Chairman L Wood

2012-13 has been a busy and highly successful year for the Financial Reporting Council (FRC). We have made a number of significant submissions to international financial reporting organisations; have released completed reports from the Managing Complexity and Board Education taskforces; our meetings were attended by the then Parliamentary Secretary to the Treasurer, the Hon. Bernie Ripoll, MP on two occasions; and we had a variety of distinguished international visitors, keen to engage the views of FRC members.


Oversight of standard setting

At the domestic level the FRC has enhanced engagement with both of our standard 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 in its role of providing input on the strategic direction of the standard setters. 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 International Accounting Standards Board (IASB) has been committed to the completion of its remaining four convergence projects with the US Financial Accounting Standards Board (US FASB). The use of the IASB's International Financial Reporting Standards (IFRS) is now required in three quarters of G20 members and is the clear standard that countries consider adopting for their domestic financial reporting regimes for profit-oriented entities. IFRS is becoming the common accounting language within our region, with use required in such jurisdictions as Hong Kong, Republic of Korea, Malaysia, New Zealand, Singapore and Taiwan. China has adopted national accounting standards that are substantially converged with IFRS.

Our links with New Zealand have continued to be strong and, as part of our cross-appointment relationship with New Zealand, I have been a member of New Zealand's External Reporting Board (XRB) which has been both useful and informative, while Kevin Simpkins from the XRB has been an important member and contributor to the FRC.

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, also the Chairman of the AASB. The AOSSG has become an important contributor to the IASB, as well as a member of the IASB's Accounting Standards Advisory Forum (ASAF).

During the visit the FRC Secretary and I made to London and Brussels in October 2012 we took the opportunity to press a number of key interlocutors to:

  • enhance the convergence process between IFRS and the domestic accounting standards in operation in the US and Japan;
  • understand the calls for greater regulation of the audit market being made in various quarters in Europe (and elsewhere), and to attempt to ensure that there was some focus on common international approaches; and
  • highlight the attributes of the Australian public sector financial reporting system and consider ways of promoting the adoption of high quality public sector financial reporting systems more broadly.

All of these issues, and the role that might be played by integrated reporting in the financial reporting system, are possible topics for discussion by the G20 countries during Australia's hosting of the G20 in 2014.

Merran Kelsall, Chairman of the AUASB, is a Member of the International Auditing and Assurance Standards Board (IAASB), and has been very helpful in keeping us up to date with global developments in auditing. Over ninety jurisdictions now use, or are committed to using in the near future, the IAASB's International Standards on Auditing (ISAs), including in our region: China; Hong Kong; India; Indonesia; Japan; Republic of Korea; Malaysia; New Zealand; Philippines; Singapore; and Thailand. The FRC made a substantial contribution to the IAASB consultation on Improving the Auditor's Report in October 2012, which incorporated the results of a survey of (largely retail) investors undertaken with the support of the Australian Shareholders' Association (ASA).

Audit Quality

In March 2010, Treasury released Audit Quality in Australia: A Strategic Review for consultation to identify drivers of audit quality, and to assess whether any measures should be taken to address any threats to these drivers. The review recommended a number of minor amendments to the framework.

These recommendations were progressed by the Corporations Legislation Amendment (Audit Enhancement) Act 2012 which allowed the extension of the current five year audit partner rotation period by two years under certain circumstances; requires the publication of annual transparency reports by certain audit firms; allowed ASIC to issue audit deficiency reports in certain circumstances; allowed ASIC to communicate directly with an audited body on certain audit matters; and removed duplication by replacing the FRC auditor independence function with a strategic, high-level Ministerial advice role regarding audit quality.

The FRC Audit Quality Committee has included a report on audit quality in this report. One particular focus of the audit quality work of the FRC has been to develop a working definition of the term 'audit quality'. In May 2013 the FRC made a submission to the IAASB's consultation on a Framework for Audit Quality, in which the FRC proffered the following working definition of audit quality for consideration:

'the likelihood of the audit achieving the fundamental objective of the audit which is to obtain reasonable assurance that material misstatements in the overall financial report are detected, and addressed or communicated to relevant stakeholders'.

Other Activities during 2012-2013

In 2011, as part of the FRC's 2011-14 Strategic Plan, the FRC established a taskforce to examine ways of managing the complexity of financial reporting. In May 2012 the Managing Complexity Taskforce released a report detailing outcomes from the review and inviting comments. Fifteen submissions were received by the end of July 2012 and on 3 October 2012 the Managing Complexity Taskforce released its final report and concluded its work. Since that time the FRC has been assiduously following the implementation of the recommendations and these are detailed in Chapter 3 below. The Financial Report Taskforce was later established to follow up on one of the key recommendations.

Similarly in 2011 the FRC established the Board Education Taskforce to consider the issue of board understanding of financial reporting. The taskforce, ably assisted by the Australian Securities Exchange (ASX), conducted a survey of directors and financial reporting professionals, working with them to identify if there were any shortcomings in terms of the financial literacy of directors and, if so, how to address them. On 5 September 2012 the Taskforce released the report with the results of the survey and recommendations, and concluded its work.

