material for what purpose?) Insofar as it is intended to warn shareholders of changes in the nature of the company's activities, paragraph (b) above will cover the ground. The accounts themselves will reveal some other changes in fixed assets. The advantages to be gained from the retention of the paragraph are in our view outweighed by the burdens.

Section 162A (1) (e): Approved.

Section 162A (1) (f): We think this paragraph should be deleted. Section 129 requires the prior approval of the company in general meeting before certain kinds of payments are made to directors (i.e., payments by way of compensation for loss of office as a director of the company or a subsidiary, or as consideration for or in connection with his retirement). Section 129 (5) (a) to (e) set out certain kinds of payment which do not require such approval. The effect of paragraph (f) is to require that details of the payments which do not require approval shall be set out in the directors' report. If the word "director" includes a former director, then in each year all the pension or superannuation payments made to former directors in that year must be particularized. If it does not include former directors, but only those who are directors at the date of the report (or at the end of the financial year) then it is unlikely that there will be any payments to be disclosed. In either event, since the legislature does not require the prior approval of shareholders to such payments, we do not think there is any good reason why they should be disclosed. The amendment under discussion is to be distinguished from that proposed to be made to section 129 of the Act (General Revision Bill section 14 (a)). That amendment would require disclosure of the proposed payments which do not require approval, when proposals for payments which do require approval are being submitted to the shareholders. We would agree with such an amendment.

Section 162A (1) (g): Approved.

Section 162A (1) (h): There is a minor technical difficulty about the wording of this paragraph. The provisions requiring directors to indicate the amount declared or recommended as dividend have not always been in the Act. In the case of a company whose history goes back to a date before the requirement was introduced, the wording of (h) would literally require the directors (in the first year at any rate) to include dividends paid at that remote time. We, therefore, suggest that (h) might be reworded as follows:

"(h) The amount (if any) which the directors recommend should be paid by way of dividend, and any amounts which have been paid or declared by way of dividend since the end of the previous financial year, indicating which of such amounts (if any) have been shown in a previous report under this subsection or under subsection (2) of this section."

Section 162A (1) (i): The form of this paragraph does not require the directors to make 'any investigation or assessment of the position in relation to bad and doubtful debts but merely to declare whether or not, in their opinion, adequate provision is made to cover doubtful debts. If it is intended that the requirement to make a statement should imply a duty to direct their attention specifically to the question of bad and doubtful debts, we think the Act should expressly say so. For our part, although in general we are not in favour of attempting to define the obligations of directors by detailed provisions, we think there is a good case for an express provision to this effect. We think, too, that section 162A (1) and (2) tend to require inclusion in the director's report of statements as to the financial year and statements as to what has happened since the financial year ended, without any very definition of the time element (contrast, for example, the use of the words "have arisen" and "existing" in section 162A (1) (m) of the Accounts and Audit Draft and section 162 (6) (ha) of the Act with the words "arose" and "previous" used in the General Revision Bill). In our view, wherever doubt could arise as to the time element, words should be included to resolve that doubt. In the case of paragraph (i), we think the situation requires not only a provision creating a positive obligation to consider the question (prior to the making out of the accounts) but a further provision requiring the directors to declare that nothing has since come to their knowledge which would cast doubt on their assessment. Accordingly, we propose that a new subsection (6A) should be inserted in section 162, in the following terms:

"(6A) The directors shall (before the profit and loss account and balance-sheet referred to in subsections (i) and (3) are made out) take reasonable steps to ascertain what action has been taken in relation to the writing off of bad debts and the establishment of provisions for doubtful debts and to satisfy themselves that all known bad debts have been written off and that adequate provision has been made for doubtful debts."

Paragraph (i) of section 162A (1) can then be amended to read:

"(i) that the directors (before the profit and loss account and balance-sheet were made out) took reasonable steps to ascertain what action had been taken in relation to the writing off of bad debts and the establishment of provisions for doubtful debts, and satisfied themselves that all known bad debts had been written off and that adequate provision had been made for doubtful debts."

A further paragraph should then be added as follows:

"(ia) whether or not at the date of the report the directors are aware of any circumstances which would render the amount written off for bad debts or the amount of the provision for doubtful debts inadequate to any substantial extent."

Section 162A (1) (j): This paragraph derives from section 162 (6) (d) of the Ordinance but has been twice modified. The original requirement was that the report must state, "where the directors are of opinion that any current assets would not realize at least the value at which they are shown in the accounts of the company, their opinion as to the amount that those current assets might reasonably be expected to realize in the ordinary course of business of the company". This presumably related to an opinion held at the time of the report, but to current assets shown in the accounts as at the close of the financial year, many of which would no doubt have been realized by the time the report was signed. Moreover, it referred to any current assets and presumably was to read distributively. On the other hand, it did not require the directors to hold any opinion about the matter at all, but if they did hold the first-mentioned opinion they were bound to form an opinion as to realizable value. In the Accounts and Audit Draft, the directors were required to state their opinion as to the first-mentioned matter, and the obligation was extended to all fixed assets. The expression "all current assets as defined in the Ninth Schedule to this Ordinance" was substituted for "any current assets" (the definition introduced into the Ninth Schedule of the Accounts and Audit Draft has now been included in amendments to section 5 by section 18 of the General Revision Bill but for reasons stated elsewhere in this report, we recommend its omission). The reference to the "ordinary course of business" was deleted. The opinion was presumably one which the directors were to state as being held at the date of the report, but no specific time was fixed for its formulation. The reference to the "value at which they are shown in the accounts of the company" remained unchanged, 'so that the reference was presumably still to the current assets (and lured assets) as at the end of the financial year. Many objections were raised to the attempt to require a valuation to be put on fixed assets and the Registrars agreed that the reference to fixed assets should be deleted. However, in the General Revision Bill, the directors are required to state their opinion whether "all current assets" (the reference to the definition being omitted) "and all investments which are not quoted on any prescribed Stock Exchange in Australia or elsewhere would realize, in the ordinary course of business, at least the value at which they are shown in the accounts" and if not, their opinion as to the amount that they might reasonably be expected "so to realize" (i.e., presumably in the ordinary course of business).

It is desirable to treat current assets and unquoted investments separately.

As to current assets, since we are dealing with the current assets shown in the accounts as at the end of the financial year, the position seems to be analogous to that obtaining in relation to the treatment of bad and doubtful debts, that is to say, it is necessary, first, to ensure that any current assets which would not be expected to realize in the ordinary course of business the value shown in the books are written down in the accounts, secondly, to impose on the directors some responsibility for supervision of this function, thirdly, to require them to state that they have performed this duty, and finally to provide for the case in which circumstances subsequently come to the notice of the directors which give rise to the belief that the balance-sheet figure, even though correct at the time, can no longer be relied on.

In order to achieve these objectives, we recommend a new subsection (6n) in section 162, as follows:

"(6a) The directors shall (before the profit and loss account and balance-sheet referred to in subsections (1) and (3) hereof are made out) take reasonable steps to ensure that any current assets which are unlikely to realize in the ordinary course of business their value as shown in the accounting records of the company are written down to an amount which they might be expected so to realize."

Paragraph (j) of section 162A (1) should then be amended to read:

"(j) that the directors (before the profit and loss account and balance-sheet were made out) took reasonable steps to ensure that any current assets which were unlikely to realize in the ordinary course of business their value as shown in the accounting records of the company were written down to an amount which they might be expected so to realize."

A new paragraph (ja) should also be added as follows:

"(ja) whether or not at the date of the report the directors are aware of any circumstances which would render the values attributed to current assets in the accounts misleading or inappropriate."

It is to be noted that as a matter of drafting the proposed section 162 (6A) and (6n) could be combined into one subsection. We have considered whether the proposed paragraphs (in) and (ja) of section 162A (1) could be dispensed with, as being covered by the general requirement of section 162A (1) (o), but the Committee feels that the matters dealt with are of such importance that a specific statement should be required in respect of each.

With regard to unquoted investments, we think the test of realizable value is inappropriate. Unquoted investments are not normally intended to be realized, and the concept of realization in the ordinary course of business is one which it is impossible to quantify. However, as explained in paragraphs 23 to 26 of the main report, we have formulated provisions designed to cover the case of over-statement of the amount of non-current assets of all kinds, and if our proposed subsection (6c) is added to section 162 no further provision will in our view be necessary.

Section 162A (1) (k): The requirement to disclose contingent liabilities is a source of difficulty, both in relation to the period covered by the accounts, and the period between the close of the financial year and the date of the report. Many contingent liabilities do not have a money figure at all, and it may be impossible even to estimate the maximum possible liability in respect of them. Secondly, the maximum possible liability may bear no relation to the probable actual liability which will be incurred (a dealer who guarantees his credit sales may have a very large possible liability, but is unlikely to be called on to cover more than a small percentage of his total sales). Thirdly, in some cases, as in that of the dealer mentioned above, his total possible liability at any given date can only be ascertained by finding out how much has been paid by the principal debtors to the creditor at that date, a fact which may not be within his knowledge. Existing provisions (section 162 (6) (bb) and Ninth Schedule clause 2 (1) (r)) assume that an amount can be stated in respect of contingent liabilities, and this is presumably the maximum liability. The proposal to insert the word "estimated" in section 162A (1) (k) creates doubt as to whether what is required is the maximum possible liability or an estimate of the probate actual liability. In our view, both in section 162A and in the Ninth Schedule, the requirement should follow substantially the form of the U.K. Act of 1948 (Eighth Schedule paragraph 11). As applied to section 162A (1), (k) should be amended to read as follows:

"(k) Whether or not there exists at the date of the report:

(i) any charge on the assets of the company which has arisen since the end of the financial year and which secures the liabilities of any other person, including, so far as practicable, the amount secured;

(ii) any other contingent liabilities which have arisen since the end of the financial year stating, the general nature thereof and, so far as practicable, the aggregate amount, or an estimate of the aggregate amount, for which the company could become liable in respect thereof."

Section 162A (1) (l): Approved.

Section 162A (1) (m): We recommend that this subparagraph be altered to read as follows:

"(m) Whether or not at the date of the report the directors are aware of any circumstances, not otherwise dealt with in the report or accounts, which would render any amount stated in the accounts misleading or inappropriate."

Section 162A (1) (n): This provision derives from section 162 (6) (a) of the Act, and the Committee finds the proposed amendments satisfactory, subject to one exception. The draft in the General Revision Bill requires a statement not only as to whether the results of the company's operations for the year have been affected, but also as to whether its state of affairs at the end of the financial year were affected by items of a material and unusual nature.

As the clause is now drafted, the reference to "its state of affairs" may be a reference either to the state of affairs disclosed by the balance-sheet, or to the actual state of affairs of the company. The distinction between the two is important. On the first interpretation, the directors would only be required to draw attention to material and unusual events which affected the balance-sheet figures. Thus, where a company had sold some listed shares at a profit and others at a loss, and in each case the transaction was "material and unusual", the directors would presumably be obliged to disclose particulars of the transactions even though

there was no net effect in the balance-sheet figure. But the occurrence of events which enhanced or diminished the true value of the company's assets would not have to be disclosed as long as they were not brought to account in the books of the company. On the other hand, if the second interpretation were adopted, such events would have to be disclosed, even where no entry of them was made in the books of the company. Thus the freeing of land from the "green belt", or the discovery of oil, on the one hand, and the imposition of legislative restrictions, or a decline in market values for land in the area in which the company holds land, on the other hand, would not only have to be disclosed, but some attempt would have to be made to estimate the amount of the effect thereof, if known or reasonably ascertainable; and this would be so, even though after the decline in land values envisaged in the above example, the book value of the company's land was still less than, or equal to, its market value. These considerations point clearly to the rejection of any provision capable of the second interpretation. If the provision is to remain, therefore, there should be inserted, after "or its state of affairs", some such expression as "as shown in the balance-sheet". If, however, the provision is limited to items transactions or events of a material and unusual nature which affect balance-sheet items, there will be very few cases to which the provision applies which will not also be picked up by some other provision of the Act. Thus changes in book valuations of fixed assets or investments will be revealed under clause 9 of the Ninth Schedule; the proposed section 162 (6c) will pick up cases in which non-current assets should be written down; and items which are reflected in the results of the company's operations (including the matters referred to in section 162A (3) and transfers to or from reserves or provisions referred to in section 162A (1) (e)) will have to be disclosed in any event. Moreover, to require events which affect balance-sheet items, as distinct from the result of the year's operations, to be disclosed, while not requiring similar events to be disclosed where their effect has not been reflected in the balance-sheet, would be likely to be misleading rather than informative. Finally, there is the difficulty of deciding what is a material and unusual event for this purpose. Where the result of the year's operations is affected, this is not so difficult, since there will usually be a norm against which the event can be measured. Taking all these things into account, it is felt that the words "or its state of affairs at the end of" should be omitted. Otherwise, the General Revision Bill draft is acceptable.

Section 162A (1) (o): This paragraph introduces a new concept into the directors' report, viz., "any significant matters relating to the affairs of the company". The object of requiring a statement of this kind in the directors' report would seem to be to bring up to date the information provided for in paragraph (n). We think it is undesirable to add new expressions the interpretation of which might give rise to legal argument, and that the paragraph should be redrafted to read as follows:

"(o) Whether or not there has arisen in the interval between the end of the financial year and the date of the report, any item transaction or event of a material and unusual nature, likely in the opinion of the directors, substantially to affect the results of the company's operations for the financial year in which the report is made."

Section 162B (2): This subsection is limited to holding companies and follows, in general, the form of section 162A (1), which deals with companies other than holding companies. However, the provisions of section 162 (9) of the General Revision Bill require, for the first time, that the directors of a holding company shall give assurances as to the truth and fairness of the group accounts, and the provisions of section 162A (2) require the directors to make various statements about the group and its affairs, for which they must in some part be dependent on reports from the directors of subsidiaries. For reasons stated in paragraph 10 of the main report, we agree that directors of a holding company should be under an obligation to give information and assurances as to the group, but think that they should also be entitled to some protection, where they act on information from a subsidiary which turns out to be inaccurate, unless the holding company directors know or have reason to suspect that the information is false or misleading. We think also that an obligation should be placed on the directors of the subsidiary to supply such information, and that, where it is not forthcoming, the directors of the holding company should be allowed to qualify their report accordingly, but should be obliged to distribute the report of the directors of the subsidiary (or the information requested from them) to shareholders of the holding company within 28 days of its receipt by the holding company.

In order to achieve these objectives, we propose the insertion of a new section 162B, in the following terms:

"162A. (1) Subject to subsection (5) hereof, the directors of a holding company shall not issue the group accounts referred to in section 162 (4) or make the report referred to in section 162A (2) unless they have received from each subsidiary accounts, a directors' report and an auditor's report, all of which comply with the provisions of this Act.

(2) Where the date of the directors' report of the holding company is later than 14 days after the date of the directors' report of a subsidiary, the directors of the holding company shall take such steps as are reasonably available to them to ensure that the information contained in such last-mentioned report is supplemented or corrected by the directors of the subsidiary to a date within 14 days before the date of the report of the directors of the holding company, so far as may be necessary for the preparation of the report of the directors of the holding company.

(3) The directors of a subsidiary shall, at the request of the directors of the holding company, supply all such further information as may be required for the preparation of group accounts of the holding company and its subsidiaries, and of the report of the directors of the holding company.

(4) The directors of the holding company (subject to compliance with the provisions of subclause (2) hereof, if applicable) shall, unless they know or have reason to suspect that any accounts report or information furnished by the directors of a subsidiary are false or misleading, be entitled to rely on any such accounts report or information for the purpose of preparation of their report and of the group accounts so far as they respectively relate to the affairs of the subsidiary.

(5) Where, in the case of any subsidiary, the directors of a holding company, having taken all such steps as are reasonably available to them, are unable to obtain the accounts and reports referred to in subsection (1) hereof, or any further information required pursuant to subsection (2) hereof, or requested under subsection (3) hereof, they may issue the group accounts and directors' report of the holding company without incorporating therein or including therewith those accounts and reports or that further information but with such qualifications and explanations as are necessary to prevent such group accounts and report from being misleading.

(6) Where the directors of the holding company have issued the group accounts and directors' report in accordance with subsection (5) hereof, they shall distribute to the shareholders of the holding company, within 28 days after receipt from the directors of the subsidiary, a copy of the accounts and reports of the subsidiary, or a statement embodying such further information (as tile case may be), together with a statement by the directors of the holding company containing such qualifications or explanations of the group accounts and of their report as may be necessary having regard to the accounts, reports or information received from the subsidiary."

On the assumption that some such provisions are written into the Act, we recommend that section 162A (2) be dealt with as follows:

Paragraph (a): Approved.

Paragraph (b): Approved.

Paragraph (c): Approved.

Paragraph (d): Approved.

Paragraph (e): We recommend the omission of this paragraph (corresponds to paragraph (d) of subsection (1)).

Paragraph (f): Approved.

Paragraph (g): We recommend omission (corresponds to paragraph (f) of subsection (1)).

Paragraph (h): Approved.

Paragraph (i): We recommend redrafting as in paragraph (h) of subsection (1) but referring to subsection (1) instead of subsection (2), in the last line.

Paragraph (j): We recommend that this paragraph be amended, for reasons given in dealing with clause 3 (b) (i) of the Ninth Schedule (below) to read:

"(j) The amount, if any, of dividends paid to, or declared in favour of the holding company by each of the subsidiaries since the end of the previous financial year, and up to the date of the report, except so far as such dividends are shown in, or in a note to, the accounts pursuant to clause 3 (b) (i) of the Ninth Schedule."

Paragraph (k): This paragraph corresponds to (i) of subsection (1). It should be in the same form as we recommend for that paragraph, except that it will start with the words "that so far as debts owing to the holding company are concerned, the directors" instead of "that the directors". It should be followed by a new paragraph (ka) (corresponding to the proposed (ia) of subsection (1)) as follows:

"(ka) whether or not at the date of the report the directors are aware of any circumstances which would render the amount written off for bad debts, or the amount of the provision for doubtful debts, in the group of companies inadequate to any substantial extent."

Paragraph (l): This paragraph corresponds with (j) of subsection (1) and should be correspondingly amended, and supplemented with a new paragraph (Is) as in the case of paragraph (k) above.

Paragraph (m): This corresponds to (k) of subsection (1) and requires redrafting to follow the changes proposed in that paragraph. The redraft would read as follows:

"(m) Whether or not there exists at the date of the report:

(i) any charge on the assets of any corporation in the group which has arisen since the end of the financial year and which secures the liabilities of any other person, including se far as practicable the amount secured;

(ii) any other contingent liabilities of any corporation in the group which have arisen sine the end of the financial year, stating the general nature thereof and, so far as practicable the aggregate amount, or an estimate of the aggregate amount, for which the corporation could become liable in respect thereof."

Paragraph (n): Approved (corresponds to (l) of subsection (1)).

Paragraph (o): Corresponds to (m) of subsection (1) and can be in the same form.

