The past year has seen a number of key developments in financial reporting, both domestically and internationally. Overseas the trend towards adoption of International Financial Reporting Standards (IFRS) is continuing, with more countries joining the IFRS community, especially in Asia-Oceania. Domestically a number of key topics are dominating the debate around financial reporting, including integrated reporting and audit quality.
Since taking over as FRC Chairman in March 2011, I have realised that the FRC has an important role to play in all of these areas. The subsequent pages of this annual report provide more detail about how we are striving to do this. I would at the outset like to highlight the efforts of my predecessor, Jeffrey Lucy AM, in positioning the FRC as a recognised and respected stakeholder in Australia and internationally in the field of financial reporting. Jeffrey in his two terms as FRC Chairman has had a key influence in shaping its profile and its activities. The plans for the FRC's future activities that are outlined in this annual report build on his achievements, and I would like to thank him here for his efforts over the five years he has devoted to the FRC.
FRC Strategic Plan 2011-2014
My first priority after taking over as Chairman was to work out and agree with the Members of the FRC a strategic plan covering the three years of my term, based on strategic discussions that had already taken place at meetings. I am happy to say that we achieved this very quickly, and that the FRC, at its meeting of 18 April 2011, approved in principle the Strategic Plan 2011-2014 which is described in more detail later on in this report.
The strategic plan is an important document which starts with an analysis of the FRC's functions and the environment in which it is operating. It then develops the analysis to arrive at a number of priority projects which will form the focus of the FRC's activities over the next period. I am pleased to report that work on these projects has already started, and that the initial indications are very promising. I expect that the results produced by the FRC Members working on these projects, partly in cooperation with representatives of the wider financial reporting community, will be valuable and make an important contribution to improving the FRC's relevance and position in Australia and overseas.
Oversight of standards setting
The key theme dominating international developments continues to be the effort to create a single set of global high-quality accounting standards, and the IFRS issued by the International Accounting Standards Board (IASB) in London continue to represent our best hope for achieving this objective. The FRC, and the AASB, fully support this effort and the work of the IFRS Foundation, both through the financial contribution made by the FRC on behalf of the Australian Government to the Foundation and through the in-kind contribution made by the AASB to the work of the IASB.
Over the past year there has been considerable debate about the governance of the IFRS Foundation, with both the IFRS Foundation's Trustees and the Monitoring Board conducting reviews and asking for submissions. The FRC responded to all of these requests, after giving extensive consideration to the key issues raised in the reviews.
A key focus for the FRC is to foster and support regional adoption of IFRS. In this respect the FRC was very active during the year, and worked with counterparts from across Asia-Oceania in encouraging the adoption of IFRS by regional jurisdictions.
Our links with New Zealand have continued to strengthen on all levels over the past year, and I expect that this cooperation will continue with the establishment of new institutional arrangements for standard setting in New Zealand on 1 July 2011.
On the domestic front the FRC continued to monitor developments related to audit independence, and in particular followed the work done by Treasury subsequent to the release of the Audit Quality Review in 2010. I expect that this matter will continue to be of particular importance to the FRC, especially as its role in relation to audit independence is under review by the Government.
A key international and local focus affecting auditing and assurance over the past year has been the debate on auditing related issues following the global financial crisis. These issues include audit quality, the role of the auditor and auditor reporting. There is also a considerably heightened focus on the independence of auditors and greater scrutiny over the scepticism and professional judgement exercised by auditors, and as a consequence, growing international pressure for greater regulation of auditors.
During 2010-11 the FRC continued to monitor the effectiveness of Australia's auditor independence requirements. The FRC performs this work primarily through the use of information obtained from the Australian Securities and Investments Commission (ASIC) and the other bodies with which it has a Memorandum of Understanding (MOU) and through periodic meetings with those bodies and other stakeholders, such as auditing firms.
The overall conclusion reached by the FRC as a result of its 2010-11 work on auditor independence is that the independence framework in Australia continues to operate effectively.
Outlook for 2011-12
2011-12 will be a crucial year in which a number of key decisions will be made in relation to the global adoption of a single set of accounting standards. In particular, a decision in principle is expected from the Securities and Exchange Commission (SEC) of the United States of America (USA) as to whether adoption of IFRS in that jurisdiction will be prescribed. The decision by the SEC is expected to have a key impact on a number of other important jurisdictions, in particular Japan. I am planning to visit a number of the key stakeholders involved in these decisions later in 2011 to understand their views and offer the FRC's perspective on the issues involved.
A key objective for the FRC next year will be to start delivering outputs from its priority projects. I know that the FRC Members have started work on the issues involved in these projects, which are all matters that are of substantial interest and concern to the financial reporting community in Australia. A key issue on the horizon is integrated reporting which has been identified as a possible means of providing more holistic information about an entity's operations rather than the perceived narrow focus of financial reporting. I expect that the FRC will be devoting significant time and resources to exploring this and the other matters addressed in the projects.
In addition to thanking Jeffrey Lucy, I would also like to acknowledge the contributions of all FRC Members for the generous assistance they have provided. I would also like to welcome Kevin Lewis, Vas Kolesnikoff and Grant Hehir who joined the FRC during the year.
Don Challen (who was one of the FRC's founding members), John Gethin-Jones, Eric Mayne and Stuart Wilson left the FRC during the year. I would like to thank them for their contributions and wish them well for the future.
The FRC Secretariat provides invaluable services that ensure the smooth operation of the FRC. On behalf of the FRC as a whole, I would like to thank the Secretary, Michael Lim, and the other members of the Treasury team working on FRC matters for their efforts.
I have greatly enjoyed my first months as FRC Chairman. I look forward to working with the FRC Members in the coming year to further improve the contribution of the FRC as a key part of the financial reporting community in Australia and overseas.
Chairman of the Financial Reporting Council
9 October 2011