Anticipated changes to the FRC arising from the CLERP 9 legislation, and the move towards the adoption of international accounting standards dominated the Council’s agenda during 2003-04. The passage of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 on 25 June 2004 was the culmination of many years of discussion over a broad range of issues, including auditor independence and auditing standards, which lie at the heart of the FRC’s new responsibilities. The Council, with the support of the Secretariat, contributed to the final shape of the legislation which enhances the FRC as a key player in the promotion of dynamic and well-informed capital markets in Australia.
The achievements of the FRC would not have been possible without the diligence of those who served on the Council, showing their commitment to resolving the myriad of issues that were faced by the Council in 2003-04. I want to particularly acknowledge the contribution of Mr Ken Spencer, a member of the Council until his passing in March 2004. Mr Spencer contributed much to the development of accounting standards as Chairman of the AASB from 1995 to 1999, and as a member of the International Accounting Standards Committee Foundation. Mr Spencer will be sorely missed by the FRC.
As the 2005 deadline approached, there was widespread interest in reviewing the rationale behind the FRC’s original decision to support the adoption of IAS developed by the International Accounting Standards Board (IASB) and whether it remained valid. The decision was made by the FRC on 28 June 2002 against a backdrop of similar moves being made in countries around the world, most notably in Europe. The benefits to Australia of adopting common global accounting standards have been long recognised, given that we form only a small part of world capital markets. Having accounting standards that are the same as those used elsewhere removes an impediment to growth in cross-investment between Australia and the rest of the world.
The FRC monitored the development of IAS and of implementation plans among Australian businesses, with particular attention on the need to raise awareness of the new standards regime among directors. The FRC was pleased that the AASB, the professional accounting bodies and organisations such as the Australian Stock Exchange, the Group of 100 and the Australian Institute of Company Directors took responsibility to advertise the changes via their publications and training programmes.
The FRC continued to provide advice to the Government on the policy implications of adopting the IAS and the expected impact on Australian companies. At its meeting of 27 February 2004 the FRC agreed that the IAS be adopted in so far as they did not conflict with Australian law, and that such adoption was in the best interests of the Australian economy, while acknowledging that there might be adverse effects for some individual companies. The FRC considered that ‘cherry picking’ or partial adoption of the standards would substantially diminish the gains of IAS adoption, and therefore all standards should be adopted in their entirety.
The FRC also monitored the IASB’s progress on its work programme with respect to the 2005 target and relevant developments in Europe regarding the adoption of IAS. On 31 March 2004, the Council had the opportunity to receive a direct update of developments in the IASB work programme from the Chairman of the IASB, Sir David Tweedie, and from the IASB liaison member to the AASB, Mr Warren McGregor, who attended that meeting. The FRC considered at length the time pressures involved in meeting the 1 January 2005 deadline. Following these discussions, the FRC agreed unanimously to proceed with the timetable for adoption of the IAS, subject to assurance from the AASB that the set of international accounting standards issued by the IASB was complete and met the requirements of the Australian market place. The decision was confirmed by the FRC on 23 April 2004, on the understanding that the AASB would provide an appropriate period between the completion of a new standard or amendment to an existing standard and its implementation date. During the course of deliberation, particular attention was given to IAS 39 Financial Instruments: Recognition and Measurement, which had caused considerable concern in Europe and raised doubts over whether it would be included in the process of adoption in that jurisdiction.
The FRC prepared a submission on the Government’s draft CLERP 9 Bill advocating that its role be expanded to include oversight of audit quality rather than being limited to auditor independence; that its role in relation to audit quality be performed in conjunction with, but still independent of, the professional accounting bodies; and that the roles and responsibilities of all regulatory and oversight bodies in the area of audit quality, should be made clear.
The FRC established a CLERP 9 taskforce to examine the implications for the FRC of the CLERP 9 legislation, and help the FRC formulate its views on the best approach for implementing its increased responsibilities. The taskforce identified three key issues for consideration:
- making the CLERP 9 provisions operational;
- the force of law for auditing standards; and
- the structure of the FRC.