Paragraph (p): Approved subject to omission of the words "or its state of affairs at the end of" (cf subsection (1) (n)).

Paragraph (q): Corresponds to (o) of subsection (1). We recommend that this paragraph now read:

"(q) Whether or not there has arisen in the interval between the end of the financial year and the date of the report, any item transaction or event of a material and unusual nature, likely, in the opinion of the directors, substantially to affect the results of the operations of any corporation in the group for the financial year in which the report is made."

Section 162A (3): This subsection was approved subject to the following modifications:

Paragraph (a): For "principals" read "principles".

Paragraph (b): As this paragraph stands, with the word "material" included (which was not in the Accounts and Audit Draft) it gives rise to difficulties of interpretation. To say that the expression "item (&c.) of a material and unusual nature" includes "any material writing off" seems to imply that a writing off must be included, even if it is not unusual, if it is "material", and that the word "material" in this sentence has reference to magnitude, rather than significance for an investor. But a very small writing off may be significant, and in some cases even more significant than a large one. This points in the direction of requiring any writing off, large or small, usual or unusual, to be shown. But this is in fact provided for by clause 3 (b) (x) of the Ninth Schedule as at present drafted, and it would detract from the force of section 162A (3) if paragraph (b) merely required the repetition of something that is already stated in the accounts. If, therefore, clause 3 (b) (x) of the Ninth Schedule remains in the Bill, our recommendation is that paragraph (b) should be omitted. Its omission will not be equivalent to a declaration that a writing off of bad debts need never be mentioned under sections 162A (1) (n) or 162A (2) (p). If the writing off is an event of a material and unusual nature, it will still have to be mentioned by virtue of those general words.

Paragraph (c): As drafted, this is capable of being interpreted as requiring disclosure only where there has been an increase or decrease in value from year to year. In some cases, the object of the change in the basis of valuation may be to conceal a variation which would otherwise appear in the accounts. We recommend that the clause should be redrafted in some such form as the following:

"any change in the method of valuation of the whole or any part of the trading stock, where the effect of such change is material, stating the amount of such effect."

Paragraphs (d) and (e) were approved.

Section 162A (4): This subsection was approved, subject to consequential amendments being made to cover the omission of some paragraphs from subsections (1) and (2) and the re-lettering resulting from such omissions.

Section 162A (5): See Main Report.

Section 162A (6) (7) (8): These subsections correspond with section 162 (8) (9) (10) of the existing Act, except that the existing subsections do not extend to options to take up shares of other companies in a group. The Committee is in agreement with the draft but considers that, in accordance with the general principle that the directors' report should bring the members' information up-to-date, the subsections should be amended to provide that the information is given in respect of the period since the end of the financial year as well as the period of the financial year itself. If this is done it would be desirable to insert a provision to avoid the necessity of repeating information given in a previous report. Indeed, some economy of space could be achieved by combining subsections (6) (7) and (8) into two subsections, as follows:

"(6) Where any option to take up unissued shares of the company or (where the company is a holding company) of any corporation in the group of companies of which it is the holding company has been granted by the company or corporation at any time, the report under subsection (1) or (2), as the case may be, of this section shall state:

(a) in the case of an option so granted during the financial year or since the end thereof:

(i) the name of the person to whom, and the name of the corporation in respect of the shares in which, the option was granted, except where the option was conferred generally on all the holders of shares or debentures, or of a class of shares and debentures, of the company or other corporation;

(ii) the name and classes of shares in respect of which the option was granted;

(iii) the date of expiration of the option;

(iv) the basis upon which the option is or was to be exercised; and

(v) whether the person to whom the option was granted had or has any right, by virtue of the option, to participate in any share issue of any other corporation;

(b) particulars of shares issued during the financial year or since the end thereof, by virtue of the exercise of any option;

(c) the number and classes of unissued shares under option as at the date of the report, the prices, or the method of fixing the prices, of issue of those shares, the dates of expiration of the options, and the rights, if any, of the holders of the options to participate by virtue of the options in any share issue of any other corporation.

(7) Where any of the particulars required by subsection (6) have been given in a previous report such particulars may be furnished by reference to such report."

Section 162A (9): This subsection replaces section 162A (7) of the Accounts and Audit Draft, which followed the recommendation of the Jenkins Committee (paragraph 99 (n)) recommending the disclosure of particulars of management contracts in which directors were interested. A provision permitting inspection of such contracts by shareholders is to be found in section 13 of the G.R.B. introducing a new section 123A into the Act. Section 162n (9) of the G.R.B. is based on section 16 (1) (c) of the U.K. Act of 1967, and requires disclosure if there subsists at the end of the financial year "or there has at any time in that year subsisted" a contract with the company in which a director had an interest (being, in the opinion of the directors, 'a contract of significance to the business of the company and in which the interest of the director is or was material). The report required by the section must contain the details set out in subparagraphs (a) to (e) of the draft. We can envisage cases in which the disclosure required by this section would fill several pages of the directors' report. Moreover, in some cases the directors will only be able to perform their duties under the section by making extensive enquiries from branches and subsidiaries to ascertain whether they have entered into contracts with companies in which directors have an interest, and having obtained this information they will then have to consider whether the contracts are "of significance to the business of the company or of the subsidiary" and whether the interest of the director "is or was material". This is to be contrasted with the position under section 123 of the existing Act, under which a director may comply with his obligation to disclose his interest to fellow directors by giving a general notice of his share-holdings &c. It is to be noted that the Jenkins Committee was of opinion that it was neither desirable nor practicable to require any such general disclosure (para. 96, p. 33). We have made enquiries from London to ascertain whether section 16 (1) (c) of the U.K. Act has given rise to any difficulties, but so far neither of our London informants has had experience of such cases. In our view the provision should be deleted from this draft, and the proposal reexamined after there has been an opportunity to assess the operation of the U.K. Act. In another part of this report we have proposed the addition of a new section 123B enabling 10 per cent of members to requisition for a statement of indirect benefits received by directors. We have also recommended that for section 162A (9) there should be substituted a provision for which we suggest the following draft:

"(9) Where a director receives or is to receive a benefit (other than a benefit included in the aggregate amount disclosed under clause 3 (b) (xiii) of the Ninth Schedule or the fixed salary of a full-time employee) by reason of a contract made by the company or any subsidiary with that director, or with a firm of which he is a member, or with a company in which he has a substantial shareholding, the fact that such benefit has been or is to be received, and the general nature of such benefit, shall be stated in the report."

It is to be noted that we have left the term "substantial share-holding" undefined in this draft. If the proposed Division 3n of Part IV is ultimately adopted, this term will be defined for the purposes of that Division (see G.R.B.) and that definition could be incorporated by reference. We have recommended (see Appendix B) that the provisions of the proposed Division 3n of Part IV be deferred until we have had an opportunity of considering them. We would see no harm in leaving the term "substantial share-holding" undefined in the meantime.

Section 162A (10): This is a new provision suggested by the Stock Exchanges and the Queensland Company Law Advisory Committee, requiring the directors, in their report, to explain any difference between the amount of tax prima facie payable on the published profit and the amount provided in the accounts, where the difference exceeds 15 per cent. Such disclosure is already required in the case of listed companies by section 3.c (5) of the A.A.S.E. Listing Manual. The proposed subsection differs slightly (but not materially) in wording, and also in requiring the explanation to be included in the directors' report, rather than (as required by the Stock Exchanges) as a note to the published accounts. Although a majority of the Committee felt that it would be preferable to include the explanation in the directors' report, it was agreed that, having regard to the existing Stock Exchange requirement, and in order to avoid repetition of the same information in the report and accounts, the subsection should follow the Stock Exchange provision by requiring the statement to be included in a note to the published accounts.

We therefore recommend that this subsection be transferred to the Ninth Schedule, with appropriate changes in wording (e.g., omit "the report under subsection (1) or (2), as the case may be, of this section shall give" and add at the end of the section "shall be given as a note to the accounts."). We suggest that it be numbered as clause 4A of the Ninth Schedule.

Section 162A (11): Approved.

Section 162a: We propose the insertion of a new section 162a of which a draft is set out above.

Section 163: This section gives rise to considerable difficulty. In the existing section, subsection (1) is limited to two kinds of offence by a director, viz., failing to take all reasonable steps to secure compliance by a company with the preceding provisions of the Division, and having by his own willful act been the cause of default b), the company thereunder. Subsection (2) provides a defence to a charge of the first kind. In fact, the preceding provisions of the Division consist only of three sections; section 161 contains its own penalty provision (subsection (6)) whereas sections 161n and 162 impose duties on the directors, but not on the company, so that the existing section 163 is inapplicable to them.

The Accounts and Audit Draft and the General Revision Bill made substantial changes in the form of section 163, and also dropped subsection (6) from section 161. As a result of this omission, there is no penalty provision for "managers", on whom duties are imposed by section 161, but they can presumably be charged under section 379 (maximum penalty $100) instead of under 161 (6) (maximum penalty three months' imprisonment or $200 with additional default penalty). Section 163, in the form proposed in the General Revision Bill, will create offences by companies as well as by directors, and will apply to failure to comply, as v, ell as to failure to take reasonable steps to secure compliance. As applied to a director this means that an individual director can be charged with failure to comply with sections 162 and 162A which impose a collective responsibility on the directors as to preparation and presentation of accounts and reports. In our view, as stated in paragraph 15 of the main body of this Report, the liability of a director should be confined to liability for failure to take reasonable steps to comply with the provisions or to secure compliance (either by the directors or by the company). In order to avoid too much complication in the section, it would be desirable to restore section 161 (6) in its original form but increasing the penalty to equal that imposed by section 163. If this were done not only managers but also subordinate officers who knowingly and wilfully authorized or permitted the commission of offences under the section would be penalized, and we think this is desirable.

If section 161 (6) is restored, then section 163 (1) can be redrafted to read:

"(1) Subject to the succeeding provisions of this section, if a director of a company fails to take all reasonable steps to comply with or to secure compliance with any of the preceding provisions of this Division, or has by his own willful act been the cause of any default under any of those provisions, he is guilty of an offence against this Act.

Penalty: $400 or imprisonment for six months."

If subsection (1) is amended as proposed, subsection (2) can remain unchanged, except that we think the word "all" should be inserted before the words "reasonable steps", to make the wording conform with subsection (1). It is to be noted that subsection (2) is limited to cases in which the non-compliance is "by a company" (as in the existing section). Primarily, this will apply to the obligation to keep records under section 161. The result will be that in such a case the director may discharge himself by showing in effect that he believed on reasonable grounds that competent staff were employed to perform the task, and he need not, while he holds that belief, take steps to check the performance of the task. Where, however, the duty of compliance is imposed not on the company but on the directors, a director cannot excuse himself merely by saying he left it to someone else whom he believed to be competent; but, of course, before he has any case to answer it must be shown that he failed to take all reasonable steps, and the view may be accepted that in certain circumstances it would be reasonable for a director appointed, say, for his technical knowledge, to accept the assurances of more experienced fellow directors as to compliance with the provisions. Subsection (3) of section 163 is a new provision (suggested by the Law Society of New South Wales), making it a defence for the director to prove "that he acted in good faith on a statement or opinion which he had no cause to believe to be untrue or unreliable, furnished by an auditor of the company" and (this should read "or") "in the case of a director of a holding company, that he acted in good faith on a statement or opinion, which he had no cause to believe to be untrue or unreliable, furnished by an officer or auditor of a subsidiary of which he was not, at the time when the statement was made or the opinion given, a director". This subsection contains the following implications:

(a) That the mere making of an untrue statement in a directors' report is prima facie an offence (section 375 (2) makes it an offence to make a false statement in such a document "wilfully", "false in a material particular" and "knowing it to be false", but the penalty is greater);

(b) That it is no defence to prove that the director was misled by an officer of the company, nor, if the director was also a director of a subsidiary, by an officer of that subsidiary;

(c) That a director may rely on a statement of an auditor, although in the ordinary course of events the auditor will report on the accounts of the directors.

As to (a), we think the Crown should have to prove that the director failed to take reasonable steps. If the Crown makes a prima facie case of such failure the director may prove that he acted on statements from officers or auditors in order to show that he took all reasonable steps, but until a prima facie case is made he should not have to defend himself. The proposed subsection (3) implies, as stated, that a prima facie case is made out merely by proving that an untrue statement was made. As to (b) if the director is misled by any officer, either of the company or of a subsidiary, he should not be liable for the untruth of the statement, provided he took all reasonable steps to ensure compliance with the Act.

As to (c), while there may be cases in which an auditor supplies information to the directors, it seems wrong in principle to protect the director where he relies on the auditor.

For these reasons, and particularly because we think this subsection tends to weaken the position of an innocent director, we recommend that it be omitted.

Section 163 (4): We do not agree with this subsection in its present form. The Act sometimes requires disclosure of an item only if material (e.g., in section 162 (6), where the word "materially" is used - cf, section 162A (1) (n) of the G.R.B.). In other cases, the obligation to disclose is unqualified. The choice between the two kinds of obligation has, so far as we are concerned, been made deliberately. To introduce this provision m its present form is, in effect, to write in the requirement of materially as an element in every offence of non-disclosure in the accounts (but, of course, with the burden of proof placed on the defendant). In many cases where small items are omitted, their very smallness may be the matter which would arouse suspicion, yet a

defendant may plausibly argue that he thought it unnecessary to make the disclosure because it was not of a material amount and did not affect the true and fair view. We would, however, approve the subsection if it were confined to cases of inadvertence, and accordingly recommend that for the words "the omission was immaterial" there be substituted the words "the omission was not intentional and that the information omitted was immaterial".

The subsection should also be amended by omitting the words "to comply with, or" from lines 1 and 2 of the draft, to conform with the suggested amendment of subsection (1).

Section 163 (5): This subsection was approved, subject to redrafting to make it clear that proof of the stated intent would not deprive the Court of the power to impose a fine. It is suggested that for all the words following the words "the offender" there be substituted the expression "is liable to a penalty of imprisonment for one year or a fine of $400 or both".

Section 163 (6): Approved.

Section 164 (1): Approved.

Section 164 (2): Approved.

Section 164 (3): This subsection was introduced by the Accounts and Audit Draft and was not the subject of any comment by the bodies to which it was circulated. However, it raises a serious problem. Read in conjunction with section 164 (1) it requires that shareholders of a holding company shall receive not merely a copy of the auditor's report on the holding company accounts and the group accounts but "the auditor's report on each account and each set of accounts comprised in the group accounts". Section 162 (4) requires a holding company to lay "group accounts" before the general meeting at the same time as its own accounts are so laid. Section 162 (7) requires that the accounts of the company (which, in the case of a holding company, includes "group accounts" by virtue of section 5 as amended by the G.R.B.) shall be audited before they are laid before the company in general meeting and that "such auditor's reports as are required by subsection (i) of section 167 shall be attached to or endorsed upon them when they are so laid".

[NOTE - We have proposed an amendment of section 162 (7), but it is immaterial for this present purpose.]

Section 167 (1) requires an auditor's report on "all accounts required to be laid before the company in general meeting during his tenure of office", which, similarly, includes group accounts in the case of a holding company. Section 164 (3) seems only to be capable of two meanings: either it requires no more than section 162 (7), section 167 (1) and section 164 (1) already require (in which case it is superfluous), or it means that all the reports of the auditors of all the subsidiaries must be sent to persons entitled to receive notice of general meetings of the company. In the case of a holding company with a large number of subsidiaries this would add enormously to the bulk of the annual reports and accounts. Unless the report of the auditor of the subsidiary were qualified, this would be purely formal material, and section 167 (i) requires the holding company auditor to set out any such qualifications in his report on the group accounts. We therefore recommend that section 164 (3) should be deleted.

Section 164 (4): Approved.

Section 164 (5): Approved.

Section 164A (1): Introductory words--approved.

Subparagraph (a): As indicated in our Main Report, paragraphs 35 to 37, we recommend that an auditor registered in any one State or Territory should be deemed to be registered in any other State or Territory. If this recommendation is accepted section 9 of the Act and the definition of "registered company auditor" in section 5 of the Act should be amended to cover this and no amendment would then be required in this paragraph.

Subparagraph (b) - Approved.

Subparagraph (c) - Approved.

Section 164A (2) - Approved.

Section 164A (3) - Approved.

Section 164A (4) and (5): These provisions were the subject of disagreement among members of the Committee. Two members considered that having regard to the probable development of companies in remote areas, and to the fact that under the G.R.B. it is proposed that the accounts of all companies should be subject to audit, some such power as is given by these subsections is likely to be required. Their expectation is that the power would be sparingly used by the Companies Auditors Board, and only used if the conditions laid down have been satisfied. The third member disagreed, being of opinion that no justification had been shown for the provision, and that an audit by a person who was not qualified should not in any circumstances be regarded as a substitute for a proper audit. The subsections were accordingly approved by a majority decision.

Subsection (6): As stated in paragraph 35 of the main report, we think there should be a positive provision enabling the appointment of a firm as auditor, and we would propose a new subsection (5a) in somewhat the following terms'

"(5A) Subject to subsection (6) hereof, a firm may be appointed as auditor, and such an appointment shall be taken to be an appointment of all persons who are members of the firm, whether resident in a State or Territory of the Commonwealth or not, at the date of the appointment."

Subsection (6): Subject to the comment made in respect of subsection (1) (a) (above) this subsection is approved.

Subsection (7): Approved.

Subsection (8): Approved. We think, however, that having regard to the fact that non-resident partners may be members of a firm appointed under tile section, it should be provided that the consent should be given by a resident member. This should also apply to the signature of reports. We accordingly propose the addition of a new subsection (9) in the following terms:

"(9) Any consent or report required to be signed on behalf of a firm appointed or to be appointed in accordance with this section shall be signed by a member of the firm who is a registered company auditor, who shall sign in the firm name, with the addition of the name of the member so signing."

Section 165: Subsection (i): We recommend the insertion of the words "or a firm" after the words "a person or persons" in line 4. This will make it clear that the appointment may be of a single named individual, of more than one named individual, or of a number of persons described by a firm name.

Subsection (2): It is noted that the G.R.B. proposes a change in the existing law, so that an auditor will, in effect, hold office for life, subject to removal. At present he must be annually re-elected. We have discussed this question in the Main Report (paragraph 39) and concluded that the present draft of subsection (2) is generally acceptable, but recommend the following changes:

(a) We recommend the insertion of the words "or a firm" after the words "or persons" in line 4.

(b) We also recommend that there should be express provision that a vacancy occurs where an auditor becomes disqualified under the terms of section 164A (1) or (6). This could be achieved by adding at the end of the section the words "or (subject to subsection (19A)) until such auditor ceases to be capable of acting as auditor in accordance with the provisions of subsection (1) or subsection (6) of section 164A".

Subsection (3): Approved.

