5. Other independence-related issues
This section of the report deals with the following matters:
- issues associated with the CLERP 9 reforms;
- ASIC’s inspection powers;
- auditors who are not members of an accounting body;
- staffing issues; and
- non-Corporations Act audits.
Issues associated with the CLERP 9 reforms
In its previous independence reports, the FRC commented on the anomalies and unintended consequences of CLERP 9 and a number of other issues raised by the MOU parties, accounting firms and other stakeholders with respect to the implementation of CLERP 9. The reports also noted the cooperation between Treasury, ASIC, the accounting bodies and the accounting firms in resolving these issues.
Three issues were addressed through amendments to the Corporations Regulations 2001 made on 1 June 2006:
- the introduction of an ‘ordinary course of business’ exemption in relation to the prohibition on an audit firm owing more than $5,000 to an audit client;
- clarification that cheque and savings accounts are not intended to be covered by the prohibition on loans by an audit firm to an audit client; and
- giving ASIC the power to extend the period within which an auditor is required to resolve a conflict of interest situation beyond the 21 days allowed under the Corporations Act 2001.
Two other issues, which related to the auditor’s independence declaration, were addressed by ASIC class orders.
Subsequently, in the context of the Government’s consultation process to simplify the regulatory system, it was decided that the auditor independence issues dealt with in the Corporations Regulations and ASIC class orders should be incorporated into the Corporations Act. This was achieved in conjunction with a range of amendments to the Corporations Act included in the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007, which was passed by the Australian Parliament during June 2007.
ASIC’s inspection powers
In its 2004-05 independence report, the FRC noted that ASIC’s powers of inspection in relation to audit firms needed to be clarified. In that report the FRC also noted the release of a consultation paper by the Australian Treasury containing proposals for law reform in this respect.
Following consultation between Treasury and interested parties (including audit firms), changes to ASIC’s inspection powers were made during 2006-07, when the ASIC Act was amended to:
- provide ASIC with enhanced information gathering powers in relation to audit inspections; and
- facilitate ASIC entering into cooperative arrangements with foreign regulatory bodies relating to audit regulation. 12
During July 2007, the Parliamentary Secretary to the Treasurer gave his consent for ASIC to enter into a cooperative audit oversight arrangement with the US Public Company Accounting Oversight Board (PCAOB). The first joint ASIC/PCAOB inspection under this arrangement commenced at one of the major accounting firms during September 2007.
Auditors who are not members of an accounting body
The 2004-05 independence report included an observation that an issue that needs to be considered further is the case of RCAs who are not members of a professional accounting body and, therefore, are not subject to any of the professional development requirements, ethical requirements, or disciplinary procedures of those bodies.
During 2006-07 the FRC, in consultation with ASIC and the professional accounting bodies, reviewed the Register of Company Auditors to obtain statistical information about the professional affiliations of those auditors. The review was based on the register as at 14 November 2006, when a total of 5,815 individuals were registered.
Key findings of the review were:
- 87.8 per cent of RCAs were members of at least one of Australia’s three professional accounting bodies;
- 0.1 per cent of RCAs were members of an overseas-based professional body; and
- no professional affiliation could be identified for 12.1 per cent of RCAs.
In view of the high number of RCAs for whom no professional affiliation could be identified, ASIC reviewed a 10 per cent sample of those RCAs to obtain information about the size and types of audits being performed by them. The information gathered by ASIC indicates that:
- 67.6 per cent of the RCAs included in the sample had stated in documents lodged with ASIC that they were members of a professional accounting body;
- 14.1 per cent of the sample listed no audits in the latest annual statement lodged with ASIC;
- the sample disclosed that the highest audit fee for both Corporations Act and non-Corporations Act audits was in the band $20,001-$50,000: fees of this level were received by 16.7 per cent of those RCAs who performed Corporations Act audits; and
- the maximum audit fee received by the majority of RCAs included in the sample was in the band $0-$5,000: maximum fees of this level were received by 61.9 per cent of those auditors who performed Corporations Act audits.