The Council hired a consultant, Mr Robert Lynn, to advise on the type of activities that would be required from the FRC to discharge its expanded functions under CLERP 9 (in particular with relation to auditor independence), the extent to which these activities could be undertaken by consultants and their likely cost. Subsequent discussions with the Australian Treasury, assisted by the FRC Secretariat, provided further guidance on the FRC’s role with respect to auditor independence. In this respect, the Council agreed that the FRC would obtain high level information from parties with which it has entered into Memoranda of Understanding (MOUs) and would conduct tests through selective contacts with individual audit firms. MOUs governing the exchange of information and co-operation were established with the professional accounting bodies, the Australian Securities and Investments Commission (ASIC) and the Australian Stock Exchange. Substantial progress was made on an MOU with the Australian Prudential Regulatory Authority (APRA), and an exchange of letters was agreed with the Companies Auditors and Liquidators Disciplinary Board.
Also, on the recommendation of the taskforce, the FRC made an ‘in-principle’ decision to appoint the members of the former Auditing and Assurance Standards Board (AuASB) to the new Auditing and Assurance Standards Board (AUASB) which will operate under the FRC’s guidance.
A key FRC task is to secure the funding needed to ensure an effective standard setting process operates in Australia, via the AASB, and also globally, by contributing to the IASB. Without this funding, it would be very difficult to maintain the momentum needed to achieve common global accounting standards in which Australia has had a significant input. The new arrangements under CLERP 9 also require funding to be procured to operate the AUASB and oversee auditing standard setting and auditor independence.
In September 2003 the Government announced that it would contribute an additional $2 million to the FRC to ensure that there was adequate funding for the work required in the lead-up to the adoption of international accounting standards, and also to assist in the set-up costs of the reconstituted AUASB. The money was sourced from the Companies’ Unclaimed Monies Account administered by ASIC. A further $1 million was provided to the FRC from the Financial Institutions Development Account, and a total of $235,000 was received as voluntary contributions by business in 2003-04. A further $25,000 was received as a voluntary contribution in respect of 2003-04 after 1 July 2004, and therefore is not included in the accounts for 2003-04.
In the 2004-05 Budget the Commonwealth provided an additional $3.4 million to the FRC, plus a provision set aside in the contingency reserve for 2005-06 to 2007-08, with funding for this measure to be determined in the context of the 2005-06 Budget. In response to requests from the FRC, the three professional accounting bodies agreed first to renew their funding commitment in 2003-04 and more recently, to substantially increase their contributions to the FRC in 2004-05. The States and Territories have also reaffirmed their commitment to continue to provide funding up to 2005-06.
The FRC agreed to provide an additional contribution of $300,000 in 2003-04 to the IASB in keeping with the funding commitment previously given, which demonstrates Australia’s support for the development of global international accounting standards. The FRC affirmed at its September 2003 meeting that the key to Australia maintaining its influence on the development of global standards was through the high quality of its intellectual contribution. There was a need also for Australia to show its tangible support, by moving funding to the IASB to a firm footing rather than being a variable item in the budget.
The FRC is aware that at various times, including during debate on the CLERP 9 Bill, concerns were raised regarding the transparency of the FRC’s decision-making process. In June 2003 the FRC considered whether its meetings should be open to the public, and decided that a fuller consideration of the issue would be warranted following implementation of the CLERP 9 reforms. In the meantime, the Council agreed to take additional steps to increase transparency. One way that this has been achieved is through better use of the bulletins on the FRC website. The bulletins have been expanded to include greater detail about the matters discussed and decisions taken at FRC meetings. Also, the bulletins have been released in a more timely manner, usually within a few days after the FRC meetings, making them more user-friendly for interested parties who did not want to wait until the formal meeting minutes are posted following their approval at the subsequent FRC meeting.