Subsection (4): Approved. It has been suggested that since an auditor cannot resign without the consent of the Board, removal from office under this subsection should be subject to the like consent. We see considerable difficulty in making such a provision workable, whether it required consent to be obtained before the passing of the resolution or afterwards. On the whole, we think the provisions for enabling the auditor to place his case before the shareholders, and the fact that the proposal to remove him will come to the Board's notice, provide a sufficient safeguard against the use of the power of removal to attempt to silence the auditor, and we approve the subsection as it stands.

Subsections (5) (6) and (7): These are approved in principle but it is to be noted that they do not contemplate the case of an auditor which is a firm being removed. A number of drafting questions need to be solved, viz.; in the case of a firm, to whom should notice be sent under subsection (5) (a), what should be done to amplify the words "by him" in (5) (h), what is the appropriate addition to "his right to be heard orally", and why do (7) (a) line 6 and (7) (b) line 5 refer to the appointment of "another person" without reference to "persons" as in subsections (1) and (2)? We suggest also that reference to "a firm" be added here as we have recommended in the case of subsections (1) and (2).

Subsection (8): Approved subject to the comments on subsection (9) below.

Subsection (9): if it is sufficient to use the phrase "appoint an auditor" in the last line of subsection (8), the same phrase should suffice in subsection (9). if it is thought necessary to use the more lengthy form, we suggest adding the words "or a firm" after "person or persons" in line 3 of subsection (9), and substituting the same phrase (i.e. "person or persons or a firm to be the auditor or auditors of the company") for the words "an auditor" in the last line of subsection (8).

Subsection (10): Approved. The Committee noted that subsection (10) of section 165 of the existing Act has not been reproduced in the G.R.B. The effect of this omission is to remove the power of an exempt proprietary company to dispense with auditors, so that if this proposal is carried into effect every company ^sill have to have an auditor. As we do not regard exempt proprietary companies as coming within the scope of our instructions to make recommendations in relation to the protection of the "investing public" we make no comment on this proposal.

Subsection (11): We recommend the insertion of the words "or firm" after "person" in line 1, and e the words "or its" before the word "nomination" in line 4. We also recommend deletion of the words "he held office as auditor of the company immediately before the meeting, or" from lines 3 and 4. Where a person has been appointed auditor to fill a casual vacancy under subsection (3) (7) (8) or (9), or by the director under subsection (1), we think he should be specifically nominated before his temporary appointment, convened to a life tenure.

Subsections (12) and (13): Approved in principle, subject to drafting amendments to provide for "persons" and "firms".

Subsection (14) In our view the provisions of the Acts in relation to the fixation of auditors' fees an cumbersome and may in some cases be unfair to auditors. An auditor must consent in advance to act a, auditor. Under the existing provisions his fees are frequently fixed before the work is done, and he cannot (under the G.R.B.) resign without the consent of the Board. He must either obtain a fixation of his fee (by the meeting or by the directors) before he knows what work is involved, or run the risk that the amount subsequently fixed will be inadequate to compensate him for the work involved. Discovery of inadequate or dishonesty in the keeping of accounts or mere expansion of the company's business may involve substantial, additional work. We see no reason why an auditor should not be in the position of any other professional man employed on a quantum meruit basis, especially as his responsibilities are imposed by Statute, and extend beyond the mere protection of shareholders. We therefore recommend that subsection (14) be amended to read:

"(14) The reasonable fees and expenses of an auditor of a company are payable by the company."

It is to be noted that the remuneration of auditors must be disclosed in the accounts, under the provisions of the G.R.B. and under the amended provisions recommended by us.

Subsections (15) (16) (17) and (18): Approved.

Subsection (19): In our view, a member of a firm who desires to retire from a firm which, after his retirement, is no longer qualified to act under section 164A (6) should obtain the consent of the Board; otherwise the provisions of section 165 (15) may be defeated. A further difficulty about subsection (19) is that under it, a person who becomes a member of the firm must be "otherwise qualified to act as auditor". If this includes registration, the result is that a non-resident and unregistered partner may act if he is a member of the firm at the time of appointment, but not if he subsequently becomes a member of the firm. It is to be noted that under proposed amendments to section 9 of the Act (G.R.B. section 2 (f)), if adopted, residence in a State or Territory will become a condition precedent to registration. We think that subsection (19) should be replaced by the following subsections:

"(19) Where a firm has been appointed auditor of a company, and the persons constituting that firm change by reason of retirement or withdrawal of a member or by reason of the admission of new members, the firm as constituted after the change of membership shall subject to subsection (19A) be deemed to have been appointed auditor of the company as from the date of such change, in place of the firm as previously constituted.

(19A) Where on the retirement or withdrawal from a firm of a member thereof the firm will no longer be capable, by reason of the provisions of section 164A (6) (a), of acting as auditor of any company, the member so retiring or withdrawing shall (if otherwise qualified) be deemed to be the auditor of the company unless or until he obtains the consent of the Board to his retirement.

(19B) Nothing in subsection (19) or (19^) shall be read as enabling a person or firm to act as auditor or to prepare any report where to do so would involve a contravention of the provisions of subsection (1) or subsection (6) of section 164A."

We think also that a further subsection (19c) should be added to prevent an auditor from freeing himself of his office, without the consent of the Board, by becoming disqualified, e.g. by accepting employment with an officer of the company. We suggest the following form:

"(19c) A person who has been appointed auditor of a company or who is a member of a firm so appointed shall not while such appointment continues wilfully disqualify himself or the firm of which he is a member from acting as auditor of the company."

Subsection (20): Approved.

Section 167: Our comments on this section are made on the assumption that our proposals for a new section 162n are adopted. We envisage that group accounts will not be prepared until the directors of the holding company have obtained accounts, directors' reports, and auditors reports from all subsidiaries, except in the special case where, after having taken all reasonable steps, the directors are unable to obtain the material sought from the subsidiary. Subparagraph (c) (iii) of section 167 (1) appears to assume that all auditors' reports on subsidiaries will be available to the auditor of the holding company, and if, as we think, it is necessary to provide for the case in which they cannot be obtained, some modification of the subparagraph is necessary. On the other hand, subparagraph (c) (i) may be taken to imply that there may be some subsidiaries on which the auditor is not reporting. In fact, the auditor of the holding company does not report on subsidiaries, nor on their accounts, but on the group accounts (in one form or another). In our view the auditor of the holding company should first state of which of the subsidiaries he is the auditor, and then state

whether or not he has examined the accounts and auditors' reports of all subsidiaries whose accounts are included (whether separately or in a consolidation) in the group accounts. We also think that where the auditor of a subsidiary has made any statement pursuant to section 167 (2), even though it may not amount to a "qualification", such a statement should be brought to the attention of the shareholders of the holding company. We therefore propose that section 167 (1) (c) be redrafted as follows:

"(c) in the case of group accounts:

(i) in respect of which of the subsidiaries (if any) he has acted as auditor;

(ii) whether or not he has examined the accounts and auditors' reports of all subsidiaries whose accounts are included (whether separately or in a consolidation) in the group accounts;

(iii) whether or not he has satisfied himself (&c. as in (c) (ii) of the G.R.B. draft);

(iv) whether or not the auditor's report on the accounts of any subsidiary was made subject to any qualification, or any comment made under subsection (2) of this section, and, if so, what; and."

Subsection (2): We agree with this subsection, subject to the following:

Subparagraph (g): In our view the words "are valid" should be deleted and the words "he agrees with" inserted after the words "whether or not" in the third line.

Subparagraph (h): We have recommended the deletion of clause 16 of the Ninth Schedule and therefore recommend the deletion of this subparagraph also.

Subsection (3): In our view this subsection should be deleted. It either amounts to no more than a statement of the existing content of the auditor's duty, or it imposes a heavier duty of enquiry and verification than at present exists. We think the former view is correct, in which case the subsection is unnecessary. If the latter view is the correct one, we would delete it on the ground that we do not favour any extension of the responsibilities of auditors in this respect.

Subsections (4) (5) (6) and (7): Approved.

Subsection (8): This provision to some extent covers some of the ground which we propose should be covered by a new subsection (8A) of section 167 (see paragraph 34 of the Main Report). Subsection (8) is dealing with a special case, and is worded so as to give the auditor no option as to whether he reports the matter to the Registrar or not. Our draft of subsection (8A) does not impose so absolute an obligation, since it will apply to a variety of breaches or failures, some of which may be trivial, and some of which may be committed to persons other than the directors, and hence may be adequately dealt with by a report to the directors. In the case of the defaults mentioned in subsection (8), we agree that the obligation to report should be absolute, and we have inserted words in our draft of (8A) to prevent overlapping between the two subsections.

Subsection (8A): As explained in paragraph 34 of the Main Report, we recommend the insertion of a provision requiring the auditor to report breaches of the Act to the Registrar, subject to certain qualifications. One draft we propose is as follows:

"(8A) Except in the cases provided for in subsection (8) of this section, if the auditor, as a result of his investigation of the company's accounting and other records, is satisfied that there has been a breach or non-observance of any of the provisions of this Act, and the circumstances are such that in his opinion the matter has not been or will not be adequately dealt with by comment in his report on the accounts or by bringing the matter to the notice of the directors he shall report the matter to the Registrar [and any communication so made to the Registrar shall be the subject of qualified privilege]."

The words in brackets can be omitted if the proposed section 167AB (referred to below) is appropriately

Subsection (9): Approved.

Section 167A (1) and (2): Approved.

Section 167AB: For reasons stated in paragraph 33 of the Main Report, we propose the insertion of a ???????? section expressly declaring that an auditor has qualified privilege in respect of any reports made in the performance of his functions as auditor, and, in the case of reports which will in due course become public to obtain documents by being lodged with the Registrar, protecting persons who publish such documents before they are so lodged.

Section 167B: Subsections (1) (2) and (3): Approved.

The Institute of Chartered Accountants has raised the question whether the auditor of a Bank or Life Insurance) Company should be required to state that the accounts are properly drawn up so as to give the true and fair views required to be given by section 162, having regard to the fact that the disclosure required in their

Subsection (11): We recommend the insertion of the words "or firm" after "person" in line 1, and of the words "or its" before the word "nomination" in line 4. We also recommend deletion of the words "he held office as auditor of the company immediately before the meeting, or" from lines 3 and 4. Where a person has been appointed auditor to fill a casual vacancy under subsection (3) (7) (8) or (9), or by the directors under subsection (1), we think he should be specifically nominated before his temporary appointment is converted to a life tenure.

Subsections (12) and (13): Approved in principle, subject to drafting amendments to provide for "persons" and "firms".

Subsection (14). In our view the provisions of the Acts in relation to the fixation of auditors' fees are cumbersome and may in some cases be unfair to auditors. An auditor must consent in advance to act as auditor. Under the existing provisions his fees are frequently fixed before the work is done, and he cannot (under the G.R.B.) resign without the consent of the Board. He must either obtain a fixation of his fee (by the meeting or by the directors) before he knows what work is involved, or run the risk that the amount subsequently fixed will be inadequate to compensate him for the work involved. Discovery of inadequacy or dishonesty in the keeping of accounts or mere expansion of the company's business may involve substantial additional work. We see no reason why an auditor should not be in the position of any other professional man employed on a quantum meruit basis, especially as his responsibilities are imposed by Statute, and extend beyond the mere protection of shareholders We therefore recommend that subsection (14) be amended to read:

"(14) The reasonable fees and expenses of an auditor of a company are payable by the company."

It is to be noted that the remuneration of auditors must be disclosed in the accounts, under the provisions of the G.R.B. and under the amended provisions recommended by us.

Subsections (15) (16) (17) and (18): Approved.

(19a) Nothing in subsection (19) or (19A) shall be read as enabling a person or firm to act as auditor or to prepare any report where to do so would involve a contravention of the provisions of subsection (1) or subsection (6) of section 164A."

We think also that a further subsection (19c) should be added to prevent an auditor from freeing i himself of his office, without the consent of the Board, by becoming disqualified, e.g. by accepting employment with an officer of the company. We suggest the following form:

Subsection (20): Approved.

Section 167: Our comments on this section are made on the assumption that our proposals for a new section 162B are adopted. We envisage that group accounts will not be prepared until the directors of the holding company have obtained accounts, directors' reports, and auditors' reports from all subsidiaries, except in the special case where, after having taken all reasonable steps, the directors are unable to obtain the material sought from the subsidiary. Subparagraph (c) (iii) of section 167 (1) appears to assume that all auditors' reports on subsidiaries will be available to the auditor of the holding company, and if, as we think, it is necessary to provide for the case in which they cannot be obtained, some modification of the subparagraph is necessary. On the other hand, subparagraph (c) (i) may be taken to imply that there may be some subsidiaries on which the auditor is not reporting. In fact, the auditor of the holding company does not report on subsidiaries, nor on their accounts, but on the group accounts (in one form or another). In our view the auditor of the holding company should first state of which of the subsidiaries he is the auditor, and then state

"(c) in the case of group accounts:

(i) in respect of which of the subsidiaries (if any) he has acted as auditor;

(ii) whether or not he has examined the accounts and auditors' reports of all subsidiaries whose accounts are included (whether separately or in a consolidation) in the group accounts;

(iii) whether or not he has satisfied himself (&c. as in (c) (ii) of the G.R.B. draft);

(iv) whether or not the auditor's report on the accounts of any subsidiary was made subject to any qualification, or any comment made under subsection (2) of this section, and, if so, what; and."

Subsection (2): We agree with this subsection, subject to the following:

Subparagraph (g): In our view the words "are valid" should be deleted and the words "he agrees with" inserted after the words "whether or not" in the third line.

Subparagraph (h): We have recommended the deletion of clause 16 of the Ninth Schedule and therefore recommend the deletion of this subparagraph also.

Subsections (4) (5) (6) and (7): Approved.

Subsection (8): This provision to some extent covers some of the ground which we propose should be covered by a new subsection (8^) of section 167 (see paragraph 34 of the Main Report). Subsection (8) is dealing with a special case, and is worded so as to give the auditor no option as to whether he reports the matter to the Registrar or not. Our draft of subsection (8A) does not impose so absolute an obligation, since it will apply to a variety of breaches or failures, some of which may be trivial, and some of which may be committed by persons other than the directors, and hence may be adequately dealt with by a report to the directors. In the case of the defaults mentioned in subsection (8), we agree that the obligation to report should be absolute, and we have inserted words in our draft of (8A) to prevent overlapping between the two subsections.

The words in brackets can be omitted if the proposed section 167AB (referred to below) is appropriately worded.

Subsection (9): Approved.

Section 167A (1) and (2): Approved.

Section 167AB: For reasons stated in paragraph 33 of the Main Report, we propose the insertion of a new section expressly declaring that an auditor has qualified privilege in respect of any reports made in the performance of his functions as auditor, and, in the case of reports which will in due course become public documents by being lodged with the Registrar, protecting persons who publish such documents before they are so lodged.

Section 167a: Subsections (1) (2) and (3): Approved.

The Institute of Chartered Accountants has raised the question whether the auditor of a Bank or Life Assurance Company should be required to state that the accounts are properly drawn up so as to give the true and fair views required to be given by section 162, having regard to the fact that the disclosure required in their

case is more limited than that required by section 162 itself. We think that provision should be made for a more limited form of statement, as is done in paragraph 3 (2) of the Ninth Schedule of the U.K. Act of 1948. Paragraph 23 (2) of the Eighth Schedule of that Act provides that "the accounts of a banking or discount company shall not be deemed, by reason only of the fact that they do not comply with any requirements ... from which the company is exempt by virtue of this paragraph, not to give the true and fair view required by this Act." Paragraph 3 (2) of the Ninth Schedule, dealing with matters to be stated in the auditors' report, after referring to "true and fair view" adds the words "or, as the case may be, give a true and fair view thereof subject to the non-disclosure of any matters (to be indicated in the report) which by virtue of Part III of the Eighth Schedule to this Act are not required to be disclosed". Although the point raised by the Institute relates only to the duties of auditors, the directors and the persons referred to in section 162 (10) (if our proposed amendment is accepted) are under an obligation to make statements as to the truth and fairness of the accounts, and we think a further subsection (4) should be added to section 167B providing that the accounts referred to in subsection (I) shall not be deemed, by reason only of the fact that they do not comply with any requirements of this Act which do not apply to such accounts, not to give the true and fair view required by this Act.

A further subsection (5) should be added providing that in the case of such accounts where any person is required to make a statement under section 162 (9) or (10) or section 167 as to whether such accounts give the true and fair views required by section 162, he may qualify such statement by adding the words "subject to section 167B of the Act".

Section 374B: This is an amendment of the Victorian Act only. In the case of Territories and the other States, which have not yet adopted the provisions of the Companies (Defaulting Officers) Act, 1966, a corresponding amendment should be made to section 303.

Section 375 (2): Approved.

Section 378A: The Committee agreed in principle with this proposal, it felt, however, that the section should be confined to false or misleading statements, it also felt that to penalize an officer of the company with up to two years' imprisonment and a fine of $1,000 for making a statement to an ordinary creditor was too severe a penalty, since the officer might be doing no more than trying to persuade a creditor to defer drastic action against the company, it therefore recommends that the reference to creditors should be deleted. At the same time, it felt that debenture holders and trustees for debenture holders were in a special position as they are recognized as having a special claim to be supplied with information. The Committee therefore recommends the following amendments of the draft of section 378A:

(1) In line 3, for "any statement" substitute "any false or misleading statement".

(2) In paragraph (a), for "or creditor" substitute "debenture holder or trustee for debenture holders".

The phrase "of an officer" in paragraph (c) should read "or an officer".

Amendments to Fourth Schedule

Section 15 of the Accounts and Audit Draft recommended the following redraft of Regulation 3 of Table A and Regulation 3 of Table B:

"3. Subject to the Ordinance [Act], any preference shares may, with the sanction of an ordinary resolution, be issued on the terms that they are to be redeemed or at the option of the company are liable to be redeemed."

This amendment is not referred to ill the General Revision Bill, probably because the punctuation of the Victorian Act eliminates the difficulty about tile existing clause. We would suggest that, for uniformity, the form suggested by the Accounts and Audit Draft be adopted in all States and Territories.

Amendments to Eighth Schedule

(a) Proposed new paragraph 11: Approved.

(h) (i) The word "audited" has been omitted from the quoted (old) heading of the paragraph, and also from the proposed new heading. We think it should be inserted in both places.

(ii) Approved.

(iii) The amendment as such (which merely makes use of the new definition of "accounts") is unobjectionable. But the provision which it amends seems to contemplate that, although under section 161 the company's accounting and other records must be kept in the English language, the accounts which the directors are required to submit to the auditor and to lay before the general meeting may be in a foreign language. In our view, it is implied in the requirement to cause accounts to be made out and laid before the annual general meeting that the accounts shall be in English, and it is only such accounts that are required to be audited. But in any case, section 371 (1) provides for a translation in the case of documents in a foreign language. We therefore recommend that the words "and if any such balance sheet or account is in a foreign language ... correct translation" should be omitted from the Eighth Schedule.

