L Wood

The movement toward greater adoption of the International Accounting Standards Board's (IASB) International Financial Reporting Standards (IFRS) has continued apace. Within the broad Asia-Oceania region, the trend is clear: with announcements regarding adoption by Indonesia, Malaysia, Singapore and Saudi Arabia in 2011-12. Hopefully the United States will make a positive decision on adopting IFRS within the coming year.

There has also been much attention given to various efforts to reform audit processes worldwide. The Australian Government enacted the Corporations Legislation Amendment (Audit Enhancement) Act 2012 in June. This Act clarifies the respective roles of the FRC and the Australian Securities and Investments Commission (ASIC) in ensuring high quality auditing standards in Australia as they relate to auditor independence. In future years the FRC will have a strategic role in terms of advice to the Minister rather than a role in monitoring and reporting on auditor independence arrangements. This new role has been reflected in a review of how the FRC performs its functions, conducted in June 2012.

FRC Strategic Plan 2011-2014

The FRC Strategic Plan has now been in operation for a full year, and is starting to bear fruit.

The Managing Complexity Task Force has undertaken a comprehensive review of the complexities in financial reporting. Based on this work and substantial input from the FRC stakeholder organisations, the Task Force concluded that the way forward is to pursue a number of steps to manage complexity, recognising the sophistication of contemporary corporations and investment markets, and harnessing the innovative forces of information technology. The Task Force sought not to specify solutions to complexity, but rather to inform, influence and stimulate the debate on how best to manage it. It sought input from the broader financial reporting community on its suggested approaches on 29 May 2012 in its report Managing Complexity in Financial Reporting.

In order to influence the global debate on integrated reporting, the Integrated Reporting Task Force prepared an FRC submission to the International Integrated Reporting Committee (IIRC) with the aim of contributing to the development of an international consensus on the way forward. This submission advocated the preservation of the existing material presented in the financial statements, and urged the IIRC to build a conceptual framework, as has been done for IFRS, to underpin any specific actions recommended on integrated reporting.

The Board Education Task Force conducted a survey of directors and financial reporting professionals, working with them to identify if there are any issues in terms on the financial literacy of directors and, if so, how to address them.

The Public Sector Task Force has continued to monitor international developments in relation to public sector reporting.

International and domestic developments regarding audit issues have meant that our Audit Quality Task Force has also been very active. It led the review of the FRC functions which resulted in this Task Force becoming a Committee of the FRC reflecting its ongoing role in providing advice to the FRC on the raft of audit reform activities occurring internationally as well as on domestic developments.

Oversight of standards setting

At the domestic level the FRC has sought to enhance engagement with both of our standards setters - the Australian Accounting Standards Board (AASB) and the Auditing and Assurance Standards Board (AUASB). The AASB and AUASB each prepared a strategic plan and sought feedback from the FRC. The FRC set up sub-committees to examine and provide comment on the plans. The FRC is very pleased with the finalised plans and believes they will contribute to ensuring that Australia continues to have an appropriate, robust and dynamic financial reporting framework.

At the international level the IASB has been committed to completion of its four convergence projects with the US Financial Accounting Standards Board. Australia welcomes the announcement by the IFRS Trustees to set up a regional office in Tokyo and the decision by Japan to allow voluntary adoption of IFRS with a decision on full IFRS adoption expected in the coming year. We also hope, as previously stated, for positive developments in the US that might lead them to make a decision.

Our links with New Zealand have continued to be strong and I attended meetings of the New Zealand External Reporting Board which were both useful and informative.

Within the broader Asia-Oceania region we continue to see strong moves toward greater harmonisation of accounting and auditing standards and note the increasingly important role taken by the Asian-Oceanian Standard Setters Group (AOSSG) under the current Chairman, Kevin Stevenson, who is also the Chairman of the AASB. Merran Kelsall, Chairman of the AUASB, who is a Member of the International Auditing and Assurance Standards Board (IAASB), has also been very helpful in keeping us up to date with global developments in auditing.

Auditor independence

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, international pressure for greater regulation of auditors. During 2011-12 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 FRC anticipates that audit quality will be further improved in response to the refinement of the Australian audit framework in addition to the legislation changes mentioned earlier. The Australian Professional and Ethical Standards Board (APESB) released a revised APES 110 Code of Ethics for Professional Accountants, applying from 1 July 2011, which aligned Australia's professional requirements with a revised international code of ethics issued by the International Ethics Standards Board for Accountants (IESBA). From 31 January 2013, ASIC will commence registering Self-Managed Superannuation Fund (SMSF) auditors, and from 1 July 2013 an individual will need to be registered with ASIC to conduct SMSF audits. The Government has announced that registered SMSF auditors will also be required to comply with ongoing auditor independence requirements under APES 110.