As in previous years, much of the leg-work of the FRC has been performed by committees which have facilitated the engagement by FRC members with relevant experts for a detailed consideration of issues. By making recommendations for ratification by the FRC as a whole, the committees have greatly expedited the FRC’s workload. Committees which met during 2003-04 were:
- the Nominations Committee;
- the Audit Committee;
- the CLERP 9 Taskforce; and
- the AUASB Strategic Directions Taskforce.
The Nominations Committee, chaired by Mr Phillip Prior, considered matters relating to appointments to the AASB. Following the CLERP 9 reforms, it will have a similar role with respect to appointments to the AUASB.
The Audit Committee, chaired by Ms Elizabeth Alexander AM, provided advice on the funding and expenditures of the FRC and its constituent bodies, the AASB and — from 2004-05 — the AUASB.
Both the Nominations Committee and the Audit Committee reviewed their charters in view of the new CLERP 9 arrangements.
The CLERP 9 Taskforce examined the implications for the FRC arising from the CLERP 9 legislation. The taskforce ended with the commencement of the CLERP 9 Act from 1 July 2004. It has been superseded by a standing committee of the FRC, the Audit Independence Subcommittee, which will be chaired by Ms Elizabeth Alexander AM, who as consequence will stand down as Chairman of the Audit Committee, which in turn will be chaired by Mr Graeme McGregor AO.
The AUASB Strategic Directions Taskforce was established to consider the work of the AUASB ahead of the CLERP 9 Bill coming into force in 2004-05.
I thank members of these committees and taskforces for the endeavour that they have shown in ensuring that the FRC remains well-informed and able to carry out its tasks effectively.
The Council received valuable support during the course of the year. I would like to thank Ms Elizabeth Alexander AM, who became Deputy Chairman of the FRC and who has provided much useful advice to the Council and its committees.
The AASB has had a very busy year, during which Professor David Boymal commenced as Chairman. Professor Boymal brings a great wealth of experience to the job, having over 20 years experience in standard-setting, while being active in private sector accounting, academia and the professional accounting bodies. During 2003-04 he led the Board in its task of effectively introducing international accounting standards into Australian law for all companies and other entities for reporting periods commencing on or after 1 January 2005. I would also like to thank Ms Ruth Picker for her outstanding work as Acting Chairman before Professor Boymal’s commencement.
The FRC Secretariat within the Australian Treasury has continued to support the intensive workload of the Council. Credit goes to Ms Karen Gilmour and Mr Jorge del Busto for their leadership of the Secretariat.
The passage of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 and the impending adoption of international accounting standards have ushered in a new round of challenges for the FRC. I have no doubt that the coming year will also be both stimulating and rewarding.
Chairman of FRC
20 September 2004
The Financial Reporting Council (FRC) is a statutory body under the Australian Securities and Investments Commission Act 2001 (ASIC Act). The Government’s Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 amended the ASIC Act and expanded the functions of the FRC, which is now responsible for providing broad oversight of the process for setting accounting and auditing standards as well as monitoring the effectiveness of auditor independence requirements in Australia and giving the Minister reports and advice on these matters.
Specific accounting and auditing standard setting functions for which the FRC is responsible (as from 1 July 2004) include:
- appointing the members of the AASB and AUASB (other than the Chairmen, who are appointed by the Treasurer);
- approving and monitoring the AASB’s and AUASB’s: priorities; business plans; budgets; and staffing arrangements (including level, structure and composition of staffing);
- determining the AASB’s and AUASB’s broad strategic directions;
- giving the AASB and AUASB directions, advice or feedback on matters of general policy and on the AASB’s and AUASB’s procedures;
- furthering the development of single sets of accounting and auditing standards for world wide use with appropriate regard to international developments;
- promoting the continued adoption of international best practice in the Australian accounting and auditing standard setting processes if doing so would be in the best interests of both the private and public sectors in the Australian economy;
- the development of international accounting and auditing standards and the accounting and auditing standards that apply in major international financial centres;
- the operation of accounting and auditing standards to assess their continued relevance and their effectiveness in achieving their objectives in respect of both the private and public sectors of the Australian economy; and the effectiveness of the consultative arrangements used by the AASB and AUASB; and
- monitoring and periodically reviewing the level of funding, and the funding arrangements, for the AASB and AUASB and seeking contributions towards the costs of the Australian accounting and auditing standard setting processes.