The above draft changes the period for exemption of proprietary companies as suggested by the Institute of Chartered Accountants. It omits the requirement that the accounts shall be certified to be a true copy, but the return has to be signed by a director manager or secretary (at least under section 158) and it must have attached to it the certificates and auditors' reports mentioned above. The audited half-yearly accounts required by section 74F must be lodged with the Registrar under that section. The accounts laid before the annual general meeting must cover the period since the accounts last so laid (s. 162 (1)). Accordingly, the only material which could possibly be omitted would be a set of accounts audited by the company's auditors which for some reason was not placed before the company in general meeting. This could only occur, we imagine, if the directors asked the company's auditors for an audit of the accounts for part of a year for some special purpose, and in such a case the material available to the company's auditors would be similarly available for inclusion by them in their report on the annual accounts. It is to be noted that other proposals for amendment of this Part of the Eighth Schedule are contained in G.R.B. section 58 paragraph (b) (vi) and (vii). These are to some extent a duplication of G.R.B. section 28, and for reasons stated above, we prefer the form we have suggested.

Ninth Schedule

Clause 1: In our view the division of the schedule into parts should be abandoned. The subdivision in the General Revision Bill tends to suggest that the only items which need appear in, or in a note to, the accounts are those which would normally appear either in the profit and loss account or the balance-sheet or, more specifically, that the matters specified in Part II (Profit and Loss Account) need only be disclosed if they are in fact brought into the profit or loss for the year, in fact, these items are only required to be shown "by way of note or otherwise" and there is no particular reason in some cases for attributing them to one heading or the other. Other items {such as 3 (b) (iv) -"the amount of any other profit arising otherwise than in the ordinary course of business") need not appear in the profit and loss account at all. Further, the heading of Part V - "Provisions Applying to Accounts Generally" would suggest that Parts II and III do not apply to Group Accounts (Part IV). If, as we suggest, the headings are dropped, section 162 (1) and (3) will still require the presentation of a profit and loss account and balance sheet. Section 162(8) and the Ninth Schedule will require all the information there specified to be set out somewhere, leaving it to the accountants to show the information as they think most appropriate, and to the directors and auditors to ensure that the accounts so prepared give a true and fair view. In our view, therefore, the heading "Part I - Preliminary" and the whole of clause 1 should be deleted.

Clause 2: Interpretation of "related corporation" - approved.

Interpretation of "reserve": The Committee approved this interpretation, but felt that some further provision was required. Although the term "reserve" is (negatively) defined for the purposes of the Schedule, what is really needed is a direction that in the accounts themselves, the term "reserve" is not to be used to describe provisions for known liabilities, depreciation and the like. We therefore recommend that after subclause (1) of clause 2 there be inserted a new subclause (1A) in the following terms:

"(1A) The term 'reserve' shall not be used in any accounts to describe any amount which is excluded by the provisions of subclause (1) of this clause from the meaning of that term for the purposes of this Schedule."

Interpretations of "Current Asset", "Current Liability" and "Non-current Liability"

These definitions appeared in clause 2 of the Ninth Schedule in the Accounts and Audit Draft, but have been transferred to section 5 in the G.R.B. As stated above we recommend that the interpretation of "current asset" be deleted.

Clause 2 (2): Approved.

Clause 3 (a): See Main Report.

Clause 3 (b) (i): Dividends: Under the draft General Revision Bill, as it stands, section 162a (2) (j) requires a statement as to dividends from each subsidiary separately to be included in the directors' report, but 3 (b) (i) allows dividends received or due and receivable from "related corporations" to be shown as a single amount. In our view, dividends brought into account as part of the year's income should be stated in the accounts (and therefore subject to audit) and the amount in respect of each subsidiary should be separately stated. We therefore recommend the addition, at the end of 3 (b) (i), of the words "showing the amounts in respect of each subsidiary separately". We do not consider it is necessary to distinguish between the holding company and related corporations other than subsidiaries.

If clause 3 (b) (i) is amended as proposed, we think section 162a (2) (j) can be confined to an "updating" provision, so that it would now read:

"(j) the amount, if any, of dividends paid to or declared in favour of the holding company by each of the subsidiaries since the end of the previous financial year and up to the date of the report, except so far as such dividends are shown in, or in a note to, the accounts pursuant to clause 3 (b) (i) of the Ninth Schedule."

Clause 3 (b) (ii): Interest: In our view, there is a difference in kind between interest received from a holding company and interest received from a subsidiary, and it is inappropriate to aggregate them under one heading if, as we think, disclosure of interest paid and received within the group is desirable. We therefore recommend that for (A) and (B) there be substituted the following:

(A) the holding company;

(B) subsidiaries;

(D) other persons.

Clause 3 (b) (iii): As pointed out in dealing with the definition of "current asset", that definition is quite inappropriate for the purposes of this subparagraph. Assuming our recommendation for the omission of the interpretation of "current asset" to have been accepted, we approve this subparagraph subject to one modification, viz., that for the words "which is brought into account" there be substituted "indicating whether or not it has been brought into account". We think that such profits should be disclosed in, or in a note to, the accounts, whether or not they are brought into the profit and loss account. While they will ordinarily be detectable under clause 4 (d), it is desirable that the obligation be expressly stated.

Clause 3 (b) (iv): Approved.

Clause 3 (b) (v): This is the correlative provision to 3 (b) (ii) dealing with interest paid as opposed to interest received. For similar reasons, we recommend that the subdivision into (A) the holding company(B) subsidiaries (C) other related corporations and (D) other persons, which was proposed in the Accounts and Audit Draft, should be restored.

Clause 3 (b) (vi): Approved subject to the substitution of "indicating whether or not it has been brought into account" for "which is brought into account", as in 3 (b) (iii).

Clause 3 (b) (vii) (viii) and (ix): Approved.

Clause 3 (b) (x): Approved, subject to the substitution of "the accounts" for "the balance-sheet" in line 2. The separation of debtors required by the Ninth Schedule may not be shown in the balance-sheet, but in the notes thereto, which form part of the accounts (section 5) but do not necessarily form part of the balance-sheet.

Clause 3 (b) (xi): Approved, subject to the substitution of "the accounts" for "the balance-sheet" in line 2 (see note on (x) above).

Clause 3 (b) (xii): This was also approved in principle but will be deleted if our recommendation in relation to clause 4 (e) is adopted.

Clause 3 (b) (xiii) and (xiv): See Main Report. If the recommendations there made are accepted, subparagraph (xiii) could be redrafted as follows:

"(xiii) separately, the total of the emoluments received, or due and receivable (whether from the company or otherwise) by:

(a) directors of the company engaged in the full-time employment of the company and its related corporations (including all bonuses and commissions received or receivable by them as employees but not including the amount received or receivable by them by way of fixed salary as employees);

(b) other directors of the company:

including, in either case, commissions for subscribing or agreeing to procure subscriptions for, any shares iv or debentures of the company or any related corporation, and indicating the portion, if any, of the total amount contributed or to be contributed otherwise than by the company."

Subparagraph (xiv) would be omitted.

The definition of emoluments would also need to be amended as indicated in the Main Report, a new subsection (9) of section 162n inserted (as recommended above), and a new section (say 123s) drafted, requiring disclosure of benefits on requisition, similar to the present provisions of section 166 but applying to directors instead of auditors. There should also be a provision excluding the payment or reimbursement of out-of-pocket expenses from the definition of "emoluments" (see Pook v. Owen (1968) 2 W.L.R. at p. 598). We suggest the addition, at the end of the definition, of the words "(but not including the payment or reimbursement of out-of-pocket expenses incurred for the benefit of the company)" (see draft at end of our comments on clause 3 (b) (xv), below).

Clause 3 (b) (xv): Our proposal to introduce the words "the management of" in the definition of emoluments (see Main Report paragraph 31) renders that definition inappropriate to the position of auditors. For this reason we would suggest that the reference to auditors should be deleted from the definition, and the word "emoluments" deleted from 3 (b) (xv). In case the auditors receive any benefits from the company otherwise than in return for services, we think a statement should be required as to whether such benefits are received and the general nature thereof. We propose the following draft:

"(xv) the amounts (including benefits in kind) received or due and receivable by the auditors for their services to the company, showing separately amounts in respect of:

(A) the auditing of the accounts; and

(B) other services;

and indicating the portion of each such amount contributed or to be contributed otherwise than by the company, and stating whether the auditors receive any other benefits and if so the general nature thereof."

Having regard to the changes we have recommended in the definition of emoluments, we set out hereunder a draft of the amended definition:

"'Emoluments' includes fees percentages and other payments made or consideration given, directly or indirectly, to a director of a company or of any holding company or subsidiary company of that company, whether as a director or otherwise in connection with the management of the affairs of such company, and the money value of any allowances and perquisites (but not including the payment or reimbursement of out-of-pocket expenses incurred for the benefit of the company)."

Clause 3 (c): The information required by clauses 3 (d) and 4 (b) read together will provide the amount referred to in 3 (e), which can therefore be omitted. If not, it should be amended in the same way as 3 (d) below.

Clause 3 (d), 4 (a) and 4 (b): Clause 3 (d) should, in our view, require a statement of the amount of income tax attracted by the operations of the year and we assume that this is what the words would be held to mean. But the words "in respect of the financial year" appear in the introductory words of clauses 3 and 4, and when so used they may relate merely to accounting entries made in the accounts of that year. To avoid possible ambiguity we think that in clause 3 (d), 4 (b) and 4 (c) the words "income tax in respect of" should be replaced by the words "income tax attributable to". Subject to these amendments 3 (d), 4 (a) and 4 (b) were approved.

Clause 4(c): We recommend the following changes:

(l) Line 1, delete "in the financial year" as being unnecessary and in most cases inaccurate. The words "in respect of the financial year" in the introductory words of clause 4 should be sufficient.

(2) Line 2, substitute "attributable to" for "in respect of" (as in 3 (d) and 4 (b)).

(3) Line 3 to end of paragraph - omit all the words following "financial year" (for reasons stated under 4 (e) below).

Clause 4(d): For reasons discussed below, in relation to clause 5 (a) (vi), the Committee recommends be amended to require that, for the future, the origin of amounts set aside, or proposed to be reserve, should be stated. This can probably be best achieved by splitting the paragraph into two, viz.:

"(d) any amount set aside, or proposed to be set aside, to any reserve, stating the origin of such amount;

(da) any amount withdrawn, or proposed to be withdrawn, from any reserve;."

(e): The form of this paragraph is such as to require a statement of amounts' withdrawn and not applied for the purposes of a provision only in the case of provisions not specifically provided for. Clause 3 (b) (xii) makes a similar requirement in relation to provisions for doubtful debts, and 4 (c) in relation to income tax: but no such requirement is laid down for provisions for depreciation &c. (clause 3 (b) (viii)). We therefore recommend that the word "such" be omitted from line 3 of clause 4 (e), that paragraph (xii) of clause 3 (b) and the latter portion of clause 4 (c) ("and any amount withdrawn ... ") be deleted and that 4 (e) be split into two paragraphs, so that it would now read:

"(e) any amount set aside to a provision (other than a provision specifically provided for in this Schedule);

(ea) any amount withdrawn from any provision where the amount withdrawn was not applied for the purposes of the provision;".

[The words "this Part of" have been deleted on the assumption that the division of the Ninth Schedule into Parts is to be abandoned.]

Clause 4 (f), (g), (h), and (i) were approved.

Clause 4n: We recommend the insertion of section 162^ (10) (in a modified form) in this position (see above).

Clause 5 (a): Subparagraphs (i) to (v): Approved.

Subparagraph (vi): The Committee noted that the Registrars desire the retention of the word "purpose" in this subparagraph, whereas the Institute of Chartered Accountants proposes the substitution of the word "origin". Neither expression is free from difficulty, especially having regard to the problems that might be encountered by companies in relation to reserves of long standing, whichever expression were adopted. The Committee agreed, however, that it was important in some cases to know the origin of reserves, and that, in relation to future transfers to reserves, this could be provided for by amending clause 4 (d) as indicated above. Subject to this amendment being made, the Committee recommends the deletion from 5 (a) (vi) of the words "and indicating clearly its purpose".

Subparagraphs (vii) and (viii): Approved.

Subparagraph (ix) (B): We recommend the omission of the words "bad and". We have already recommended (in relation to section 162^ (l) (i) and our proposed new section 162 (6A) that directors be required to take reasonable steps to satisfy themselves that all known bad debts have been written off. Subject to the above amendment we approve of subparagraph (ix).

Clause 5 (b): This paragraph was approved subject to the following:

Subparagraph (iii): We think there is a significant distinction between debentures held by the holding company and other related corporations, and we recommend that the four categories included in the Accounts and Audit Draft, be restored, viz.:

"(A) subsidiaries;

(B) the holding company;

(D) other persons."

Subparagraph (v): For the same reasons we recommend the restoration of the three categories ((A), (B), and (C) of subparagraph (iii) above).

Subparagraph (vii): This subparagraph is, strictly speaking, out of place in paragraph (b) and we recommend that it be replaced by a new paragraph (ha), and that subparagraph (viii) of S (b) be renumbered as (vii). In conformity with our comments on section 162A (1) (k), the new paragraph (ha) should read:

"(ba) if not otherwise shown, contingent liabilities, stating the general nature thereof and, so far as practicable the aggregate amount, or an estimate of the aggregate amount, for which the company could become liable in respect thereof."

We are also of the opinion that the requirement to distinguish between secured and unsecured contingent liabilities should be restored, and that this can be done by amendment of clause 6 (below), by substituting for the words "amount owing by the company as shown in the accounts" in line 1 of clause 6, the words "liability or contingent liability shown in the accounts".

Clause 5 (c): Introductory words approved.

Subparagraphs (i) to (iv): Approved.

Subparagraph (v): Having regard to amendments proposed to clause 9 (below), it will be unnecessary to provide for (D) and (E) as separate classes, and we therefore propose that for (D) and (E) as drafted, there be substituted the expression "(D) Other corporations".

Subparagraph (vi): As in the case of subparagraph (v) above, for (D) and (E) substitute "(D) Other corporations".

Subparagraph (vii): Approved. It is to be noted that, as drafted, trade debts owing by subsidiaries and bills receivable from subsidiaries will appear under this heading and not under subparagraph (viii). This represents an alteration of the existing law, but we think it is a desirable one, if the safeguards recommended in relation to the writing off of bad debts and providing for doubtful debts (see above) are adopted.

Subparagraphs (viii) and (ix): Approved.

Subparagraph (x): We think the reference to "the values" of goodwill &c. should be omitted. What is required is the amount which stands in the books; we have provided in clause 9 (below) for additional disclosure in respect of items shown otherwise than on the basis of cost, and in section 162 (6c) for cases where the amount shown in the books is an overstatement. Moreover, we think that it is sufficient to provide for one aggregate sum under this heading, as in the U.K. Act (Second Schedule clause 8 (2)). We therefore propose that this subparagraph should read:

"(x) the aggregate of the amounts of any items of goodwill and of any patents and trademarks, insofar as they have not been written off."

Subparagraphs (xi) and (xii): Approved.

Clause 6: As indicated above we think that the requirement to distinguish between secured and unsecured contingent liabilities should be restored. Accordingly, we think this clause should be redrafted to read:

"6. In respect of each liability or contingent liability shown in the accounts, the payment of which is secured by a charge on the assets of the company, whether registered or unregistered, there shall be shown a statement that it is so secured and the extent to which it is secured, and each such liability or contingent liability shall be distinguished from any other liabilities or contingent liabilities the payment of which is not so secured."

Clause 7: Approved.

Clause 8: In the light of our comments on "materiality" in paragraphs 21 and 22 of the Main Report, we recommend the omission of this clause except for a transitional provision to deal with cases where the assets or liabilities cannot be separated at the date of coming into operation of the G.R.B. If subparagraph (a) were to be retained in any form, it would be necessary to amend it to make it clear which class of asset or liability was being treated as immaterial. For example, it should not be permissible for the directors to show one aggregate sum under the heading "Loans to directors and other persons". But if the subparagraph is redrafted to prevent such a practice, there is not likely to be much saving of space. We therefore recommend that clause 8 be amended to read:

"8. Where at the date of coming into operation of the [G.R.B.] the records of the company are not such as to enable the separation of classes of assets or liabilities required by this Act to be separately shown, the total of such classes may be shown, together with a note indicating that the classes are not separable, but in respect of transactions occurring thereafter separate records shall be kept in respect of each such class."

Clause 9: Subclause (1): Approved.

Subclause (2): This clause as it stands in the G.R.B. only requires the net amount standing in the books to be shown, unlike the U.K. Act and the present Ninth Schedule, both of which require a basic amount to be shown, and the amounts written off the basic amount. We have redrafted the subclause to retain this requirement, and also to provide for the case where a valuation has been made of part of a class of assets. The draft proceeds on the assumption, which we think is inherent in the G.R.B. draft, that any basic figure which is not cost must be a valuation of some kind. We have also taken into account the possibility that the

valuation may be made at the time when an asset is taken into the books (e.g. where a grazing company buys on a "walk-in walk-out" basis, it will often have a valuation of machinery made for the purpose of depreciation calculations). Our recommended draft is as follows:

"(2) Subject to subclause (3) hereof, there shall be shown in respect of each class of fixed assets or investments referred to in the accounts:

(a) the cost thereof, or (at the option of the directors) where they have been valued, the amount thereof as so valued, and, where the valuation applies only to part of such a class, separate totals for such of the assets as have been valued and for the remainder of the assets of that class;

(b) the aggregate amount written off in respect of each class or part of a class since the date of acquisition or valuation, as the case may be; and

Subclause (3): Under clause 9 (3) of the G.R.B., where part of an asset shown at an aggregate amount is sold after the commencement of the 1961 Act, there shall be deducted from the amount at which the asset is shown in the books "the amount of the valuation as at that date of the assets that have been sold". The date referred to is the commencement of the Companies Act, 1961. This draft assumes that a valuation as at that date is available. The draft differs from the existing Act, which requires the price obtained for the assets sold to be deducted. We think the principle of the G.R.B. is correct, but that the draft requires modification to provide for the case where no valuation as at the relevant date is in fact available. We propose the following draft:

"(3) For the purposes of subclause (2) of this clause, tile net amount at which any assets stood in tile company's books at the commencement of the Companies Act, 1961 (after deduction of the amounts previously provided or written off for depreciation, diminution in value or amortization) shall, if the figures relating to the period before that commencement cannot be obtained without unreasonable expense or delay, be treated, until a valuation is made, as if it were the amount of a valuation of those assets made on the date of commencement of that Act, and where any of those assets are sold, that net amount (less the net amount at which the assets sold stood in the books as at that date, or if no separate amount is available, their estimated value as at that date) shall be treated as if it were the amount of a valuation of the remaining assets made on that date."

Subclause (4): We think the expression "provided for" in line 2 of the G.R.B. draft and in subparagraph (c), should be replaced by the expression "dealt with", in order to avoid the use of "provided for" in a different sense from the word "provision" used elsewhere in the clause. We also think the word "revenue" should be restored, in place of "profits" in subparagraph (b) (as in the Ninth Schedule of the existing Act). We also think the introductory words "Subclause (2) of this clause does not apply" should be replaced by the words "Subparagraphs (h) and (c) of subclause (2) of this clause do not apply". This change will make it necessary to state either cost or value as a basic figure in respect of assets dealt with under subclause (4). We also recommend the substitution of "method" for "means" in subparagraph (e).