On the basis of these figures, the FRC has formed the view that those RCAs for whom no professional affiliation could be identified do not currently pose a risk for the overall integrity of Australia’s auditing regime. Notwithstanding this conclusion, the FRC considers that there should be ongoing monitoring of the number of RCAs who are not affiliated with a professional accounting body.
The FRC believes that, while there is currently no requirement for RCAs to be members of a professional accounting body, there may be merit in the Government giving consideration to making membership of a professional accounting body a prerequisite for registration as a company auditor. Having such a requirement would ensure that all RCAs have on-going obligations to undertake continuing professional development activities so as to ensure that they remain qualified and equipped to discharge their responsibilities as provided for in the legislation. The FRC understands that having membership of a professional body as a prerequisite for registration as a company auditor would bring Australian requirements more closely into line with those in overseas jurisdictions.
Staffing issues
One of the issues raised with the FRC during its meetings with MOU bodies and other stakeholders was the difficulty of recruiting staff for firms operating within the audit profession. While the recruitment of staff is a matter that is generally outside the FRC’s area of responsibility, the FRC does nevertheless maintain a high-level overview of staffing-related developments that may ultimately have consequences for auditors and their independence.
During 2006-07, the FRC’s attention was drawn to the fact that audit-related work for some Australian audit clients of a major audit firm was being performed in an offshore jurisdiction using staff engaged by the Australian firm in that jurisdiction. The FRC understands that this development is part of the globalisation that is taking place in many industries and it will monitor such developments for the purpose of considering actual or potential implications for auditor independence. This will include offshore staff of local audit firms being subject to the same standards of disciplinary, quality control and ethical standards that apply to Australian-based staff.
Another issue that was raised with the FRC during the period was the ‘fast track’ education system introduced by the ICAA in conjunction with Deakin University to bring graduates with non-traditional degrees into the accounting profession. A similar system has been in place in the UK for at least 30 years. The FRC notes that the object of the ‘fast track’ courses have been introduced to provide, in part, a solution to the long-standing problem of a shortage of accountants in Australia. Many of the audit firms when interviewed remarked that qualified and experienced positions in their audit and assurance business were the most difficult to fill principally because of the growth of the business due to increased regulatory requirements. Western Australia, which has many listed mining companies, was seen to be the most challenging geographic area for the recruitment of staff. The FRC proposes monitoring this positive development as part of its future work programmes, including considering what, if any, implications there may be for auditor independence.
Non-Corporations Act audits
While non-Corporations Act audits are not within the prime ambit of the FRC’s responsibility, the FRC maintains a watching brief concerning independence issues that may arise in respect of such audits.
During 2006-07, the FRC consulted the Parliamentary Secretary to the Treasurer on whether it would be appropriate for the FRC to expand the scope of its auditor independence work to encompass independence issues in respect of non-Corporations Act audits, especially in the area of self-managed superannuation funds (SMSFs). The Parliamentary Secretary advised the FRC that, as the Government had provided additional funding to the Australian Taxation Office (ATO) of $112 million over the period 2006-07 to 2009-10 for better regulation of SMSFs (including the effectiveness of SMSF auditors), it would be sensible for the FRC to defer its work for at least 12 months in order to give the ATO sufficient time to make substantial progress in implementing its SMSF auditor programme. The Parliamentary Secretary also indicated that a deferral of the FRC’s proposed work on SMSFs would enable the FRC to be better informed by the outcomes from the ATO programme, and that the FRC should raise the issue with the Minister in 2007-08 when the Minister would be in a position to consider the FRC’s proposal in light of the progress the ATO had made in implementing its programme for SMSF auditors.
In view of the Parliamentary Secretary’s advice, the FRC will limit its work on non-Corporations Act audits in 2007-08 to monitoring any independence issues that may arise in relation to audits of SMSFs and other non-Corporations Act entities.
12 The amendments were made by the Australian Securities and Investments Commission Amendment (Audit Inspection) Act 2007 and were effective from 20 February 2007.