Specific auditor independence functions for which the FRC is responsible include:
- monitoring and assessing the nature and overall adequacy of:
- the systems and processes used by Australian auditors to ensure compliance with auditor independence requirements;
- the systems and processes used by professional accounting bodies for planning and performing quality assurance reviews of audit work undertaken by Australian auditors to the extent to which those reviews relate to auditor independence requirements;
- the action that Australian auditors who have been subject to such quality assurance reviews have taken in response to the reports prepared as a result of those reviews;
- the action taken by professional accounting bodies to ensure that Australian auditors who have been subject to such quality assurance reviews respond appropriately to the reports prepared as a result of those reviews; and
- the investigation and disciplinary procedures of professional accounting bodies as those procedures apply to Australian auditors.
- monitoring the overall compliance by companies, registered schemes and disclosing entities with the audit related disclosure requirements of the Corporations Act and the accounting and auditing standards;
- giving the Minister and the professional accounting bodies reports and advice on the above matters;
- monitoring international developments in auditor independence, assessing the adequacy of the Australian auditor independence requirements in the light of those developments and giving the Minister, and professional accounting bodies, reports and advice on any additional measures needed to enhance the independence of Australian auditors; and
- promoting, and monitoring the adequacy of, the teaching of professional and business ethics by, or on behalf of, professional accounting bodies to the extent to which the teaching of those subjects relates to auditor independence.
The FRC operates within a framework set out in the ASIC Act. The Act sets out core objectives for accounting and auditing standard setting in Australia:
- Accounting standards should facilitate the Australian economy by reducing the cost of capital and enabling Australian entities to compete effectively overseas and should maintain investor confidence in the Australian economy, including its capital markets.
- Accounting and auditing standards should facilitate the Australian economy by having accounting and auditing standards that are clearly stated and easy to understand.
The ASIC Act expressly limits the FRC’s ability to become involved in the technical deliberations of the AASB and AUASB. It provides that the FRC does not have power to direct the AASB or AUASB in relation to the development, or making, of a particular standard, or to veto a standard formulated or recommended by the AASB or AUASB. This provision is designed to ensure the independence of the standard setters.
Under section 235A of the ASIC Act, the members of the FRC are appointed by the Treasurer and hold office on terms and conditions determined by the Treasurer. Most members of the FRC have been appointed on the basis of nominations put forward by key stakeholder groups.
A full list of members during 2003-04 and the stakeholders who nominated them is in Appendix A. In addition, a list of alternate members, appointed to be able to participate in FRC meetings when FRC members for whom they have been nominated as alternates are unable to attend, is also in Appendix A. As members are now able to appoint proxies on a meeting-by-meeting basis, it is not expected that further alternate members will be appointed in the future.
The FRC Nominations Committee is responsible for recommending appointments to the AASB. In 2003-04, the Chairman of the Nominations Committee was Mr Phillip Prior. The other members of the Nominations Committee were the FRC Chairman, Mr Charles Macek, Mr Don Challen and Mr Klaus Zimmerman.
The Nominations Committee met three times during 2003-04 and recommended to the FRC that Mr Bryce Denison be appointed to the AASB and Mr Wayne Cameron be reappointed to the AASB.
The appointment of Mr Garth Campbell-Cowan to the AASB was agreed by the FRC during 2002-03 but only took effect from 2 July 2003.
The FRC’s responsibilities include reviewing and approving the AASB’s priorities, business plan, budget and staffing arrangements.
The FRC considered the AASB’s broad strategic plan and its timetable for the adoption of international accounting standards. Progress made on the AASB’s work programme in 2003-04 is outlined in Appendix E. The FRC also approved the AASB’s work programme for 2004-05 and its priorities are set out in Appendix F.