Subclause (5): The G.R.B. draft refers to "an investment" and the subclause might be read as requiring the quoted market value of each parcel of shares to be separately shown. Moreover, since there was in the G.R.B. no requirement to distinguish quoted and unquoted investments in subsidiaries and related corporations, it would be impossible to make any significant comparison of book value and market value of investments of that kind. We accordingly propose that the clause be red rafted to provide for separate totals for quoted and unquoted investments in each class (this incidentally enables the elimination of 5 (c) (v) (D) and 5 (c) (vi) (D) together with the aggregate quoted market value of the quoted investments of each kind. The draft we propose is:

"(5) If any investments of a kind for which subparagraph (iv), (v) or (vi) of paragraph (c) of clause 5 of this Schedule requires a separate amount to be shown are quoted on any prescribed stock Exchange in Australia or elsewhere, a separate total shall be shown for the quoted investments of each kind, and there shall also be shown (whether by way of note or otherwise) the aggregate quoted market value, calculated on the official quotation of that Exchange, of the quoted investments of each kind."

Subclauses (6) and (7): If the foregoing amendments are adopted, all fixed assets must be shown either at cost less amounts written off or at a valuation (actual under subclause (2) or notional under subclause (3)). This enables subclause (6) to be simplified. The words "during the financial year" are insufficient as a valuation may be made for the purpose of the accounts but after the close of the financial year. The Committee considered whether the words "during the financial year" should be omitted altogether, as subclause (7) seems to contemplate that subclause (6) would operate on valuations made prior to the commencement of the G.R.B. (but after 19617). The Committee felt that the requirement to give particulars of qualifications &c. should apply only to valuations made after the commencement of the G.R.B. On this basis, subclause (7) becomes unnecessary except to provide code-words for use in the accounts. The following is our suggested redraft of (6) and (7):

"(6) (a) Where the amount of any fixed asset or investment (other than an investment the quoted market value of which has been included in an aggregate market value pursuant to subclause (5) hereof) is shown at a valuation or at a valuation less amounts written off, there shall be shown (whether by way of note or otherwise) the date of the valuation, and whether the valuation was made by an officer of the company or a related company or by a person not being such an officer;

(b) if the valuation was made after the commencement of the [General Revision Act] by a person not being such an officer, the name of the person who valued it and particulars of his qualifications shall be shown in the first accounts in which reference is made to the valuation.

(7) For the purposes of subparagraph (a) of subclause (6) of this clause, the expression 'Officer's valuation' may be used to indicate a valuation made by an officer of the company or of a related corporation, and the expression 'independent valuation' may be used to indicate a valuation made by a person not being such an officer."

Subclause (8): Approved.

Clause 10: Approved.

"Part IV--Group Accounts": For reasons stated earlier, this heading will be eliminated if our proposals are accepted.

Clause 11 (1) (a): Approved. [NOTE: It will be noted that there is no provision for exemption from disclosure of this information, such as is contained in section 3 (3) of the U.K. Act of 1967. We have referred to this question in paragraphs 21 to 24 of the Main Report. In view of the fact that provision for disclosure of subsidiaries has been contained in Companies Acts in this country since 1961, and that no representations have been made, either in respect of the Accounts and Audit Draft or to this Committee, for any change in the law, we do not suggest any change in this requirement.]

Clause 11 (1) (b): Approved.

The G.R.B., at the suggestion of the Institute of Chartered Accountants, has dropped what was subparagraph (c) in the Accounts and Audit Draft. The Institute has reconsidered this, and has informed us that they now think the paragraph should be restored. The paragraph read "The percentage of each class of the shares in each subsidiary held by the holding company". We think this is valuable information, and that subparagraph (c) of the Accounts and Audit Draft should be reinserted.

Clause 11 (1) (c): This subparagraph was approved subject to being re-lettered "(d)" to make room for (c) of the Accounts and Audit Draft.

Clause 11 (2) (3) and (4): Approved.

Clause 11, subclause (5): The Committee considers that this subclause as now drafted is unduly restrictive. There may be cases where consolidation is impracticable (e.g., for lack of information) and, as long as the effect of inter company transactions is indicated, there may be many cases in which the presentation of separate accounts is more informative, although the information given is not the same as would be given by consolidated accounts. We propose the following draft:

"(5) Where group accounts are prepared in accordance with paragraph (b) of the definition of 'group accounts' in subsection (1) of section 5 of this Act, the directors shall certify on, or in a certificate attached to, the accounts:

(a) that the preparation of consolidated accounts is impracticable, for reasons to be stated in the certificate; or

(b) that it is preferable, in the interests of the share-holders, that the accounts be prepared in accordance with the said paragraph (b) of the said definition, for reasons to be stated in the certificate;

and in either case:

(c) that in the opinion of the directors the accounts so prepared are not significantly affected by inter-company transactions, except to the extent stated in any notes forming part of the accounts."

Subclause (6): Approved.

Subclause (7): Approved subject to the deletion of the words "or in the case of a proprietary company having only one director by that director" if the proposed amendment of section 114 of the Act (see G.R.B.) is adopted.

"Part V - Provisions Applying to Accounts Generally"

This heading should be deleted, for reasons stated earlier.

Clause 12: The requirement that conversion shall be made as at the end of the financial year might in some cases require an amount to be shown which was greater or less than the amount actually received or paid by the Company. We therefore recommend its omission. We also feel that the requirement to state the "basis and rate of the conversion" would be unduly burdensome, especially if it applied to fluctuating rates at different times during the year. The following draft will enable companies to give a short statement of the method used (e.g. "all amounts actually transferred during the year have been taken into account at the rate prevailing at the time of transfer"):

"12. All amounts shown in the accounts shall be expressed in Australian currency, and where any conversion has been made otherwise than on the basis of the rate of exchange current at the end of the financial year an explanation of the method used in calculating the conversion shall be given."

Clause 13: There is a question here whether comparison of balance-sheet items should be made with the last balance-sheet (which may be a half-yearly one) or with the balance-sheet drawn up at the corresponding time in the previous financial year. Because of seasonal variations in stocks and debtors, and because the shareholders may not receive half-yearly balance-sheets, we think the second alternative is to be preferred. We therefore recommend that clause 13 (1) (a) should read:

"(a) in every balance-sheet the corresponding amounts as at the end of the corresponding period of the immediately preceding financial year; and"

and that clause 13 (2) (a) should read:

"(a) the balance-sheet does not include an item corresponding to an item in the balance-sheet as at the end of the corresponding period of the immediately preceding financial year; or".

Clauses 14 and 15: The Committee approves of clause 14 of the G.R.B. draft down to the words "arrived at" in line 5 of the draft. It does not, however, approve of subparagraph (a) of clause 14. The Accounts and Audit Draft referred to the capitalization of "operating expenses". The Institute of Directors pointed out that if they were properly capitalized they could not be operating expenses. In tile G.R.B. the word "operating" has been omitted, with the result that the "amount and nature" of all capital expenditure of any kind must be shown. This would impose a heavy burden. Part of the evil at which the provision is aimed has been dealt with by clause 9 (8) (in relation to land held for resale) and our proposed section 162 (6c) will provide a safeguard against capitalization of expenses to an amount in excess of the value of the asset to the company. If interest or other recurrent expenditure is improperly capitalized, this is dishonest accounting, but there are many cases in which interest &c. is properly capitalized, and it is unlikely that an investor will be greatly enlightened by being told the amount and nature of the expenses. We therefore recommend that subparagraph (a) be deleted.

The Committee agrees with the principle embodied in clause 15 of the G.R.B. draft, and also with tile requirement that a statement of the method by which unearned income has been calculated shall be included in the accounts. It does not consider, however, that any useful purpose is served by requiring a separate statement of the amount shown as unearned income of a previous year but brought into account as income of the current year. Where unearned income is manipulated so as to produce a misleading result an explanation will be required by the first part of clause 14. Logically we think clause 15 should precede clause 14 (b) and we propose the following draft to replace clauses 14 and 15:

"14. (1) Where the accounts could be misleading by reason of a failure to explain the method used in dealing with, or in calculating the amount of, any item or information included in or excluded from the accounts, there shall be stated (whether by way of note or otherwise) the method by which that item or information has been dealt with or the amount thereof arrived at.

(2) Any sums which consist of or are in the nature of interest, accommodation charges, service charges, maintenance charges or insurance premiums which have not been earned at the end of the financial year shall not be included in the gross amount of debts owing to the company unless that unearned income is shown as a deduction from that amount.

(3) A short statement of the method by which the amount of unearned income has been calculated shall be included in the accounts (whether by way of note or otherwise)."

Clause 16: In our view this clause is inconsistent with section 162 (8) of the G.R.B. (as proposed to be amended) and if retained it would foster the idea that directors are free to make up their own minds as to what is material and what can be omitted. If no such statement is made, there will be no way of telling whether it should have been made, and if it is made, it will convey no further information than the statement that the accounts give a true and fair view, which the directors are already required to make. We therefore recommend that clause 16 be omitted.

APPENDIX B

LIST OF PROPOSALS IN GENERAL REVISION BILL REQUIRING FURTHER CONSIDERATION

As indicated in the main body of the Interim Report, we are listing in this Appendix the provisions of the General Revision Bill which relate to topics which fall within our terms of reference but which we have not yet considered. We have not included in this list any provisions which, although they may relate to such topics, are in the nature of verbal improvements or corrections, or are obviously desirable amendments which we consider could be made independently of any we might wish to suggest. References are to the General Revision Bill draft of 20th February, 1968.

Section 4 (j) - relates to protection of minorities.

Section 5 (a) (proposed section 35B) - relates to sales of a company's undertaking or assets without the consent of a general meeting.

Section 5 (e) (proposed amendment of section 38 (1) (c)) - relates to the description of documents evidencing loans raised by invitation to the public.

Section 5 (g) - relates to exemption of prescribed corporations from prospectus provisions.

Section 5 (i) (ii) - relates to retention of over-subscriptions.

Section 5 (j) - relates to statements of interest cover in prospectuses.

Section 6 (a) - relates to prospectuses.

Section 6 (g) - relates to payment of brokerage or commission.

Section 6 (i) (iv) (amendment of section 64) - relates to reduction of' capital.

Section 7 (a) (proposed new subsections (1A) (1b) and (1c) of section 65) - relates to protection of minorities.

Section 7 (c) - relates to recovery of loans &c., where financial assistance given for purchase of a company's own shares.

Section 7 (e) - relates to disclosure of substantial shareholdings.

Section 13 (b) - relates to misuse of confidential information.

Section 13 (c) - extension of prohibition against loans to directors.

Section 13 (d) - disclosure of interests by directors.

Section 13 (g) - relates to availability of register of directors' holdings for public inspection.

Section 13 (j) - relates to notification of changes in directors' holdings.

Section 15 (f) - extension of right to receive notices of meetings to cover voteless shares, auditors, &c.

Section 15 (g) - right of members without votes to speak.

Section 16 (d) - changes in procedure as to signature of minutes.

Section 16 (h) (ii) - introduces requirement that annual return shall disclose charges secured on the property of the company whether required to be registered or not.

APPENDIX C

ACCOUNTS AND AUDIT PROVISIONS OF GENERAL REVISION BILL

(DRAFT OF 20TH FEBRUARY, 1968)

PART II - ACCOUNTS AND AUDIT

S.4. Transitory provisions of Principal Act.

S.5. Interpretations

17. Subsections (6) and (7) of section 4 of the Principal Act shall be repealed.

18. Section 5 of the Principal Act shall be amended as follows:

(a) In subsection (1):

(i) before the interpretation of "Annual general meeting" there shall be inserted the following interpretation:

"'Accounts', in relation to a corporation, includes:

(a) profit and loss accounts, dealing with the profit or loss (or other result of operations) of the corporation;

(b) balance-sheets, dealing with the state of affairs of the corporation;

(c) if the corporation is a holding company, group accounts dealing with the state of affairs and profit or loss (or other result of operations) of the holding company and all its subsidiaries; and

(d) any notes to, or intended to be read with, the accounts.";

(ii) for the interpretation of "Books" there shall be substituted the following interpretation:

"'Books' includes any account, deed, writing or document and any other record of information whether compiled recorded or stored by microfilm or electronic processes or otherwise";

(iii) after the interpretation of "Company limited by guarantee" there shall be inserted the following interpretations:

"'Current asset', in relation to any accounts, means an asset which would, in the ordinary course of events, be realizable or receivable within twelve months after the end of the financial year to which the accounts relate."

"'Current liability', in relation to any accounts, means a liability which would, in the ordinary course of events, be payable or repayable within twelve months after the end of the financial year to which the accounts relate.";

(iv) for the interpretation of "Exempt proprietary company" there shall be substituted the following interpretation:

"'Exempt proprietary company' means a proprietary company the beneficial interests in all of the shares in which are, subject to subsection (8) of this section, held only by natural persons.";

(v) after the interpretation of "Foreign company" there shall be inserted the following interpretations:

"'Group accounts', in relation to a group of companies, means: (a) one set of consolidated accounts covering the group; or (b) one of the following:

(i) more than one set of consolidated accounts together covering the group;

(ii) separate accounts for each corporation in the group: or

(iii) one or more sets of consolidated accounts and one or more separate accounts, together covering the group."

"'Group of companies' means a holding company and all its subsidiaries.";

(vi) after the interpretation of "No liability company" there shall be inserted the following interpretation:

'Non-current liability' means a liability other than a current liability."; and

(vii) at the end of the interpretation of "Profit and loss account" there shall be inserted the words "and if the corporation concerned is engaged in the development or exploration of natural resources, also includes an operations account or any like account, and a development account or any like account."; and

(b) For subsections (8) and (9) there shall be substituted the following subsection:

"(8) For the purposes of the definition of 'Exempt proprietary company' in subsection (1):

(a) where a corporation holds a beneficial interest in a redeemable preference share in a proprietary company and:

(i) no voting rights attach to the share; or

(ii) any voting rights attaching to the share are exercisable only in special circumstances and do not include the right (except where a dividend in respect of the share is in arrear) to vote at an election of directors of the proprietary company;

the share shall be treated as if the beneficial interest in it were held by a natural person; and

(b) a person shall be deemed to hold a beneficial interest in a share in a proprietary company if that person, either alone or together with other persons, is entitled (otherwise than as trustee for, on behalf of or on account of another person) to receive, directly or indirectly, any dividends in respect of the share or to exercise, or to control the exercise of, any rights attaching to the share."

Company auditors and liquidators.

19. Subsections (1), (2), (3), (4), (5), and (6) of section 9 of the Principal Act shall be repealed

Obligations of borrowing corporation.

20. In subsection (5) of section 74F of the Principal Act for the expression "subsections (4) to (13) (both inclusive) of section one hundred and sixty-two and of subsections (1) (2) and (4) of section one hundred and sixty-seven" there shall be substituted the expression "subsections (1) (2) (3) (4) (7) (8) (9) and (10) of section 162, subsections (l) (3) (5) (6) (7) and (8) of section 162n and subsections (l) (2) (3) and (6) of section 167 (other than any such provision which requires the laying of accounts before an annual general meeting)".

Statutory meeting and statutory report

21. Section 135 of the Principal Act shall be amended as follows:

(a) in paragraph (d) of subsection (3) for the expression "auditors (if any)" there shall be substituted the word "auditors";

(b) in subsection (4) the expression "(if any)" shall be repealed; and (c) in subsection (5) the expression "(if any)" shall be repealed.

Annual general meeting.

22. Section 136 of the Principal Act shall be amended as follows:

(a) For subsection (2) there shall be substituted the following subsection:

"(2) The Registrar may, on application signed on behalf of the company by a director or secretary in accordance with a resolution of the directors, and if for any special reason the Registrar thinks fit so to do and subject to such condition as he thinks proper:

(a) extend the period of fifteen months or eighteen months referred to in subsection (1), notwithstanding that that period is so extended beyond the calendar year; or

(b) permit an annual general meeting to be held in a calendar year other than the calendar year in which it otherwise ought to be held."; and

(b) After subsection (2) there shall be inserted the following subsection:

"(2A) Where, by virtue of an extension of time under subsection (2) or for any other reason, an annual general meeting is held after the end of the calendar year in which it otherwise ought to have been held it shall, unless the Registrar otherwise directs and subject to such conditions as he thinks proper, be deemed, for the purposes only of subsection (1) in relation to the next following annual general meeting, to have been held on the thirty-first day of December in that year."

23. After section 159 of the Principal Act there shall be inserted the following section:

Auditor's certificate.

"159A. (1) Subject to subsection (2) a return under section 158 or 159 shall be deemed not to comply with that section unless the auditor certifies on, or in a certificate attached to the return whether or not:

(a) in his opinion, the company has kept proper books and made out proper accounts; and

(b) the accounts have been duly audited;

in accordance with this Act, and whether or not the audit report was subject to any qualification.

(2) The provisions of subsection (1) do not apply where the accounts of the company are by this Act required to be lodged with the Registrar."

Accounts and audit.

24. For Divisions 1 and 2 of Part VI of the Principal Act there shall be substituted the following Divisions'

Accounts to be kept.

DIVISION 1 - ACCOUNTS

161. (1) Every company, and the directors and managers thereof, shall cause to be kept in the English language (or where information in the records is compiled, recorded or stored by electronic processes or any means other than in written or printed form, in some manner such that the information is readily accessible and readily convertible into the English language) such accounting and other records as correctly record and explain the transactions and financial position of the company so as to enable true and fair accounts, and any documents required to be attached thereto, to be prepared from time to time, and shall cause those records to be kept in such manner as to enable them to be conveniently and properly audited.

(2) In subsection (1), without affecting the generality of the expression "accounting and other records" that expression includes:

(a) books containing entries from day to day in sufficient detail of all cash received and cash paid:

(b) where the trade or business has involved dealings in goods, books containing entries (except in the case of goods sold for cash by way of ordinary retail or wholesale trade) of all goods sold and purchased, showing the goods and the buyers and sellers thereof in sufficient detail to enable those goods and those buyers and sellers to be identified; and

(i) stocktaking;

(ii) analyses of amounts receivable and trade debtors used in determining the writing off of bad debts and provisions for doubtful debts;

(iii) determinations or estimates of unearned income;

(iv) material assets or groups of assets;

(v) material liabilities or groups of liabilities; and

(vi) transactions and events affecting the profit or loss (or other result of operations) and the state of affairs of the company.

(3) Subject to subsection (4), the company shall retain the records referred to in subsection (1) and the documents on which those records were based for seven years after the completion of the transactions or operations to which they respectively relate.

(4) It is a defence to a charge that documents referred to in subsection (2) have not been retained as required by that subsection if the defendant proves that the documents were not at the relevant time required for the purposes referred to in subsection (1).