The overall conclusion reached by the FRC as a result of its 2011-12 work on auditor independence is that the independence framework in Australia continues to operate effectively and will be further improved in the light of recent audit developments. This is a good position from which to pass on the baton for monitoring and reporting on auditor independence to ASIC, following the legislative changes I mentioned earlier.

Outlook for 2012-13

2012-13 may well prove to be a year of transformation in relation to the global adoption of a single set of high quality accounting standards. The work plans of the IASB and US Financial Accounting Standards Board (FASB) on convergence of specific accounting standards, as mandated by the G20, are likely to reach a conclusion. The stage will then be set for decision makers in the US and Japan to decide whether to join the rest of the world in the use of IFRS or continue to use their own separate accounting standards. Whatever decision they make the rest of the international community is likely to continue to move to more complete adoption of IFRS. This can only enhance the efficiency with which global capital markets operate and improve the transparency of financial reporting.

It is also likely that 2012-13 will see a number of decisions made regarding the greater regulation of audit arrangements. While the FRC believes our present system is robust we will need to stay abreast of international changes to be prepared for any effects in Australia of these changes.

Several of the FRC's Task Forces will see their current work projects complete in 2012-13 with the release of public reports and the FRC will continue to monitor developments in the strategic areas. The FRC will be conducting a mid-term review of the strategic plan in the 2012-13 reporting year. This review will consider how recommendations offered have been progressed. It may also identify new areas of interest; while conscious that the tight fiscal situation means that the FRC will have to be selective in determining priorities.


I would like to acknowledge the contributions of all FRC Members for the generous assistance they have provided and particularly those of the Deputy Chairman Mr Michael Coleman and the Chair of the Nominations Committee Ms Jan West AM who have both undertaken significant work in their roles and who also stepped in to act as Chairmen for the Managing Complexity and Integrated Reporting Task Forces when the previous Chairmen, Mr Bruce Brook and Mr John Stanhope, retired from the FRC. I would also like to note the contributions of Mr Kevin Lewis who led the Board Education Task Force and provided much support from the ASX for its work. Mr Grant Hehir, who led the Public Sector Task Force, was also very helpful in coordinating their efforts, particularly in relation to submissions in relation to International Public Sector Accounting Standards (IPSAS).

Two other very experienced members of the FRC - Mr Michael Dwyer and Mr Klaus Zimmermann - left the FRC during year. We would like to recognise their outstanding contributions, and those of Mr Bruce Brook and Mr John Stanhope, and to note the sad passing of Mr Dwyer on 2 March 2012.

Mr Andrew Fleming, Ms Belinda Gibson and Mr Ian Purchas all joined the FRC during 2011-12 and we look forward to their contributions. Mr Mark Coughlin and Ms Noelle Kelleher were re-appointed to the FRC during 2011‑12 and we know that they will continue to make valuable contributions.

The FRC Secretariat provides an important service to ensure the smooth and effective operation of the FRC. During 2011‑12, two separate sets of significant changes occurred within the Secretariat. At the end of the first half of 2011‑12 the FRC Secretary, Mr Michael Lim, and two other senior members of staff moved to other Treasury areas. I would like to extend my gratitude to Michael for his work with the FRC. Mr Les Pascoe stepped in as Acting Secretary of the FRC until his retirement in mid-June 2012, and performed a superb job. Les attended the first FRC meeting in October 1999 and provided many years of valuable service before his retirement. Mr Bruce Donald took on the role of Secretary following Mr Les Pascoe. Thanks are given to those Treasury officials who have acted as Secretaries of FRC Committees and Task Forces. Thanks also to Ms Darinka Zubovic for her very effective support for the FRC over the more than ten years she spent with us before her retirement in June 2012.

I have greatly enjoyed my first year as FRC Chairman and I look forward to working with FRC Members and the FRC Secretariat in the coming year to ensure the FRC continues its role in overseeing the effectiveness of the financial reporting framework in Australia.


Lynn Wood
Chairman of the Financial Reporting Council
18 October 2012