The FRC also adopted its new Strategic Plan for 2013-16 at its June 2013 meeting. The Strategic Plan updates the 2011-14 Strategic Plan in light of the June 2012 changes to the Australian Securities and Investments Commission Act 2001 (ASIC Act), which considerably revised the FRC's functions in relation to audit quality. An analysis of the environment in which the FRC is operating concluded that the financial reporting environment is now more complex and confirmed the continuing importance of the work of the FRC on audit quality, public sector reporting and mapping out the financial reporting framework.

Outlook — 2014 FRC's 15th Year

The coming year will represent the 15th year of the FRC's existence in its current form, and it promises to be an important one for the financial reporting community in Australia. A key event for the FRC will be the meeting of the IFRS Foundation Trustees in Sydney in the week commencing 7 April 2014, as proposed by the former FRC Chairman and current IFRS Foundation Trustee, Mr Jeffrey Lucy AM. The week will include the 2014 Ken Spencer Memorial Lecture, to be given by the IASB Chairman, Hans Hoogervorst.

As mentioned earlier, Australia will be hosting the G20 in 2014, and we are very hopeful that progress on issues supported by the FRC, such as the G20 call for convergence to a single set of high quality global accounting standards can be achieved.

In July 2013 the FRC made a submission to the International Integrated Reporting Council's (IIRC) Consultation Draft of its Framework. The IIRC is currently analysing the responses in order to shape the International Integrated Reporting Framework which they expect to be publishing in December 2013

A number of international inquiries and processes aimed at reforming the audit sector may well come to fruition over the coming year, including those underway in Europe at the European Commission level, and in member states including the United Kingdom; by the Public Company Accounting Oversight Board (PCAOB) in the United States and by the Canadian Public Accountability Board (CPAB) in Canada.

Australia is already very well placed in this regard given the 2010 Treasury review mentioned earlier which, whileleading to a number of minor amendments (now enacted), concluded the framework was fundamentally appropriate.

However, we are not taking a complacent attitude, especially given the areas needing improvement raised by the Australian Securities and Investments Commission (ASIC) in its Audit Inspection Program Report 2011-12 in December 2012 (the sufficiency and appropriateness of audit evidence obtained by the auditor; the level of professional scepticism exercised by auditors; and the extent of reliance that can be placed on the work of other auditors and experts), and by matters being identified in other jurisdictions.

To ensure a continuing focus by the FRC on audit quality, the FRC's Audit Quality Committee intends to meet every quarter. The Committee, and other members of the FRC, will continue to engage with audit firms, professional bodies, regulators, and other interested stakeholders to proactively identify trends and issues in audit quality as they occur.


I would like to acknowledge the contributions of all FRC Members for the generous assistance they have provided, not least their tireless input to the work of our various Committees and Taskforces, and particularly those of the Deputy Chairman Michael Coleman, also Chair of the Audit Quality Committee, and the Chair of the Nominations Committee, Jan West AM, who have both undertaken significant work in their roles. The inputs of Kevin Stevenson and Merran Kelsall, Chairmen of the AASB and AUASB respectively, have also been invaluable, both in the work of numerous Committees and Taskforces, and across the board on the FRC.

During 2012-13 there were a number of changes to the membership of the FRC. Ross Barker joined the FRC on behalf of the Business Council of Australia, and I would like to thank his predecessor, Bruce Brook for his work for the FRC, including his important role as Chair of the Managing Complexity Taskforce. Roger Burrows joined, on behalf of G100, and I also thank his predecessor, John Stanhope, for his work on the FRC, including his key role as Chair of the Integrated Reporting Taskforce (noting he remains a highly valued member of this taskforce).

During 2012-13, Belinda Gibson, Deputy Chair of ASIC stepped down, and was replaced by ASIC Commissioner, John Price. Although Belinda was only a member of the FRC for one year her strong contribution during that time was much appreciated. Vas Kolesnikoff, CEO of the ASA also stepped down during the year. Vas was a key contributor to the survey of ASA members which informed our submission to the IAASB.

Finally Mr Jim Murphy, Executive Director, Markets Group of Treasury stepped down in early July 2013 after more than ten years of outstanding service. His strong support for the FRC over this period was particularly valued, as well as his very thoughtful contributions. On behalf of the FRC, I wish all the departing members well in their future endeavours, thank them for their efforts, and look forward to their successors making important contributions as well.

Michael Coleman, Mark Coughlin, Stein Helgeby, Noelle Kelleher and Ian Laughlin, were re-appointed to the FRC during 2012-13 and I know that they will continue to make valuable contributions. Merran Kelsall was re-appointed as AUASB Chairman, and FRC representative. Jim Murphy had also been re-appointed during the year.

I would very much like to thank Bruce Paine for his important contribution to the FRC Secretariat over the year, and wish him well on his retirement from Treasury.

In conclusion, it is important that the FRC acknowledge the contribution being made to this work by the three professional accounting bodies, the Australian Public Policy Committee (APPC) and many others.

I have greatly enjoyed my second year as FRC Chairman and I look forward to working with FRC Members and their stakeholder bodies in the coming year to ensure the FRC continues its role in overseeing the effectiveness of the financial reporting framework in Australia, and furthering the development of a single set of high quality global accounting standards and auditing standards.


Lynn Wood
Chairman of the Financial Reporting Council
18 October 2013