(5) The records referred to in subsection (1) shall be kept at the registered office of the company or at such other place as the directors think fit, and shall at all reasonable times be open to inspection by the directors and by any other persons authorized by or under this Act to inspect them.

(6) If accounting and other records are kept at a place outside the State, there shall be sent to and kept at a place in the State and be at all times open to inspection by the directors and by any other persons authorized by or under this Act to inspect the records such statements and returns with respect to the matters dealt with in the records so kept as will enable true and fair accounts, and any documents required to be attached thereto, to be prepared.

(7) The court may, in any particular case, order that the accounting and other records of a company be open to inspection by a registered company auditor acting for a director, and in that case shall order that information acquired by the auditor during his inspection be not disclosed by him except to the director.

Financial years of grouped companies

161A. (1)Subject to the provisions of subsections (11), (12), and (13), the directors of a holding company that is not a foreign company shall take such steps as are necessary to ensure that:

(a) within twelve months after the coming into operation of the Companies (Public Borrowings) dot, 1963, the financial year of each of its subsidiaries coincides with the financial year of the holding company; and

(b) within twelve months after any corporation becomes a subsidiary of the holding company, the financial year of that corporation coincides with the financial year of the holding company.

(2) Subject to subsection (3), where the financial year of a holding company that is not a foreign company and those of each of its subsidiaries coincide, the directors of the holding company shall at all times take such steps as are necessary to ensure that, without the consent of the Registrar, the financial year of the holding company or any of its subsidiaries is not altered in such a way that all of those financial years no longer coincide.

(3) Where the directors of a holding company are of the opinion that there is good reason why the financial year of any of its subsidiaries should not coincide with the financial year of the holding company, the directors may apply in writing to the Registrar for an order authorizing any subsidiary to continue to have or to adopt (as the case requires) a financial year that does not coincide with that of the holding company.

(4) An application under subsection (3) shall be supported by a statement by the directors of the holding company of their reasons for seeking the order.

(5) The Registrar may require the directors who make an application under this section to supply such information relating to the operations of the holding company, and of any corporation that is deemed by virtue of subsection (5) of section 6 to be related to the holding company, as he thinks necessary for the purpose of determining the application.

(6) The Registrar may, at the expense of the holding company of which the applicants are directors, request any registered company auditor to investigate and report to him on the application.

(7) The Registrar may rely upon a report obtained under subsection (6).

(8) The Registrar may make an order granting or refusing the application or granting the application subject to such limitations, terms or conditions as he thinks proper, and shall serve a copy of the order on the holding company.

(9) Where the applicants are aggrieved by an order made by the Registrar under subsection (8), the applicants may, within two months after the service of the order upon the holding company, appeal against the order to the Board.

(10) The Board shall determine the appeal and, in determining the appeal, may make any order that the Registrar had power to make on the original application, and may exercise any of the powers that the Registrar might have exercised in relation to the original application.

(11) Where the directors of a holding company have applied to the Registrar for an order under this section, the operation of subsection (1) is suspended in relation to that subsidiary until the determination of the application and of any appeal arising out of the application.

(12) Where an order is made authorizing a subsidiary to have a financial year that does not coincide with that of the holding company, compliance with the terms of the order of the Registrar, or where there has been an appeal compliance with the terms of any order on the determination of the appeal, shall be deemed to be compliance with the provisions of subsection (1) in relation to the subsidiary.

(13) Where an application for an order under this section has been refused and there is no appeal, or where there has been an appeal which has been rejected, the time within which the directors of the holding company are required to comply with the provisions of subsection (1) in relation to the subsidiary shall be deemed to be the period of twelve months after the date upon which the order of the Registrar is served on the holding company, or the period of twelve months after the determination of the appeal, as the case may be.

(14) Where the directors of a holding company have applied to the Registrar for an order under this section, and the application and the appeal (if any) arising out of the application have been refused, the directors of the holding company are not entitled to make a similar application with respect to the subsidiary within three years after the refusal of the application or, where there is an appeal, after the determination of the appeal, unless the Registrar is satisfied that there has been a substantial change in the relevant facts or circumstances since the refusal of the former application or the determination of the appeal, as the case may be.

Profit and loss account, Balance-sheet and group accounts.

162.(1) The directors of every company shall make out and lay before the company at each annual general meeting a profit and loss account for the period since the date to which the last preceding profit and loss account so laid was made up (or in the case of the first profit and loss account, since the incorporation of the company) made up to a date not earlier than 6 months before the date of the meeting, giving a true and fair view of the profit or loss (or other result of operations) of the company for the financial year.

(2) Notwithstanding the provisions of subsection (I), tile Registrar may, on application signed on behalf of tile company by a director or secretary in accordance with a resolution of the directors, and if for any special reason the Registrar thinks fit so to do, extend, with respect to any year. the period of six months referred to in that subsection, subject to such conditions as he thinks proper and whether or not that period has expired at the time of the application.

(3) The directors of every company shall cause to be made out and shall lay before the company at each annual general meeting, together with the profit and loss account required by subsection (i), a balance-sheet as at the end of the financial year, giving a true and fair view of the state of affairs of the company as at the end of the financial year.

(4) Where, at the end of the financial year, a company is a holding company, tile directors of the company shall, subject to subsection (5), cause to be made out and shall lay before tile company in annual general meeting, at the same time as the company's own balance-sheet and profit and loss account are so laid, group accounts dealing with:

(a) the profit or loss (or other result of operations) of the company and its subsidiaries for their respective last financial years: and

(b) the state of affairs of the company and its subsidiaries as at the end of their respective last financial years:

and giving a true and fair view of the state of affairs and profit or loss (or other result of operations) of the group of companies of which it is the holding company so far as concerns members of the company.

(5) Notwithstanding the provisions of subsection (4) group accounts are not required where the company is, at the end of its financial year, the wholly-owned subsidiary of another company.

(6) For the purposes of subsection (5) a company shall be deemed to be the wholly-owned subsidiary of another company if it has no members other than that other company and that other company's wholly-owned subsidiaries and its or their nominees.

(7) The accounts of the company shall be duly audited before they are laid before the company in general meeting as required by this section, and such auditors' reports as are required by subsection (1) of section 167 shall be attached to or endorsed upon them when they are so laid.

(8) Without affecting the generality of the preceding provisions of this section, all accounts shall comply with the requirements of Schedule 9 so far as that Schedule is applicable thereto and so far as compliance with tile requirements of that Schedule does not prevent the giving of the true and fair views required by this section.

(9) There shall be attached to any accounts to be laid before a company in annual general meeting, before the auditor reports thereon under this Part, a statement made, in accordance with a resolution of the directors, and signed by not less than two directors (or in the case of a proprietary company having one director only, by that director), stating that in the opinion of the directors, or of the director, as the case may be:

(a) the profit and loss account is drawn up so as to give a true and fair view of the profit or loss (or other result of operation) of the company for the financial year;

(b) the balance-sheet is drawn up so as to give a true and fair view of the state of affairs of the company as at the end of the financial year; and

(i) the profit or loss (or other result of operations) of the company and its subsidiaries for their respective last financial years; and

(ii) the state of affairs of the company and its subsidiaries as at the end of their respective last financial years;

so far as concerns members of the company.

(10) The directors of a company shall cause to be attached to any accounts of the company laid before the company in annual general meeting, before the auditor reports thereon under this Part, statutory declarations by the secretary of the company (or where there are more secretaries than one, by one of them) and by the principal accounting officer or other person or persons in charge of the preparation of the company's accounts, declaring to the best of their knowledge and belief the correctness or otherwise of the accounts.

Directors' report.

162A. (1) Subject to subsection (4) of this section, the directors of a company (other than a holding company for which group accounts are required) shall cause to be attached to every balance-sheet made out under subsection (3) of section 162 a report made, in accordance with a resolution of the directors, and signed by not less than two of them (or in the case of a proprietary company having one director only, by him) with respect to the profit or loss (or other result of operations) of the company for the financial year and the state of the company's affairs as at the end of the financial year, stating, with appropriate details:

(a) the names of the directors in office at the date of the report;

(b) the principal activities of the company in the course of the financial year and any significant change in the nature of those activities during that period;

(c) the amount of the net profit or loss (or other result of operations) of the company for the financial year after provision for income tax;

(d) any material changes in the nature or character of the fixed assets of the company during the financial year;

(e) any material transfers to or from reserves or provisions;

(f) particulars of any payment of a kind referred to in paragraph (a), (b), (c), (d) or (e) of subsection (5) of section 129 made to a director during the financial year;

(g) if, during the financial year, the company has issued any shares or debentures, the purposes of the issue, the classes of shares or debentures issued, the number of shares of each class and the amount of debentures of each class, and the terms of issue of the shares and debentures of each class;

(h) the amount, if any, which has been paid or declared, or which the directors recommend should be paid, by way of dividend excluding any amount shown in a report under this subsection or subsection (2) relating to a previous financial year as an amount paid or declared, or recommended to be paid, by way of dividend;

(i) whether or not, in the opinion of the directors, adequate provision is made to cover doubtful debts;

(j) whether, in the opinion of the directors, all current assets, and all investments which are not quoted on any prescribed Stock Exchange in Australia or elsewhere, would realize, in the ordinary course of business, at least the value at which they are shown in the accounts and, if not, their opinion as to the amount that those assets and investments might reasonably be expected so to realize;

(k) whether or not any contingent liabilities have arisen since the end of the financial year which continue to exist at the date of the directors' report and, if any have, the estimated total amount thereof;

(l) whether or not any contingent or other liability has become enforceable, or is likely to become enforceable, within the period of twelve months after the end of the financial year which, in the opinion of the directors, will or may affect the company in its ability to meet its obligations as and when they fall due;

(m) whether or not, in the opinion of the directors, any circumstances arose which rendered adherence to the previous method of arriving at the amount of any assets or liabilities of the company misleading or inappropriate;

(n) whether or not the results of the company's operations during, or its state of affairs at the end of, the financial year were, in the opinion of the directors, affected by any item, transaction or event of a material and unusual nature, and, if they were, particulars of that item, transaction or event and the amount of the effect thereof, if known or reasonably ascertainable; and

(o) whether or not in the interval between the end of the financial year and the date of the report any significant matters relating to the affairs of the company have arisen.

(2) Subject to subsection (4), the directors of a holding company shall cause to be attached to all group accounts made out under subsection (4) of section 162, a report made, in accordance with a resolution of the directors, and signed by not less than two of them (or in the case of a proprietary company having one director only, by him) with respect to the profit or loss (or other result of operations) of the group of companies of which it is the holding company for the financial year, and the state of affairs of the group as at the end of the financial year, stating, with appropriate details:

(a) the names of the directors of the holding company in office at the date of the report;

(b) the principal activities of the corporations in the group in the course of the financial year and any significant change in the nature of those activities during that period;

(c) the amount of the consolidated net profit or loss (or other result of operations) of the group after provision for income tax, showing separately the extent to which each corporation in the group contributed to that consolidated net profit or loss, for the financial year, and after deducting from that consolidated net profit or loss any amounts thereof which should properly be attributed to any person other than a corporation in the group;

(d) the names of any subsidiaries acquired or disposed of during the financial year, the consideration for each such acquisition or disposal and tile amount in each case of the net tangible assets of the subsidiary acquired or disposed of;

(e) any material changes in the nature or character of the fixed assets of any of the corporations in the group during the financial year;

(f) any material transfers to or from reserves or provisions of any corporation in the group;

(g) particulars of any payment of a kind referred to in paragraph (a), (b), (c), (d) or (e) of subsection (5) of section 129 made to a director of a corporation in the group during the financial year:

(h) if, during tile financial year, any corporation in the group has issued any shares or debentures, the purposes of the issue, the classes of shares or debentures issued, the number of shares of each class and the amount of debentures of each class, and the terms of issue of the shares and debentures of each class;

(i) the amount, if any, which has been paid or declared, or which the directors of the holding company recommend should be paid by way of dividend to members of the holding company, excluding any amount shown in a report under this subsection or subsection (!) relating to a previous year as an amount so paid or declared, or recommended to be. so paid, by way of dividend;

(j) the amount, if any, of dividends paid to, or declared and payable to, the holding company by each or the subsidiaries, excluding any amount shown in a report under this subsection relating to a previous financial year as an amount paid or payable by way of dividend to the holding company;

(k) whether or not, in the opinion of the directors, adequate provision has been made by all corporations in the group to cover doubtful debts;

(l) whether, in the opinion of the directors, all current assets and all investments which are not quoted on any prescribed Stock Exchange in Australia or elsewhere, would realize, in the ordinary course of business, at least the value at which they are shown in the group accounts, and, if not, their opinion as to the amount that those assets and investments might reasonably be expected to realize;

(m) whether or not any contingent liabilities have arisen in respect of any corporation in the group since the end of the financial year which continue to exist at the date of the directors' report and, if any have, the estimated total amount thereof;

(n) whether or not any contingent or other liability of any corporation in the group has become enforceable, or is likely to become enforceable within the period of 12 months after the end of the financial year, which, in the opinion of the directors, will or may affect the corporation in its ability to meet its obligations as and when they fall due:

(o) whether or not, in the opinion of the directors, any circumstances arose which rendered adherence to the previous method of arriving at the amount of any assets or liabilities of any corporation in the group misleading or inappropriate:

(p) whether or not the results of the operations of tile group or of a corporation in the group during, or its state of affairs at the end of, the financial year were, in the opinion of the directors, affected by any item, transaction or event of a material and unusual nature and, if they were, particulars of that item, transaction or event and the amount of the effect thereof, if known or reasonably ascertainable; and

(q) whether or not in the interval between the end of the financial year and the date of the report any significant matters relating to the affairs of the group or of any corporation in the group have arisen.

(3) In subsections (1) and (2) without affecting the generality of the expression "any item, transaction or event of a material and unusual nature", that expression includes:

(a) any change in accounting principals adopted since the last report:

(b) any material writing off of bad debts;

(c) any material increase or decrease in the value of trading stock owing to a change in the basis of valuation of the whole or any part of the trading stock;

(d) any material item appearing in the accounts for the first time or not usually included therein; and

(e) any absence from the accounts of any material item usually included therein.

(4) In the application of subsection (I) or (2), as the case requires, of this section to and in respect of an exempt proprietary company, the provisions of:

(a) paragraphs (a), (b), (d), (e), (f). (j), and (m) of subsection (1); or

(b) paragraphs (a), (b), (e), (f), (g), (1), and (o) of subsection (2);

as the case may be, do not apply.

(5) Where, at the end of its financial year, a company is the subsidiary of another corporation, there shall be stated in, or in a note on or statement annexed to, the company's accounts laid before it in general meeting the name of the corporation regarded by the directors as being the company's ultimate holding company and, if known to them, the country in which it is incorporated.

(6) Where any option to take up unissued shares of the company, or (where the company is a holding company) of any corporation in the group of companies of which it is the holding company, has been granted by the company or the corporation, as the case may be, during the financial year, the report under subsection (1) or (2), as the case may be, of this section shall state:

(a) the name of the person to whom, and the name of the corporation in respect of the shares in which, the option has been granted;

(b) the number and classes of shares in respect of which the option has been granted;

(d) the basis upon which the option may be exercised; and

(e) whether the person to whom the option has been granted has any right, by virtue of the option, to participate in any share issue of any other corporation.

(7) A report under subsection (1) or (2) shall specify:

(a) particulars of shares issued, during the financial year, by virtue of the exercise of options to take up unissued shares of the company, or (where the company is a holding company) of any corporation in the group of companies of which it is the holding company whether granted before or during that period; and

(b) the number and classes of unissued shares of the company, or of any corporation in the group, as the case may be, under option as at the end of the financial year, the prices or the method of fixing the prices, of issue of those shares, the dates of expiration of the options and the rights, if any, of the holders of the options to participate by virtue of the options in any share issue of any other corporation.

(8) The provisions of paragraph (a) of subsection (6) do not apply where the option to take up shares of the company or other corporation has been conferred generally on all the holders of shares or debentures, or of a class of shares or debentures, of the company or corporation.

(9) If at the end of the financial year of the company or, where the company is a holding company, of any of its subsidiaries, there subsists a contract with the company or with that subsidiary in which a director of the company or of that subsidiary had in any way, whether directly or indirectly, an interest, or there has at any time in that year subsisted any such contract (being, in either case, in the opinion of the directors of the company a contract of significance to the business or the company or of the subsidiary, as the case may be, and in which the interest of the first-mentioned director is or was material), the report under subsection (1) or (2), as the case may be, of this section shall contain:

(a) a statement that the contract so subsists or subsisted;

(b) the names of the parties to the contract (other than the company or the subsidiary, as the case may be);

(d) an indication of the nature of the contract; and

(e) an indication of the director's interest in the contract;

but nothing in this subsection applies to or in respect of a contract with a director who is a natural person for his personal services.

(10) Where in the accounts of a company the amount set aside for the payment of income tax in respect of the financial year differs, or but for compensatory items would differ, by more than fifteen per centum from the amount of income tax that would be payable by the company if its taxable

income for that year were equal to the amount shown in the accounts as being the amount of net profit or loss before provision is made for the payment of income tax in respect of that year, the report under subsection (1) or (2), as the case may be, of this section shall give an explanation of the difference, including a statement of the major items responsible for the difference and the amount, or estimated amount, of those items.

(11) Every statement, report or other document relating to the affairs of a company or (where the company is a holding company) of a group of companies of which it is the holding company, attached to or included with a report of the directors laid before the company in annual general meeting or sent to the members under section 164 (other than a document required by this Act to be laid before the company in general meeting) shall, for the purposes of section 375, be deemed to be part of that last-mentioned report.

Failure to comply with aa. 161-162A.

163. (1) Subject to the succeeding provisions of this section, if a company, or a director of a company, fails to comply with, or fails to take all reasonable steps to comply or to secure compliance with, any of the preceding provisions of this Division, or, in the case of a director, has by his own willful act been the cause of any default by the company under any of those provisions, it or he is guilty of an offence against this Act.

Penalty: $400 or imprisonment for six months.

(2) In any proceedings against a person for failure to take reasonable steps to secure compliance by a company with the preceding provisions of this Division, it is a defence to prove that he had reasonable ground to believe and did believe that a competent and reliable person was charged with the duty of seeing that those provisions were complied with and was in a position to discharge that duty.

(3) In any proceedings against a director for failure to comply with, or to take reasonable steps to comply or to secure compliance with, the preceding provisions of this Division, it is a defence to prove that:

(a) the director acted in good faith on a statement or opinion, which he had no cause to believe to be untrue or unreliable, furnished by an auditor of the company; and

(b) in the case of a director of a holding company, he acted in good faith on a statement or opinion, which he had no cause to believe to be untrue or unreliable, furnished by any officer or auditor of a subsidiary of which he was not, at the time when the statement was made or the opinion given, a director.

