3.1 Introduction

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 former FRC Chairman met regularly with key stakeholders during 2013-14 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 attended a number of public fora where issues of relevance to the FRC have been discussed and made three public presentations to the financial reporting community. In January 2014 the then FRC Chairman and FRC Secretary met the then Assistant Treasurer (AT), Senator the Hon. Arthur Sinodinos to discuss a number of issues, including financial reporting. The Chairman also had meetings with a number of Treasury officials. During 2013-14 she also met the Chairmen of:

• the AASB (Kevin Stevenson), attended a AASB meeting and a AASB roundtable;
• the AUASB (Merran Kelsall), made a presentation to an AUASB meeting and attended an AUASB roundtable; and
• ASIC (Greg Medcraft) as well as ASIC Commissioner John Price and members of ASIC staff.

The FRC Chairman met a variety of stakeholders during the period, including Ian Laughlin (Deputy Chairman APRA); the ICAA (including Lee White); CPA Australia (including Alex Malley); and IPA (including Andrew Conway); stakeholders at KPMG and PwC, and the Chairs of the audit committees of a number of listed companies. In July 2013 the then FRC Chairman made a presentation to the Corporate Finance Leaders Forum in Sydney on the topic The Imprecise World of Accounting. In March 2014 the then FRC Chairman gave an address at the CFO Summit in the Gold Coast where she outlined the role of the FRC and the policy issues facing the financial reporting community. Later in March 2014 she was part of a panel at the ASIC Annual Forum in Sydney considering ‘Assuring the quality of audits — what is the solution’. Papers from most of these events are available on the FRC website (FRC website: Media>Speeches and Lectures).

3.3 Strategic Activities

In 2013-14 the FRC continued to work with the 2013-16 Strategic Plan adopted in June 2013. The Strategic Plan is reproduced in Appendix A and is available on the FRC website (FRC website: About the FRC>Strategic Plans>Strategic Plan 2013-16). The FRC notes the suggestion of the Parliamentary Joint Committee on Corporations and Financial Services that the FRC include in this annual report analysis and commentary on changes to the strengths and weaknesses in the FRC’s SWOT analysis underlying its strategic plan. In 2013-14 there was no change to the FRC’s 2013-16 Strategic Plan.

3.3.1 Strategic Planning Committee

This previously named Strategic Plan Committee was renamed as the Strategic Planning Committee, primarily to reflect that its work had covered not just the new Strategic Plan but other issues such as a review of the Memoranda of Understanding with stakeholder bodies, and the FRC Performance of Functions document.

3.3.2 Financial Reporting

The Financial Report Taskforce was established in February 2013 to follow up on the first recommendation of the Managing Complexity Taskforce report, which was to examine how the current financial reporting regime for the various types of reporting entities in Australia can be best explained and understood, and if needed, seek rationalisation of the regime. The key objective of the Taskforce is to support the FRC in responding to this recommendation and, if warranted, develop proposals regarding rationalisation of the regime and/or providing a vehicle for co-ordinating existing and new legislation. During 2013-14 the Taskforce, assisted by input from PwC, considered a large number of examples of financial reporting requirements in Australia, and made initial progress in drawing conclusions and recommendations regarding these reporting requirements.

3.3.3 Public sector financial reporting

The FRC has a mandate not just for financial reporting within the private sector, but also in the not-for-profit and public sectors, reflecting Australia’s sector neutral approach to financial reporting. In April 2014 the FRC made a submission to the International Public Sector Accounting Standards Board (IPSASB) Governance Review Group regarding the future governance of IPSASB. As in its 2012 submission, the FRC remains of the view that a model for the oversight and monitoring bodies for IPSASB, which is compatible with a goal of convergence between the IASB and IPSASB is the most appropriate objective. This submission was ably assisted by the members of the currently dormant Public Sector Committee, most notably Dr Stein Helgeby.

3.3.4 Integrated reporting

Much of the focus on integrated reporting is global in nature reflecting the work of the International Integrated Reporting Council (IIRC). The Integrated Reporting Taskforce supported the FRC’s submission, in July 2013, on the consultation draft of the International Integrated Reporting framework issued by the IIRC. The submission highlighted the FRC’s belief that for integrated reporting to achieve the IIRC’s ambition of market-led adoption, that it is critically important that the market accepts either:

• that integrated reporting will in fact deliver on the promise to produce better, rather than more, reporting; or
• if it is perceived that integrated reporting is likely to require additional reporting, that the business case for the additional reporting is cogent and compelling and that the benefits are seen clearly to outweigh the burdens.

The FRC made it clear that integrated reporting is unlikely to be mandated in Australia, and its adoption will be a function of market acceptance of the value of integrated reporting. Full compliance with the principles of Integrated Reporting would require forward looking disclosures. Company directors continue to be concerned about the inherent uncertainty of forward looking disclosures and whether there are appropriate and adequate protections for corporations and directors when making these disclosures. They argue further protections are needed for directors to be able to make more meaningful forward looking disclosures. The current ‘business judgment rule’ in the Corporations Act does not provide comprehensive protection to directors. The ‘business judgement rule’ is only a defence to the directors’ duty of care and diligence, it is not available as a defence to allegations of false or misleading forward looking statements or any other reporting requirement in the Corporations Act. In November 2013 the IIRC wrote a specific response to the FRC submission, reflecting the importance of the FRC’s views. The response seeks to address each of the substantive issues raised by the FRC and to address the way in which integrated reporting could work in Australia’s regulatory environment. The response is available on the FRC website (FRC Website: Documents>Submissions>FRC submission to the International Integrated Reporting Council on Integrated Reporting). The Integrated Reporting Taskforce is currently dormant.

3.3.5 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 its findings (FRC website: Documents>Publications>Results of Survey of the Financial Literacy of Australian Directors). There have been three areas of follow-up activity during 2013-14, which involved a considerable amount of work from the FRC’s stakeholder bodies:

1. ASIC has developed a webpage on financial literacy for directors with links to appropriate courses on financial literacy for directors provided by Chartered Accountants Australia and New Zealand (formerly ICAA), CPA Australia, IPA and the AICD.
2. A free directors’ financial literacy app is being developed by a working group of the same organisations so that directors will be able to self-test their financial literacy and take appropriate education if warranted; and
3. The AICD has developed and released a publication called Financial Fundamentals for Directors. This follows the AICD introducing compulsory continuous professional development requirements for all directors. These require directors to keep up to date with developments affecting directors, including changes to financial reporting requirements, accounting standards and regulatory expectations.

In addition the Parliamentary Joint Committee on Corporations and Financial Services recommended that the FRC implement regular surveys of the financial literacy of directors and to subsequently publish the results. Although the FRC acknowledges the importance of this recommendation it does not independently have the capacity to conduct this type of survey. In addition various methodological limitations of the approach have been drawn to the FRC’s attention, which it believes compromises the effectiveness of such surveys to provide the information regarding the level of director financial literacy sought by the Parliamentary Joint Committee.