ASIC Report

  • Date:01 Dec 2007
  • Type:CompanyDirectorMagazine

Strengthening the independence of experts

Reports by experts are commonplace in our financial system and often greatly influence how the market forms a view on value and the fairness of a takeover bid or other proposal.

These reports can inform retail and institutional investors on technical issues such as an assessment of a scheme of arrangement through to providing a specialist opinion on the geological characteristics of a mineral deposit.

Regardless of the purpose of such a report, one underlying principle exists: an expert report that is biased frustrates rather than assists informed decision-making.

Security holders will rightly assume that an expert report is an independent opinion, whether the report is mandatory or voluntary, and will be misled if this is not the case.

That is why the Australian Securities and Investments Commission (ASIC) takes an interest in these reports and has recently issued new regulatory guidance on the independence of experts.

Two fundamental points underpin the independence of experts:

  • An expert should be, and should also appear to be, independent; and

  • An expert should give an opinion that is genuinely the expert’s own opinion.

The Corporations Act contains indicators that an expert must be, and must appear to be, independent in the provisions requiring an expert report for certain takeover bids, schemes of arrangement, for a compulsory acquisition and in the Australian Financial Services licensee conflict management provisions.

The independence of an expert is also established in case law, which identifies that the independence of an expert is critical for the protection of security holders.

The courts have also required the opinion of an expert to be genuine and a product of the expert’s professional judgement. Clearly, an expert’s opinion that is tailored to support the views of the commissioning party, or any other party, is not a genuine opinion. It may also be misleading or deceptive.

Obviously, any relationship between the expert and the commissioning party can have a bearing on the issue of independence.

Where a relationship exists that may, in either real or perceived terms, affect the expert’s ability to prepare an independent report, then the expert needs to consider declining the engagement or determine if the issue can be adequately dealt with through other measures including disclosure in the expert report.

Those commissioning an expert report also need to be mindful of the real and perceived issues that existing relationships between them and the expert create.

Equally, care should be taken to avoid any communication with the expert that may undermine, or appear to undermine, independence. This is relevant to discussions on issues such as the choice of methodologies or the process for evaluating a transaction. While an expert may seek information for the purposes of producing an analysis, an expert should not be taking instructions from, or holding discussions with, interested parties.

Having successfully addressed the issue of independence and relationships, the eagerly awaited expert’s report has arrived in draft form. The board and its advisers closely read its contents. A discussion about the expert’s analysis develops. People want changes.

ASIC’s regulatory guidance makes it clear that such a draft report is provided to the commissioning party for the purposes of factual checking only. The report’s analysis should only be altered if the expert is persuaded that all or part of the assessment is based on an error of fact.

However, any alteration made at the suggestion of the commissioning party or its advisers that affects the report’s analysis or conclusions should be clearly and prominently disclosed in the report, including an explanation of the changes and why the expert considered them appropriate.

ASIC believes that expert reports provide market participants with a valuable decision-making tool. They are an important aspect of a transparent and confident market and as such, need to contribute to the market’s, knowledge base by presenting truly independent expert analysis.

ASIC’s new regulatory guidance reinforces the need for experts to be truly independent.

For further information, visit: to review ASIC Regulatory Guide 112: Independence of Experts.

John Price, acting executive director regulation, Australian Securities and Investments Commission