(4) In any proceedings against a person for failure to comply with, or to take all reasonable steps to comply or to secure compliance with, the preceding provisions of this Division relating to the form and content of the accounts of a company by reason of an omission from the accounts, it is a defence to prove that the omission was immaterial and did not affect the giving of the true and fair views required by section 162.

(5) If an offence against this section is committed with intent to defraud creditors of the company or creditors of any other person or for a fraudulent purpose, the offender is liable to a penalty, in lieu of any penalty provided by the preceding provisions of this section, of imprisonment for I year.

(6) A person shall not be sentenced to imprisonment for an offence against this section unless in the opinion of the court dealing with the case the offence was committed wilfully.

Members of company entitled to balance-sheets, &c.

164. (1) Every company shall not less than fourteen days before each annual general meeting send a copy of all accounts which are to be laid before the company at the meeting (including every document required by law to be attached to any such accounts), accompanied by a copy of the auditor's report on the accounts to all persons entitled to receive notice of general meetings of the company.

(2) Any member of a company, whether or not he is entitled to have sent to him copies of the accounts, to whom copies have not been sent, and any holder of debentures, shall on request in writing being made by him to the company be furnished by the company as soon as practicable and without charge, with a copy of the last accounts (including every document required by this Act to be attached thereto) laid or required to be laid before the company in annual general meeting, together with a copy of the auditor's report on the accounts.

(3) In the application of subsections (1) and (2) to and in relation to group accounts, a reference in either of those subsections to an auditor's report shall be read as a reference to the auditor's report upon each account and each set of accounts comprised in the group accounts.

(4) If default is made in complying with subsection (1) or subsection (2), the company and every officer of the company who is in default is guilty of an offence against this Act, unless it be proved that the person concerned had been furnished with a copy of the accounts and all documents referred to in that subsection, before the default was made.

Penalty: $400. Default penalty: $50.

(5) Nothing in this section applies to a mutual life assurance company limited by guarantee registered under the Life Insurance Act, 1945 - 1966 of the Commonwealth.

DIVISION 2 - AUDIT

Qualified auditors.

164A. (1) Except as provided in subsection (4), a person shall not knowingly consent to be appointed, and shall not knowingly act, as auditor of a company and shall not prepare, any report required by this Act to be prepared by a registered company auditor:

(a) if he is not a registered company auditor;

(b) if he is indebted in an amount exceeding one thousand dollars to the company or to a corporation that is deemed to be related to the company by virtue of subsection (5) of section 6; or

(i) an officer of the company;

(ii) a partner, employer or employee of an officer of the company; or

(iii) a partner or employer of an employee of an officer of the company.

Penalty: $200. Default penalty: $20.

(2) For the purposes of paragraph (c) of subsection (1), a person shall be deemed to be an officer of a company if:

(a) he is an officer of a corporation that is deemed to be related to the company by virtue of subsection (5) of section 6; or

(b) he has, at any time within the immediately preceding period of twelve months, been an officer or promoter of the company or of such a corporation, unless the Board if it thinks fit in the circumstances of the case, directs otherwise;

but nothing in this section contained shall be deemed to disqualify a person as auditor of a company solely on the ground of his being or having been the liquidator of a corporation that is so deemed to be related to the company.

(3) For the purposes of this section, a person shall not be deemed to be an officer of a company by reason only of his having been appointed as auditor of a corporation or, for any purpose relating to taxation, a public officer of a corporation or of his being or having been authorized to accept on behalf of a foreign company service of process and any notices required to be served on the company.

(4) Notwithstanding the preceding provisions of this section, where, in view of the location of the operations of a company, it is, in the opinion of the Board, impracticable for the company to obtain the services of a registered company auditor as auditor of the company, a person who is in the opinion of the Board, suitably qualified or experienced and who is approved by the Board for the purposes of this Act in relation to the audit of the company's accounts, may be appointed auditor of the company, subject to such terms and conditions as are specified in the approval.

(5) A person appointed in accordance with subsection (4) shall, in relation to the auditing of the company's accounts and matters related thereto but subject to the terms and conditions of the approval under that subsection be deemed to be a registered company auditor and the provisions of this Act, mutatis mutandis, apply to and in relation to him accordingly.

(6) A firm shall not consent to be appointed, and shall not act, as auditor of a company, and shall not prepare any report required by this Act to be prepared by a registered company auditor, unless:

(a) at least one member of the firm is ordinarily resident in a State or Territory of the Commonwealth;

(b) all the members of the firm ordinarily so resident are registered company auditors;

(c) where the business name under which they are carrying on business is not registered under the Business Names Act, 1962, a return in the prescribed form showing the full names and addresses of all the members of the firm has been lodged with the Registrar;

(d) no member is disqualified under the provisions of paragraph (b) or (c) of subsection (1) from acting as the auditor of the company; and

(e) no officer of the company receives any remuneration from the firm for acting as a consultant to it on accounting or auditing matters.

(7) If a firm contravenes subsection (6), each member of the firm is guilty of an offence against this Act.

Penalty: $200. Default penalty: $20.

(8) A company or person shall not appoint a person as auditor of a company unless that last-mentioned person has, prior to that appointment, consented in writing to act as the auditor and a company or person shall not appoint a firm as auditor of a company unless the firm has, prior to that appointment consented in writing under the hand of at least one member of the firm to act as the auditor and such consent shall, unless otherwise expressed, continue in force until withdrawn by notice in writing to the company.

Appointment. &c. of auditors.

165. (1) Within one month after the date on which a company is entitled to commence business, the directors of the company shall appoint (unless the company at a general meeting has appointed) a person or persons to be the auditor or auditors of the company, and an auditor so appointed shall, subject to this section, hold office until the first annual general meeting.

(2) A company shall, at the first annual general meeting of the company and thereafter at annual general meetings as required in order to fill any vacancy in the office of auditor, appoint a person or persons to be the auditor or auditors of the company, and an auditor so appointed shall hold office until death, or removal or resignation from office in accordance with this section.

(3) Subject to subsections (7) and (8), the directors of a company may fill any casual vacancy in the office of auditor of the company, but while such a vacancy continues the surviving or continuing auditor or auditors, if any, may act.

(4) An auditor of a company may be removed from office by resolution of the company at a general meeting of which special notice has been given, but not otherwise.

(5) Where special notice of a resolution to remove an auditor is received by a company:

(a) it shall forthwith send a copy of the notice to the auditor concerned and to the Board; and

(b) the auditor may, within seven days after the receipt by him of the copy of the notice, make representations in writing to the company (not exceeding a reasonable length) and request that, before the meeting at which the resolution is to be considered, a copy of the representations be sent by the company at its expense to every member of the company to whom notice of the meeting is sent.

(6) Unless the Board on the application of the company otherwise orders, the company shall send a copy of the representations in accordance with the auditor's request, and the auditors may (without prejudice to his right to be heard orally) require that the representations be read out at the meeting.

(7) Where an auditor of a company is removed from office under subsection (4) at a general meeting of the company:

(a) the company may, at the meeting and, without adjournment, by a resolution passed by a majority of not less than three-fourths of such members of the company as, being entitled so to do, vote in person, or where proxies are allowed by proxy, forthwith appoint as auditor another person nominated at the meeting; or

(b) the meeting may be adjourned to a date not earlier than twenty days and not later than thirty days after the day of the meeting and the company may, at the adjourned meeting, by ordinary resolution appoint as auditor another person, being a person notice of whose nomination as auditor has been received by the company at least fourteen days before the date to which the meeting is adjourned.

(8) A company shall, forthwith after the removal of an auditor from office under subsection (4) give notice in writing to the Board of the removal, and if the company does not appoint another auditor under subsection (7) it shall within seven days of the conclusion of the meeting notify the Board accordingly, whereupon the Board shall appoint an auditor.

(9) Subject to subsection (8) if a company does not appoint an auditor, the Board may, on the application in writing of any member of the company, appoint a person or persons to be the auditor or auditors of the company.

(10) An auditor appointed under subsection (3) (7) (8) or (9) shall, subject to this section, hold office until the next annual general meeting of the company.

(11) Subject to this section, a person is not qualified to be appointed auditor of a company at an annual general meeting unless he held office as auditor of the company immediately before the meeting, or notice of his nomination as auditor was given to the company by a member of the company not less than twenty-one days before the meeting.

(12) Where notice of nomination of a person as an auditor of a company is received by the company (whether for appointment at an adjourned meeting under subsection (7) or at an annual general meeting) the company shall, not less than seven clays before the adjourned meeting or the annual general meeting, as the case may be, send a copy of the notice to the person nominated, to each auditor of the company and to each person entitled to receive notice of general meetings of the company.

(13) If, after notice of nomination of a person as an auditor of a company has been given to the company, the annual general meeting of the company is called for a date twenty-one days or less after the notice has been given, subsection (11) does not apply in relation to that person, and if the annual general meeting is called for a date not more than seven days after the notice has been given and a copy of the notice is, at the time when the notice of the meeting is given, sent to each person to whom, under subsection (12) it is required to be sent, the company shall be deemed to have complied with subsection (12) in relation to the notice.

(14) The fees and expenses of an auditor of a company are payable by the company, and:

(a) in the case of an auditor fixed by the company in the last preceding annual appointed by the company at a general meeting - shall be general meeting or, if so authorized by the members at general meeting, by the directors; and

(b) in the case of an auditor appointed by the directors or by the Board - may be fixed by the directors or by the Board, as the case may be, and, if not so fixed, shall be fixed as provided in paragraph (a) as if the auditor had been appointed by the company.

(15) Subject to subsection (18) an auditor may, by notice in writing to the company and with the consent of the Board first obtained, resign as auditor of a company.

(16) A person aggrieved by the granting or refusal of assent by the Board to the resignation of an auditor of a company may, within three months from the date thereof, appeal to the court from the grant or refusal, and thereupon the court may confirm or reverse the grant or refusal and may make such further order in the premises as to it seems proper.

(17) resignation

Subject to any order of the court under subsection (16) and to subsection (18), the of an auditor takes effect:

(a) on the date (if any) specified for the purpose in the notice of resignation;

(b) on the date on which the Board gives its consent to the resignation; or

whichever last occurs.

(18) The resignation of an auditor of an exempt proprietary company does not require the consent of the Board under subsection (15), and takes effect:

(a) on the date (if any) specified for the purpose in the notice of resignation; or

(b) on the date on which the notice is received by the company;

whichever is the later.

(19) Where a firm has been appointed auditor of a company, a member of the firm who retires or withdraws from the firm shall be deemed to have resigned as auditor and a person who becomes a member of the firm and is otherwise qualified to act as auditor of the company shall be deemed to be an auditor of the company.

(20) Within fourteen days after the receipt of a notice of resignation, or after the removal from office, of an auditor of a company, the company shall lodge with the Registrar, and in the case of an auditor of a borrowing corporation lodge with the trustee for the holders of debentures of the borrowing corporation, notice thereof in the prescribed form.

Penalty: $100. Default penalty: $10.

Powers and duties of authorities as to reports on accounts.

167. (1) In addition to his other functions and duties under this Act, every auditor of a company shall report to the members on the company's accounting and other records examined by him and on all accounts required to be paid before the company in general meeting during his tenure of office, and shall state in the report:

(a) whether or not the accounts are in his opinion properly drawn up:

(i) in accordance with the provisions of this Act; and

(ii) so as to give the true and fair views required to be given by section 162;

(b) whether or not the accounting and other records (including registers) required by this Act to be kept have been, in his opinion, properly kept in accordance with the provisions of this Act; and

(i) he has examined the accounts of all subsidiaries on which he is reporting;

(ii) he has satisfied himself that the accounts of the subsidiaries included in any consolidated accounts are in form and content appropriate and proper for the purposes of the preparation of the consolidated accounts, and has received satisfactory information and explanations as required by him for that purpose; and

(iii) any auditor's report on the accounts of a subsidiary were made subject to qualifications, and, if so, what; and

(d) whether or not the report is made subject to qualifications and, if so, what:

and if he is not satisfied as to any matter referred to in paragraph (a), (b) or (c) he shall clearly state his qualification.

(2) It is the duty of an auditor to form an opinion as to each of the following matters'

(a) whether or not he has obtained all the information and explanation that he required;

(b) whether or not proper accounting and other records (including registers) have been kept by the company;

(d) whether or not, according to the best of his information and the explanations given to him and as shown by the accounting and other records of the company, the profit and loss account is in agreement with the company's accounting and other records, and is properly drawn up so as to give a true and fair view of the profit or loss (or other result of operations) of the company for the financial year;

(e) whether or not, according to the best of his information and the explanations given to him and as shown by the accounting and other records of the company, the balance-sheet is in agreement with the company's accounting and other records and is properly drawn up so as to give a true and fair view of the state of the company's affairs as at the end of the financial year;

(f) whether or not all procedures and methods used by a holding company or subsidiary in arriving at all figures taken into consolidated accounts were appropriate to the circumstances of the consolidation;

(g) where group accounts are prepared in accordance with paragraph (b) of the definition of "group accounts" in subsection (1) of section 5 - whether or not the reasons therefor given by the directors under subclause (5) of clause 11 of Schedule 9 are valid;

(h) where a certificate has been given by the directors under clause 16 of Schedule 9 - whether or not any omission to which the certificate relates was material or affected the giving of the true and fair views required by section 162:

and he shall state in his report particulars of any deficiency, failure or short-coming in respect of any matter referred to in this subsection.

(3) Every auditor shall make such tests of the records and accounts of the company, and such independent examination of the methods by which and the evidence upon which the amounts at which the assets and liabilities have been stated have been determined, as will enable him to form opinions on the matters referred to in subsections (1) and (2).

(4) Every auditor has a right of access at all reasonable times to the accounting and other records (including registers) of the company, and is entitled to require from any officer of the company such information and explanations as he desires for the purposes of audit.

(5) Every auditor of a holding company has a right of access at all reasonable times to the accounting and other records (including registers) of any subsidiary, and is entitled to require from any officer or auditor of any subsidiary, at the expense of the company, such information and explanations in relation to the affairs of the subsidiary as he requires for the purpose of reporting on the group accounts.

(6) The auditors' report shall be attached to the accounts and shall, if any member so requires, be read before the company in general meeting, and is open to inspection by any member at any reasonable time.

(7) The auditor of a company or his duly authorized agent is entitled to attend any general meeting of the company and to receive all notices of, and other communications relating to, any general meeting which a member is entitled to receive, and to be heard at any general meeting which he attends on any part of the business of the meeting which concerns the auditor in his capacity as such.

(8) If the auditor becomes aware that the directors have made default in complying with the provisions of section 136 or subsection (1), (3) or (4) of section 162, the auditor shall immediately inform the Registrar and, if accounts have been prepared and audited, forward to the Registrar a copy of the accounts and of his report thereon.

Penalty: $100. Default penalty: $10.

(9) An officer or auditor of a corporation who refuses or fails without lawful excuse (the burden of proof of which is on him) to allow an auditor access, in accordance with this section, to any accounting and other records (including registers) of the corporation in his custody or control, or to give any information or explanation as and when required under this section, or who otherwise hinders, obstructs or delays an auditor in the performance of his duties or the exercise of his powers, is guilty of an offence against this Act.

Penalty: $100. Default penalty: $10.

Special provisions relating to borrowing and guarantor corporations.

167A. (1) The auditor of a borrowing corporation shall, within 7 days after furnishing the corporation or its members with:

(a) any report relating to the accounts; or

(b) any report, certificate or other document:

that he is required by this Act or by the debentures or trust deed to give to the corporation or its members, send to every trustee for the holders of debentures of the borrowing corporation a copy thereof, together with a copy of each document accompanying the report, certificate or document so furnished.

Penalty: $100. Default penalty: $10.

(2) Where, in the performance of his duties as auditor of a borrowing corporation or a guarantor corporation, the auditor becomes aware of any matter which, in his opinion, is or is likely to be prejudicial to the interests of the holders of debentures of the borrowing corporation and which is relevant to the exercise and performance of the powers and duties imposed by this Act or by any trust deed upon any trustee for the holders of the debentures, he shall, within 7 days after becoming aware of the matter, send a report in writing on the matter to the borrowing corporation and a copy thereof to the trustee.

Penalty: $100. Default penalty: $10.

DIVISION 3 - SPECIAL PROVISIONS RELATING TO BANKING AND LIFE INSURANCE COMPANIES

Exemption from accounts provisions.

167a. (1) Where under the Banking Act 1959-1966 or the Life Insurance Act 1945-1966 of the Commonwealth a company is required to prepare accounts annually, any such account which complies with the provisions of that Act shall be deemed to comply with the provisions of this Act relating to the form and contents of that account.

(2) The provisions of section 162A of this Act do not apply to the accounts referred to in subsection (1) of this section.

(3) In the case of a company registered under the Life Insurance Act 1945-1966 of the Commonwealth, the accounts referred to in subsection (1) of this section shall be lodged with the Registrar within nine months after the end of the financial year to which they relate.'

S. 374B. Liability where proper accounts not kept.

25. Section 374a of the Principal Act shall be amended as follows:

(a) In subsection (1) for the words "proper books of account were not kept by the company" there shall be substituted the expression "the provisions of section 161 had not been complied with in respect of the company"; and

(b) subsection (2) shall be repealed.

S. 375. False and misleading statements.

26. For subsection (2) of section 375 of the Principal Act there shall be substituted the following subsections:

"(2) A person who, in a return, report, certificate, statement, account or other document required by or for the purposes of this Act, wilfully makes or authorizes the making of a statement which is false or misleading in a material particular knowing it to be false or misleading is guilty of an offence against this Act.

Penalty: On conviction upon indictment, $1,000 or imprisonment for two years, or both; on summary conviction, $400 or imprisonment for six months, or both.

(3) For the purposes of subsection (2), a person who votes in favour of the making of a statement referred to in that subsection shall be deemed to have authorized the making of the statement."

New s.378A.

27. After section 378 of the Principal Act there shall be inserted the following section:

False reports.

"378A. An officer of a corporation who, with intent to deceive, makes or furnishes, or who knowingly and wilfully authorizes or permits the making or furnishing of, any statement or report to:

(a) a director, auditor, member or creditor of the corporation;

(b) in the case of a subsidiary an auditor of the holding company; or

(c) a prescribed Stock Exchange in Australia or elsewhere of an officer thereof: relating to the affairs of the corporation is guilty of an offence against this Act.

Penalty: On conviction upon indictment, $1,000 or imprisonment for two years, or both; on summary conviction, $400 or imprisonment for six months, or both."

Eighth Schedule.

