In addition to providing broad oversight of the processes for setting accounting and auditing standards and strategic advice on the quality of audits conducted by Australian auditors, the FRC is also charged with:
- establishing appropriate consultative mechanisms; and
- promoting the main objects of Part 12 of the ASIC Act.
The objects of Part 12 of the Act are broadly to facilitate the development of high quality accounting standards and auditing and assurance standards and related guidance materials in order to facilitate the Australian economy and to maintain investor confidence in the Australian economy.
3.2. Domestic stakeholder engagement
To meet its statutory responsibilities the FRC seeks views from a broad range of stakeholders, including users, preparers and auditors of financial reports. Among the stakeholders are the Commonwealth, State and Territory governments, standard setters and industry regulators, as well as professional accounting, business and investor bodies. Key stakeholder bodies are represented on the FRC as members.
Over the past year, the FRC has engaged with domestic stakeholders through a variety of means, including:
- regular meetings and other involvement with stakeholders and interest groups;
- consideration of financial reporting issues in the public and private sectors; and
- consultation with stakeholders on key strategic issues through the work of the FRC Taskforces and Committees and targeted stakeholder surveys.
The FRC Chairman has also regularly met with key stakeholders to discuss financial reporting matters of general interest, obtain feedback on the work of the FRC, explain the activities of the FRC, and discuss matters of particular interest to the stakeholder. In addition she has attended a number of public fora where issues of relevance to the FRC have been discussed.
In November 2012 the FRC Chairman and members of the Secretariat met the then Parliamentary Secretary to the Treasurer, the Hon. Bernie Ripoll, MP. The Chairman also had meetings with a number of Treasury officials. In November 2012 she also met the Chairmen of the AASB (Kevin Stevenson), AUASB (Merran Kelsall) and ASIC (Greg Medcraft).
The FRC Chairman and Secretary met the then Parliamentary Secretary to the Treasurer again, in March 2013. At this time, the FRC Chairman also met with officials at the Treasury and the Department of Finance and Deregulation to discuss a variety of FRC issues, including the FRC budget and Strategic Plan.
The FRC Chairman met a variety of individual stakeholders during the period, including Ms Jan McCahey of PricewaterhouseCoopers (PwC), Mr Warren McGregor (AASB), Ms Africa Zanella (Global Reporting Initiative), Ms Liz Prescott (IIRC), Ian Curry (ASA), stakeholders from the Australian Council of Superannuation Investors, Business Council of Australia, Group of 100 (G100), Ms Nicola Steele from the Australian Institute of Company Directors (AICD) and Mr Doug Niven of ASIC.
She also attended a meeting with the Australian Public Policy Committee (APPC) on 15 March 2013 in conjunction with Michael Coleman, Chairman of the FRC Audit Quality Committee and Erin Flynn, Committee Secretary. At the meeting it was agreed that the APPC would work with the Audit Quality Committee to discuss key audit issues.
The Parliamentary Joint Committee on Corporations and Financial Services (PJC) held an ASIC Oversight hearing on the morning of 15 March 2013 on audit issues that was attended by the FRC Chairman and Mr Jim Murphy on behalf of the FRC, and Mr Bruce Paine on behalf of the FRC Secretariat. Ms Merran Kelsall attended in her role as Chairman of the AUASB. Ms Liz Stamford of the ICAA also attended the same session. ASIC Commissioners attended a subsequent hearing. In her statement to the PJC, the FRC Chairman set out the current responsibilities of various parties with respect to financial reports, including directors, auditors, ASIC, the AUASB and the FRC, as set out in the Corporations Act. She also discussed the FRC's revised responsibilities under the Audit Enhancement Act, and the establishment of the FRC Audit Quality Committee to advise the FRC on meeting these revised responsibilities.
In May 2013 the FRC Chairman participated on a panel at the annual G100 National Congress in Sydney, which focused on effective corporate reporting.
3.3. Strategic activities
In 2012-13 the FRC continued the work it had identified in its 2011-2014 Strategic Plan. The 2011-2014 Strategic Plan identified a number of priority projects for which the FRC intended to take a thought leadership role, including in relation to integrated reporting, managing complexity in financial reporting, promoting board understanding of financial reporting and public sector financial reporting. The work of the FRC in each of these areas during 2012-2013 is discussed in the subsequent sub-sections.
During the period the FRC also reviewed the 2011-2014 Strategic Plan. The Strategic Plan was updated in light of the June 2012 changes to the ASIC Act, which considerably revised the FRC's functions in relation to audit quality. The review also identified the strengths and weaknesses of, and opportunities and threats facing, the financial reporting system in Australia today. Following these considerations, in June 2013 the FRC adopted the 2013-2016 Strategic Plan, a copy of which is available as Appendix A (FRC website: FRC Strategic Plan 2013-2016).
