Home > Reports > FRC, AASB & AAUSB Annual Report 2005-2006 - Part 2: Financial Reporting Council

Part 2: Financial Reporting Council

Chairman’s report

The past year has seen the continued evolution of the role of the FRC as it fulfils the mandate bestowed by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act (CLERP 9) in 2004. In terms of its major overall responsibilities, the FRC extended its work on auditor independence matters, monitored the actions of the AUASB in issuing legally-enforceable auditing standards, and provided guidance to the AASB on its approach to public sector accounting issues and interpretations.

With Australian businesses reporting under international financial reporting standards (IFRS) requirements for financial years commencing on or after 1 January 2005, the FRC’s role in monitoring associated implementation issues has been an important one. On the international front, the FRC’s involvement in the Regional Policy Forum on IFRS, held in Sydney on 24 October 2005, contributed to furthering dialogue and sharing experiences in accounting standard setting issues between 11 jurisdictions represented from the Asia-Oceania region.

Financial Reporting Council responsibilities

Accounting standard setting

With the advent of a relatively stable platform of IFRS applying to for-profit businesses, the FRC was able to turn its attention to the development of accounting standards for other sectors.

In November 2005 the FRC engaged Mr Kevin Simpkins, the former Deputy Auditor-General of New Zealand, to undertake research into how adequately a ‘sector neutral’ approach to the development of accounting standards can meet the information needs of the different users of financial statements and the public interest more generally. Working in consultation with the FRC’s Sector Neutral Standards Steering Committee, Mr Simpkins presented his final report to the FRC in June 2006. His report raised a number of important issues, including the appropriateness of the AASB’s current approach to the making of standards for the public and not-for-profit sectors, the need for one or more separate sets of standards, and options for better meeting user needs. The FRC has sought public comment on the issues raised in the report, and will consider taking action in response to the report and public comment during 2006-07.

Mr Simpkins’ report is an outstanding document that has served to educate FRC members and the wider stakeholder community of trends and issues in standard setting around the globe. In compiling the report, Mr Simpkins surveyed a number of standard setting organisations around the world. The report has raised Australia’s profile in the global standard setting community.

The AASB’s project to harmonise GFS and GAAP accounting standards gathered pace throughout the year, with the release of exposure drafts and consultation with key public sector stakeholders. The FRC has monitored the project to ensure its compliance with the strategic direction issued to the AASB on this issue in 2002, and has sought to ensure that the concerns of the stakeholders are addressed by the AASB before the project is finalised.

The FRC provided advice to the AASB on the overhaul of its interpretations process and the establishment of an Interpretations Agenda Committee. The FRC is satisfied that under its new structure, the AASB will be able to tap into the necessary expertise and work to complement rulings made by the International Financial Reporting Interpretations Committee of the International Accounting Standards Board.

The FRC continued to encourage a positive relationship between the AASB and its New Zealand equivalent, the Financial Reporting Standards Board. I am pleased that a formal protocol of cooperation between the two boards was completed, expanding contact beyond the initial cross-appointment of the two Board Chairs. The Trans Tasman Accounting Standards Advisory Group (TTASAG), whose principal role is to encourage harmonisation of Australian and New Zealand accounting standards, has observed that the biggest difference is that New Zealand has a form of differential reporting applying to certain unlisted companies.

The FRC continues to monitor the performance of the AASB. Under the auspices of the Nominations Committee, the FRC undertook performance assessments of AASB members, via a peer survey. The results of the assessment were discussed by the Nominations Committee with the AASB Chair, allowing him to provide feedback to individual Board members. The performance assessments are useful in determining the skill needs of the AASB.

The FRC appointed four new members, and reappointed another three members to the AASB, including the reappointment of the New Zealand representative, Ms Joanna Perry, on the advice of the TTASAG.

On an international level I note that the IASB will be focusing further attention on standards for SMEs. This will be an issue of considerable significance and I look forward to strong cooperation between the IASB and the AASB on this issue to facilitate the promulgation of appropriate standards for the many SMEs that play such an important role in the Australian economy.

Audit standard setting

The focus of the AUASB in 2005-06 was on reviewing and reissuing Australian Auditing Standards in accordance with the legislative requirements under the Corporations Act 2001, and the strategic direction issued by the FRC in April 2005 requiring that the standards display a clear public interest focus. The FRC was keen to ensure that the AUASB undertook extensive consultation with a range of stakeholders, including those in sectors other than the private for-profit sector. Now that these auditing standards are in place, the FRC looks forward to the AUASB working closely with the International Auditing and Assurance Standards Board, and other international bodies, to enhance the clarity and the comprehensive nature of the Australian Auditing Standards.