28. The Eighth Schedule to the Principal Act shall be amended as follows:

(a) At the end of Part I. there shall be inserted the following paragraph:

"11. Whether or not the accounts of the company were laid before the company at the annual general meeting last preceding the date of the return.";

(b) In Part II., the paragraph bearing the heading:

"Copy of Last Balance-Sheet and Profit and Loss Account of the Company."

shall be amended as follows:

(i) for the heading there shall be substituted the following heading:

"Copy of Last Accounts of the Company.";

(ii) for the words "of the last balance-sheet and of the last profit and loss account" there shall be substituted the words "of the last accounts";

(iii) for the words "and if any such balance-sheet or account" there shall be substituted the words "and if any of those accounts";

(iv) for the words "If the said last balance-sheet or account" there shall be substituted the words "If any of the last accounts";

(v) for the sentence "If a company has more than one such audited balance-sheet or profit and loss account since the date of the last return, every such balance-sheet and profit and loss account must be included" there shall be substituted the sentence "If a company has more than one such audited set of accounts since the date of the last return, every such set of accounts must be included".

(vi) at the end of the paragraph there shall be inserted the following sentence:

"This paragraph does not apply to or in respect of any accounts which have already been lodged with the Registrar".

Ninth Schedule.

29. For the Ninth Schedule to the Principal Act there shall be substituted the following Ninth Schedule:

SCHEDULE 9

Sections 162, 341.

ACCOUNTS

PART I - PRELIMINARY

1. This Schedule is divided into Parts, as follows:

Part I. - Preliminary (Clauses 1-2).

Part II. - Profit and Loss Account (Clauses 3-4).

Part III. - Balance-sheet (Clauses 5-10).

Part IV. - Group Accounts (Clause 11).

Part V. - Provisions Applying to Accounts Generally (Clauses 12-16).

2. (1) In this Schedule:-

"related corporation", in relation to a corporation, means a corporation which is deemed to be related to that corporation by virtue of subsection (5) of section 6 of this Act.

"reserve" does not include any amount written off or retained by way of providing for depreciation, renewal or diminution in value of assets or retained by way of providing for any known liability, or any sum set aside for the purpose of its being used to prevent undue fluctuations in charges for taxation.

(2) Except where the contrary intention appears, expressions used in this Schedule have the same meaning as in Part VI of this Act.

PART II. - PROFIT AND LOSS ACCOUNT

3. There shall be shown in respect of the financial year (whether by way of note or otherwise), in addition to any other matters necessary to prevent a true and fair view of the profit or loss (or other result of operations) of the company: -

(a) the gross revenue including gross sales, showing separately the amount arising from business done with related corporations and the amount arising from business done with other persons;

(b) separately: -

(i) the amount of income received, or due and receivable, as dividends declared on shares in - (A) related corporations; and (B) other corporations;

(ii) the amounts of income received, or due and receivable, as interest on debentures, deposits, loans or advances, or otherwise, from: -

(A) related corporations; and

(B) other persons;

(iii) the amount of any profit arising from the sale or re-valuation of assets (other than current assets) which is brought into account in determining the company's net profit or loss;

(iv) the amount of any other profit arising otherwise than in the ordinary course of business;

(v) the amounts of interest paid, or due and payable, on debentures, deposits, loans or advances, or otherwise, to: -

(A) related corporations; and

(B) other persons;

(vi) the amount of any loss arising from the sale or re-valuation of assets (other than current assets) which is brought into account in determining the company's net profit or loss;

(vii) the amount of any other loss arising otherwise than in the ordinary course or business;

(viii) the amount charged for, or set aside to a provision for, depreciation, diminution in value or amortisation of: -

(A) fixed assets;

(B) investments; and

(ix) the amount charged for, or set aside for, the renewal or replacement of fixed assets;

(x) in respect of each class of debtors' accounts shown separately in the balance-sheet: -

(A) the amount of bad debts written off in the profit and loss account; and

(B) the amount of bad debts written off against any provision, reserve or other account, stating the name of the provision, reserve or account and the amount written off against it;

(xi) in respect of each class of debtor's accounts shown separately in the balance-sheet, the amount set aside to any provision for doubtful debts;

(xii) any amount withdrawn from any provision for doubtful debts and not applied for the purposes of the provision;

(xiii) the total of the amounts paid, or due and payable, as emoluments to directors of the company for their services to the company, including commissions for subscribing or agreeing to subscribe for, or procuring or agreeing to procure subscriptions for, any shares m or debentures of the company, but not including: -

(A) any amounts paid by way of salary to directors engaged in the full-time employment of the company; and

(B) the remuneration received for professional services in addition to his duties as director either directly or indirectly by a director where the director, or a firm of which the director is a member, acts for or advises the company in a professional capacity: -

and indicating what part (if any) of the total amount was paid, or is due and payable, otherwise than by the company;

(xiv) the amounts paid, or due and payable, to directors of the company and to directors of related corporations, and to any firm of which any such director is a member, for acting for or advising the company in a professional capacity, indicating what part of each such amount was paid, or is due and payable, otherwise than by the company; and

(xv) the amounts paid, or due and payable, to the auditors as emoluments for their services to the company, showing separately amounts paid, or due and payable, in respect of: -

(A) the auditing of the accounts; and

(B) other services: -

and indicating what part of each such amount was paid, or is due and payable, otherwise than by the company;

(c) the amount of net profit or loss before provision is made for the payment of income tax in respect of the financial year; and

(d) the amount set aside for the payment of income tax in respect of the financial year.

4. There shall be shown in respect of the financial year (whether by way of note or otherwise), separately: -

(a) the amount of unappropriated profits or accumulated losses (however described) at the beginning of the financial year;

(b) the amount of net profit or loss after providing for payment of income tax in respect of the financial year;

(c) any amount set aside in the financial year to any provision for the payment of income tax in respect of periods other than the financial year, and any amount withdrawn from any such provision (whenever made) where the amount withdrawn was not applied for the purposes of the provision;

(d) any amount set aside or proposed to be set aside to, or withdrawn or proposed to be withdrawn from, any reserve;

(e) any amount set aside to a provision (other than a provision specifically provided for in this Part of this Schedule), and any amount withdrawn from any such provision where the amount withdrawn was not applied for the purposes of the provision;

(f) any amount set aside for redemption of share capital or of loans;

(g) the amount of dividends paid during the financial year and the amount of dividends proposed to be paid, excluding any amount shown in a profit and loss account or balance-sheet relating to a previous financial year as an amount paid or proposed to be paid by way of dividends;

(h) the amount of any other appropriation or adjustment which affects the amount of unappropriated profits or accumulated losses at the end of the financial year; and

(i) the amount of unappropriated profits or accumulated losses (however described) at the end of the financial year.

PART III. - BALANCE-SHEET

5. There shall be shown as at the end of the financial year (whether by way or note or otherwise: -

(a) the amounts and particulars of capital, reserves and provisions, showing separately: -

(i) the amount and particulars of authorized capital, and the amount and particulars of issued capital, calls in arrear and paid-up capital, distinguishing in ,hose particulars between any different classes of shares;

(ii) where any part of the capital consists of preference shares: -

(A) the rate of dividend on each class;

(B) the amount of arrears of dividend on each class;

(D) whether they are to be redeemed or at the option of the company are to be liable to be redeemed;

(E) if they are to be redeemed or at the option of the company are to be liable to be redeemed: -

the date on or before which they are to be redeemed or are to be liable to be redeemed;

the earliest date on which the company has power to redeem them; and

the amount of the premium (if any) at which they are to be redeemed or are to be liable to be redeemed:

(iii) the amount of capital which is not capable of being called up except in the event of, and for the purposes of, the winding up of the company;

(iv) the amount of capital upon which interest has been paid out of capital during the financial year (showing the rate of interest so paid);

(v) in the case of a no-liability company: -

(A) the total number of shares forfeited and remaining unsold; and

(B) the number of shares forfeited during the financial year, showing the, number of shares forfeited in respect of each call and the amount of each such call;

(vi) the amounts of reserves of all descriptions, stating separately each class and indicating clearly its purpose;

(vii) the amount of the share premium account;

(viii) the amount of unappropriated profits or accumulated losses (if any) as shown under paragraph (i) of clause 4 of this schedule, showing any accumulated losses (insofar as they have not been written off) as a deduction from the amount of paid-up capital and reserves;

(ix) the amounts and particulars of provisions, stating separately:

(A) the amount of any provision for depreciation, diminution in value or amortization of assets, shown as deductions from the amounts of the respective assets;

(B) the amount of any provision for bad and doubtful debts shown as deductions from the amounts of the respective debtors' accounts to which the provision relates;

(C) the amount of provision for income tax, distinguishing between the amount provided for current liability and that provided for future liability, and showing separately any amount provided for the purpose of its being used to prevent undue fluctuations in liabilities for income tax; and

(D) the amount and purpose of any other provision shown, if appropriate, as a deduction from the amount of the asset to which the provision relates; and

(b) the amounts and descriptions of all current liabilities and non-current liabilities, under headings appropriate to the company's business, and arranged in classes under those headings according to their nature or function in the business, showing separately: -

(i) bank loans;

(ii) bank overdrafts;

(iii) debentures held by: -

(A) subsidiaries;

(B) other related corporations; and

(iv) the amount due to trade creditors and on bills payable;

(v) other amounts payable to:-

(A) subsidiaries; and

(B) other related corporations;

(vi) the aggregate amount or estimated aggregate amount, and particulars, of capital expenditure contracted for, so far as the amount has not been provided for;

(vii) if not otherwise shown, the estimated amounts, and particulars, of contingent liabilities, so far as those amounts have not been otherwise provided for; and

(viii) the amounts and descriptions of other liabilities, giving particulars of their nature; and

(c) the amounts and descriptions of all fixed assets, intangible assets, current assets, investments and assets of any other kind, under headings appropriate to the company's business, and arranged in classes under those headings according to their nature or function in the business, showing separately: -

(i) cash at bank and in hand;

(ii) stock on hand;

(iii) works in progress;

(iv) government, municipal and other public debentures, stock and bonds;

(v) shares in:

(A) subsidiaries;

(B) the holding company;

(D) corporations which are not related corporations, being shares which are quoted on any prescribed Stock Exchange in Australia or elsewhere; and

(E) other corporations;

(vi) debentures of: -

(A) subsidiaries;

(B) the holding company;

(D) corporations which are not related corporations, being debentures which are quoted on a prescribed Stock Exchange in Australia or elsewhere; and

(E) other corporations;

(vii) the amount due from trade debtors and on bills receivable;

(viii) other amounts receivable from: -

(A) subsidiaries;

(B) the holding company;

(D) other persons;

(ix) the total amount outstanding of any loans made, guaranteed or secured by the company, being loans made to the directors of the company or of a related corporation, or loans made to any other corporation in which a director or directors of the company, or of a related corporation, owns or own a controlling interest;

(x) the amounts of the values of goodwill and any patents and trademarks, insofar as those amounts have not been written off;

(xi) the amounts of each of the following, in so far as they have not been written off: -

(A) preliminary expenses;

(B) any expenses incurred in connection with any issue of shares or debentures;

(D) any sums allowed by way of discount in respect of debentures; and

(E) any sum allowed by way of discount on any issue of shares; and

(xii) amounts and descriptions of other assets, giving particulars of their nature.

6. In respect of each amount owing by the company shown in the balance-sheet, the payment of which is secured by a charge on assets of the company, whether registered or unregistered, there shall be shown a statement that it is so secured and the extent to which it is secured, and each such amount shall be distinguished from any other amounts owing by the company the payment of which is not so secured.

7. Current liabilities and current assets shall be clearly distinguished from other liabilities and assets.

8. Notwithstanding anything in this schedule contained: -

(a) where the amount of any class of asset or liability is not material, it may be joined with some other class having a similar nature or function; and

(b) where an asset or liability of one class is not separable from an asset or liability of another class, those assets or liabilities may be joined together.

9. (1) In respect of all fixed assets, investments, stock on hand and works in progress shown in the balance-sheet there shall be stated the method of arriving at the amount thereof, and when more than one method is used a separate total shall be shown in respect of each of the methods used.

(2) The method of arriving at the amount of any fixed asset or any investment shall be, subject to the succeeding provisions of this clause, to take the difference between: -

(a) its cost, or if it stands in the company's books at a value other than cost that value; and

(b) the aggregate amount written off since the date of acquisition or valuation, as the case may be.

(3) For the purposes of subclause (2) of this clause, the net amount at which any assets stood in the company's books at the commencement of the Companies Act 1961 (after deduction of the amounts previously provided or written off for depreciation, diminution in value or amortization) shall, if the figures relating to the period before that commencement cannot be obtained without unreasonable expense or delay, be treated, until a valuation is made, as if it were the amount of a valuation of those assets made on the date of commencement of that Act, and where any of those assets are sold, that net amount (less the amount of the valuation, as at that date, of the assets that have been sold) shall be treated as if it were the amount of a valuation of the remaining assets made on that date.

(4) Subclause (2) of this clause does not apply to fixed assets the replacement of which is provided for wholly or partly: -

(a) by making any provision for renewal or replacement and charging the cost of renewal or replacement against that provision; or

(b) by charging the cost of renewal or replacement directly against profits: -

but in respect of those assets there shall be stated: -

(d) the aggregate amount of the provisions (if any) made for renewal or replacement and not used.

(5) If an investment of a kind referred to in subparagraph (iv), (v) or (vi) of paragraph (c) of clause 5 of this Schedule is quoted on any prescribed Stock Exchange in Australia or elsewhere, there shall be shown (whether by way of note or otherwise) the aggregate quoted market value, calculated on the official quotation of that Exchange, of that investment.

(6) Where the amount of any fixed asset or investment is shown otherwise than at cost or as calculated in accordance with subclause (3) or {5) of this clause, there shall be shown (whether by way of note or otherwise) the date of the valuation and whether or not the valuation was made by an officer of the company or of a related corporation, and if the valuation was made during the financial year by a person not being such an officer, the name of the person who valued it and particulars of his qualifications shall be shown.

(7) Where the information required by subclause (6) of this clause has already been shown in a previous balance-sheet, it is a sufficient compliance with that subclause if the expression "Officer's valuation" or "Independent valuation", whichever is appropriate, is shown, together with the date of the valuation.

(8) In addition to any other information required to be shown, there shall be shown separately (whether by way of note or otherwise), in respect of land or interests in land acquired or held for sale or resale so far as they have not been written off: -

(a) the total cost of acquisition (exclusive of any costs of surveys, roads and drainage and other developmental expenses);

(b) the total of any developmental expenses capitalized; and

10. There shall be shown (whether by way of note or otherwise) in the balance-sheet of every company which is a borrowing corporation or a guarantor corporation a schedule setting out, separately, estimates of the amounts payable by, and the debts payable to, the company: -

(a) not later than two years;

(b) later than two years but not later than five years; and

calculated from the end of the financial year.

PART IV. - GROUP ACCOUNTING.

11. (1) Group accounts of a holding company shall state (whether by way of note or otherwise): -

(a) the name and place of incorporation of each subsidiary, and if any business of the subsidiary is carried on in a country other than Australia, the name of that country;

(b) the amount of the holding company's investment in each class of the share capital of each subsidiary; and

(c) where the financial year of a subsidiary does not coincide with the financial year of the holding company, the date on which the financial year of the subsidiary ends.

(2) Where any consolidated accounts are to be laid before a holding company in annual general meeting, the effect of all transactions and balances as between the corporations covered by the accounts shall be eliminated from the accounts.

(3) Subject to subclause (4) of this clause, where separate accounts of a subsidiary are to be laid before the holding company in annual general meeting as part of the group accounts, the profit and loss account and the balance-sheet of the subsidiary shall be in the same form as the profit and loss account and balance-sheet, respectively, of the holding company.

(4) In the case of a subsidiary incorporated outside the State (whether or not it has established a place of business in the State), it is a sufficient compliance with the provisions of subclause (3) of this clause in relation to the separate profit and loss account or balance-sheet if the profit and loss account or balance-sheet (as the case may be): -

(a) is in such form;

(b) is reported on by an auditor in such manner;

(d) includes or is accompanied by such documents (if any): -

as is required by the law applicable to the subsidiary in its place of incorporation for a profit and loss account or balance-sheet, as the case may be, to be !aid before the subsidiary in general meeting.

(5) Where group accounts are prepared in accordance with paragraph (b) of the definition of "group accounts" in subsection (1) of section 5 of this Act, the directors of the holding company, shall certify on, or m a certificate attached to, the accounts: -

(a) that in their opinion the presentation of the accounts in the form in which they have been prepared rather than as one set of consolidated accounts covering the group of companies would give the same or the equivalent information as to the state of affairs and the profit or loss (or other result of operations) of the group and in a more readily understandable form; and

(b) the reasons why, in their opinion, the accounts should be presented in that form.

(6) Where any accounts included in group accounts paid before a holding company are presented in a form or grouping different from that in which the immediately preceding group accounts (if any) were so laid, the directors shall certify on, or in a certificate attached to, the accounts the names of the corporations the accounts of which have been so presented and the reasons therefor.

(7) A certification under subclause (5) or (6) of this clause shall be signed by not less than two directors, or in the case of a proprietary company having only one director by that director.

PART V. - PROVISIONS APPLYING TO ACCOUNTS GENERALLY.

12. All amounts shown in the accounts shall be expressed in Australian currency, and where any conversion into Australian currency is made for that purpose it shall be made as at the end of the financial year and there shall be stated by way of note the basis and rate of the conversion of the other currency into Australian currency.

13. (1) Except in the case of the first accounts after the incorporation of the company, there shall be shown: -

(a) in every balance-sheet the corresponding amounts in the last balance-sheet; and

(b) in every profit and loss account the corresponding amounts for the corresponding period of the immediately preceding financial year: -

and where the respective financial years are not equal in length, the periods covered shall be clearly indicated by way of note or otherwise.

(2) If: -

(a) the balance-sheet does not include an item corresponding to an item in the last balance-sheet; or

(b) the profit and loss account does not include an item corresponding to an item in the profit and loss account covering the corresponding period of the immediately preceding financial year: -

that previous item and the amount thereof shall be shown in the accounts.

14. Where the accounts could be misleading by reason of a failure to explain the method used in dealing with, or in calculating the amount of, any item or information included in or excluded from the accounts, there shall be stated (whether by way of note or otherwise) the method by which that item or information has been dealt with or the amount thereof arrived at, and in particular): -

(a) where any expenses have been capitalized, the amount and nature of those expenses shall be shown; and

(b) where any item or information is shown in the accounts in relation to unearned income, there shall be stated the amount (if any) brought forward from a previous financial year and brought to account as income, and a short statement of the method by which the amount of unearned income has been calculated.

15. In relation to debts owing to the company, any sums which consist of or are in the nature of interest, accommodation charges, service charges, maintenance charges or insurance premiums which have not been earned at the end of the financial year shall not be included in the gross amount of debts unless that unearned income is shown as a deduction from that amount.

16. Where, in any accounts of a company, any item or information referred to in Part VI, of this Act or in this Schedule is omitted, the directors shall certify, on or in a certificate attached to the accounts, that in their opinion no such omission was material or affected the giving of the true and fair views required by section 162 of this Act."

Application of accounts provisions.

30. The amendments effected by this Act relating to the form and content of accounts apply, in relation to any company, to and in respect of the first full financial year of the company after the date of commencement of this Act, and of each such financial year thereafter.

(Other provisions matters for each State or Territory.)