4. International developments in auditor independence
Subsection 225(2B)(e) of the ASIC Act provides that the FRC is to monitor international developments in auditor independence, assess the adequacy of the Australian auditor independence requirements provided for in the Corporations Act and the codes of professional conduct in light of those developments and give the Minister, and the professional accounting bodies, reports and advice on any additional measures needed to enhance the independence of Australian auditors.
Monitoring developments
During 2007-08, the FRC monitored international developments through the monitoring and consideration of general media reports about audit independence issues as well as material placed on the internet websites of key overseas oversight and standard setting bodies and other regulatory agencies (such as the International Ethics Standards Board for Accountants (IESBA), the International Accounting Education Standards Board (IAESB), the Financial Stability Forum, the UK Professional Oversight Board and the US PCAOB).
In addition, Mr Macek and Mr Lucy, Chairmen of the FRC for, respectively, the period to December 2007 and from December 2007 to date, met with representatives of overseas oversight bodies during international visits in October 2007 and March 2008. The Chairmen were accompanied by a representative from the FRC Secretariat.
One key development during the year was the release by the International Federation of Accountants (IFAC) of a report entitled The Financial Reporting Supply Chain: Current Perspectives and Directions'. A number of the report's findings, which are based on an independent global survey of participants in the financial reporting supply chain, have ramifications for audit independence.
The report is based on a global survey commissioned by IFAC to assess the impact of the significant efforts in recent years to change and improve financial reporting. The report identifies positive aspects of the financial reporting supply chain, areas of concern and recommended next steps. In relation to audit independence, the report finds that the strengthening of the independence rules for auditors in recent years has been a positive move that has yielded good results. To further strengthen external audit and to preserve public confidence, the report suggests that a continued focus on independence, objectivity and integrity is required as a priority.
The report identifies some form of audit rotation as a positive for maintaining audit independence, objectivity and integrity. However, it also noted that audit rotation has raised concerns about the loss of valuable knowledge and experience, long lead times to get up to speed and more expensive audits.
A further area of concern identified in the report with potential repercussions for audit independence, is the limited choice of audit firms. It can often be the case that for listed companies the choice may be made only between the Big Four firms. If one is the outgoing auditor and another is providing consultancy services, the choice is narrowed down to two firms. The report recommends the removal of unnecessary barriers that limit the choice of auditor. The level of liability of auditors is seen as one area acting as a barrier to increased supply of auditors and competition between firms.
Further audit independence related international developments included:
- The significant advancement of the independence project of the IESBA. During the year, the IESBA made progress in revising and updating the independence requirements in IFAC's Code of Ethics for Professional Accountants, addressing the meaning of public interest entities' and partner rotation issues and strengthening guidance on additional services provided by auditors. These changes were approved by the IESBA in January 2008.
- The release of two major pieces of guidance by the IAESB aimed at assisting professional accountancy organisations and educators in developing high quality ethics education. Specifically, the IAESB released International Education Practice Statement (IEPS) 1, Approaches to Developing and Maintaining Professional Values, Ethics, and Attitudes, and the Ethics Education Tool Kit, which features case studies and supporting notes, presentations, video clips, and other teaching materials. In addition, the IAESB released two IEPSs in 2007-08 addressing information technology and practical experience requirements.
The FRC did not become aware of any international developments during the year that suggest Australia's audit independence requirements are in need of revision or further enhancement. However, in light of recent financial market turmoil, the FRC considers that there may be merit in refreshing awareness of ethical standards and therefore proposes to continue to closely monitor international developments in 2008-09 in relation to the setting, teaching and enforcement of ethical standards as they relate to audit independence.