The Audit Committee met four times in 2003-04. The Committee examined the AASB’s business plan and budget for 2003-04 and 2004-05. The Committee also examined an indicative AUASB business plan and budget for 2004-05, as the FRC has responsibility for approving these following the passage of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004.
The FRC regularly issues bulletins that communicate decisions taken at its meetings and other important developments in accounting standard setting. These bulletins are distributed to the media and stakeholders. These bulletins are available, in chronological order, at the FRC website or by contacting the FRC Secretary (see ‘Contacting the FRC’).
During the year, FRC Chairman Mr Charles Macek and other members of the FRC consulted extensively with representatives of corporations, business organisations, other stakeholder bodies and accounting and auditing organisations. In 2003-04 the FRC Chairman travelled overseas and consulted widely with executives from corporate and accounting bodies on matters relating to international accounting standards, developments in respect of accounting and auditing standards, and matters regarding auditor independence.
On 27 February 2004 the FRC decided to engage Mr Robert Lynn as a consultant to advise on what would be required from the FRC to discharge its expanded functions with respect to auditor independence.
On 5 March 2004 the FRC Chairman confirmed Mr Robert Lynn’s appointment as a consultant to the FRC. Mr Robert Lynn was engaged to prepare a written report on Auditor Independence Functions allocated to the FRC under the then Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003. Where appropriate, Mr Robert Lynn was asked to formulate his recommendations in terms of specific drafting instructions to be included in the Memoranda of Understanding with various bodies. Mr Robert Lynn delivered his report to the FRC on 16 April 2004.
The response from the top 100 Australian companies to contribute to FRC funding has continued to fall short of the expected funding under the tripartite model in 2003-04.
However, the Government has indicated that it will not allow a shortfall in business-sector contributions to undermine its objective of strengthening domestic accounting and auditing standards and their oversight arrangements. Nor will the shortfall undermine the FRC’s role in overseeing the adoption of international accounting standards.
Of the top 100 Australian companies, 16 companies voluntarily contributed to the FRC tripartite funding model for 2003-04 — four less than for the previous year. Contributors were: Amcor, ANZ Banking Group, AXA, Centro Properties, Commonwealth Bank, Mayne Group, National Australia Bank, Newcrest Mining, PaperlinX, Qantas, Rio Tinto, Telecom New Zealand, Telstra, Wesfarmers, Westfield Holdings, and Westpac.
The States and Territories have confirmed the provision of $500,000 for the financial year ended 30 June 2004 and have reiterated their commitment to continue their funding at $500,000 per year for the three year period concluding on 30 June 2006, the only proviso being that the current tripartite funding model continues and the professional accounting bodies renew their funding commitments in a similar manner.
On 29 June 2004 the professional accounting bodies agreed to increase their annual funding contribution to the FRC from $750,000 to $1,750,000 in 2004-05. CPA Australia (CPAA), and The Institute of Chartered Accountants in Australia agreed to contribute $750,000 each and the National Institute of Accountants agreed to contribute $250,000.
In 2003-04 the FRC made a contribution of $300,000 to the IASB in addition to the $700,000 contributed to the IASB in 2002-03, and will be considering further contributions in the future.
As part of the 2003-04 Commonwealth Budget, the Government decided to provide $4 million over four years to support the expanded role of the FRC. In 2003-04, a total of $467,731 of FRC expenditure was paid by Treasury out of this appropriation. This consisted of:
- $311,113 in staffing costs;
- $36,376 on consultants;
- $27,250 on the Chairman’s salary (including superannuation);
- $66,135 on travel; and
- $26,857 on overheads.
The FRC Secretariat, on behalf of the FRC, maintains possession of the following documents:
- FRC meeting agenda papers;
- administrative and technical papers concerning the FRC’s functions and its performance in regard to those functions;
- copies of minutes and bulletins issued by the FRC; and
- correspondence between the FRC, stakeholder groups and members of the public.
Requests under the Freedom of Information Act 1982 for access to documents in the possession of the FRC can be directed to the FRC Secretariat at the contact details below:
(02) 6263 3144
(02) 6263 2770