The new strategic plan concludes that, while the financial reporting system held up well during the GFC, the financial reporting environment has become more complex. The reasons for this included extensive disclosure requirements and legislative initiatives flowing from concerns about business failures and sovereign debt problems during the GFC, which had underlined the importance of financial reporting and auditing standards, audit quality and related matters for governments and international bodies. The complexity and length of financial reports is a weakness of the system and may mean that the system is not appropriately meeting the needs of investors and other stakeholders.
The review also revealed a number of ongoing and emerging issues that needed to be monitored, including a loss of momentum towards a single set of international standards if the US decides not to adopt IFRS, the trend towards uniform regulation internationally which could lead to inappropriate regulation of the audit profession globally, and additional reporting requirements (for example, on Corporate Social Responsibility (CSR) or Environmental, Social and Governance (ESG) matters) that could further increase the complexity of financial reports.
A number of the existing taskforces monitor these issues. In addition, during 2012-2013 the FRC established the Financial Report Taskforce.
3.3.1. Strategic plan
During 2012-13 the FRC approved the establishment of a Strategic Plan Committee, primarily to undertake the review of the FRC Strategic Plan. The Committee has also considered other high level matters that do not fall within the purview of other Committees and taskforces, such as a review of the Memoranda of Understanding with stakeholder bodies, the FRC Performance of Functions document and FRC proposals to the G20 for 2014.
3.3.2. Public sector financial reporting
The Public Sector Taskforce has played an important role in consulting with domestic stakeholders on whether the FRC Strategic Direction relating to public sector accounting (harmonisation of GFS and GAAP reporting) is working successfully in 2012-13, and in providing advice to the FRC on the AASB proposal on phase 2 of this Strategic Direction. Given the ongoing nature of this role, the taskforce was relabelled as a Committee during 2012-13.
In addition the Public Sector Committee has produced a number of other valuable outputs:
- a package of documents on the Australian public sector financial reporting system (FRC website: Public Sector Financial Reporting in Australia), to assist in explaining this system and promoting the characteristics of good public sector financial reporting systems more broadly;
- a submission in July 2012 to the International Federation of Accountants' (IFAC) Public Interest Oversight Board/Monitoring Group public consultation to the Monitoring Group Review and Public Interest Oversight Board Work Program suggesting ways forward on governance, funding and the International Public Sector Accounting Standards Board (IPSASB); and
- input to the Monitoring Group on the governance of public sector accounting standards in January 2013.
The Public Sector Committee plans to meet once a year in order to undertake an environmental scan of upcoming issues that will impact on public sector reporting and governance, in order to provide input through the FRC to the AASB's planning process.
3.3.3. Financial reporting
The Financial Report Taskforce was established in February 2013 to follow up on the first recommendation of the Managing Complexity Taskforce report. The key objective of the Task Force is to provide policy advice to the Financial Reporting Council (FRC):
- examining how the current financial reporting regimes for the various types of reporting entities in Australia can best be understood and, if needed, make recommendations regarding rationalisation of the regimes.
3.3.4. Integrated reporting
While much of the focus on integrated reporting is global in nature, following the work of the IIRC, the FRC's Integrated Reporting Taskforce has consulted broadly with domestic stakeholders regarding the development of integrated reporting. In particular the Taskforce and other FRC members have worked with, and held discussions with: the Minister; other relevant accounting and auditing stakeholders; and other bodies in this space including the Business Reporting Leaders Forum and the Global Reporting Initiative. The Taskforce issued What do we mean by the term 'Financial Reporting', especially in relation to Integrated Reporting? an explanatory paper incorporating comments made by the IIRC in February 2013.
The IIRC released the Consultative draft of the International IR Framework on 16 April 2013, for a three-month consultation period.
3.3.5. Managing complexity
As part of the FRC's 2011-14 Strategic Plan, the Managing Complexity Taskforce was established to review the issue of complexity in financial reporting — in particular the sources of complexity in reporting, and possible ways to manage this complexity. In May 2012 the taskforce released a report on the outcomes of the review and inviting submissions. Fifteen submissions from key stakeholders were received, and the taskforce then considered the comments received. On 3 October 2012 the taskforce issued its final report (FRC website: Managing Complexity in Financial Reporting) outlining the findings drawn from the submissions.
While the taskforce concluded its work with the report, the FRC has been assiduously following the implementation of its recommendations. These outcomes have been collated in Appendix D, and are also available on the FRC website.
3.3.6. Promoting board education
As part of the FRC's 2011-14 Strategic Plan, the Board Education Taskforce was established to consider the issue of board understanding of financial reporting. In September 2012, the Board Education Taskforce published the findings of its survey of directors and financial reporting professionals (FRC website: Results of Survey on the Financial Literacy of Australian Directors). The survey, ably conducted by the ASX, was designed to identify whether there were any issues in terms of the financial literacy of directors in Australia and, if so, how to address them.
The follow up actions for the survey's findings were consolidated and discussed at the meeting of the FRC on 13 June 2013. These actions are collated in Appendix E (FRC website: Financial Literacy of Australian Directors).