As with the AASB, the FRC monitored the performance of the AUASB, with the Nominations Committee implementing a performance assessment of AUASB members utilising a peer survey. The results of the assessment were discussed by the Nominations Committee with the AUASB Chair.

The FRC appointed five new members, and reappointed another member to the AUASB. As a consequence, the size of the AUASB expanded by two members, from 11 to 13, to assist in filling skills gaps identified by the performance assessment process and by the AUASB Chair.

Auditor independence

The FRC continued its programme of meetings with key stakeholder bodies that were initiated during the first year of its responsibilities for auditor independence matters, and the ‘Big Four’ accounting firms. I was pleased to meet with the Chair of the newly-established Audit Quality Review Board (AQRB), Mr Andrew Rogers QC. I anticipate that the FRC and the AQRB will develop a closer working relationship in 2006-07, and may establish an MOU in doing so.

Last year’s report on the FRC’s work on auditor independence was presented to the Treasurer last October and was well received by stakeholders. The report revealed strong compliance with the auditor independence requirements, along with some areas for improvement. The report for 2005-06 is being issued as a separate document rather than included with this FRC/AASB/AUASB Annual Report.

In addition to the overall work on auditor independence matters undertaken by Mr William Bartlett for the FRC, the FRC engaged consultants to undertake three specific tasks forming part of the FRC’s 2005-06 auditor independence work programme. These consultancies were concerned with the teaching of professional and business ethics by, or on behalf of, the professional accounting bodies, the quality review programmes of Australia’s professional accounting bodies, and the disciplinary procedures in place in Australia relating to auditor independence.

The Auditor Independence Subcommittee provided significant assistance to the Council in the performance of the independence function.

Transition to International Financial Reporting Standards

Following activity organised at the international level over the past few years, there is a relatively stable platform of accounting standards applying to for-profit entities. Nevertheless the FRC continues to monitor issues raised by stakeholders on IFRS implementation. In 2005 the FRC sought submissions from stakeholders on progress with implementation. A number of common themes emerged from the submissions, including the level of Australian influence over the development of IFRS, education and the skill level of those responsible for implementing and interpreting IFRS, issues affecting small and medium enterprises, the future stability of the accounting standards platform, and issues arising from the process by which standards are set by the AASB.

The FRC considered that some of the issues raised were transitional and would largely resolve themselves over time, while others were more substantive. The FRC advised the AASB of these issues.

The FRC sought legal advice on the extent to which the requirements of the Australian Securities and Investments Commission Act 2001 (ASIC Act) conditioned the role of the AASB in its treatment of options and interpretations of IFRS. The Australian Government Solicitor concluded that the objects of Part 12 of the ASIC Act did not require the AASB to limit alternative treatments in IASB standards. The AASB has undertaken to change its approach so that it will no longer exclude options allowed under IFRS or add additional guidance to that included in IFRS.

In October 2005 I was pleased to assist with the running of the IFRS Regional Policy Forum held in Sydney under the auspices of the TTASAG. The participating jurisdictions comprised China, Hong Kong SAR, Indonesia, Japan, the Republic of Korea, Malaysia, the Philippines, Singapore, Thailand and the two host countries, Australia and New Zealand. Delegates included senior representatives of accounting standard setting and oversight bodies, professional accounting bodies, central banks and government officials.

As noted in the communiqué issued by participants, the forum was held at an important time, as many jurisdictions in the Asia-Oceania region are relatively advanced in adopting IFRS or harmonising their standards with IFRS. Consequently there is significant scope to enhance regional cooperation and coordination with the aim of delivering positive outcomes for the region and participating jurisdictions. Adoption or harmonisation of IFRS within the region provides further impetus to the globalisation process by reducing the risks associated with cross-border investment, and reducing the cost of preparing financial statements for companies that operate in more than one jurisdiction. The communiqué was forwarded to Sir David Tweedie, Chairman of the IASB.

I was especially pleased that Mr Tatsumi Yamada, a member of the IASB, was able to attend the Regional Policy Forum and provide useful input into the Forum’s deliberations.

In June 2006 I followed on from the forum by meeting with relevant parties in Japan, China and Singapore. I am pleased that Japan has offered to host the next Regional Policy Forum in 2007. These fora will help provide a voice to jurisdictions in the Asia-Oceania region at a time when the IASB, in developing IFRS, will also need to take account of developments with standards issued by the Financial Accounting Standards Board of the United States.

Stakeholder liaison

Liaison with a broad range of domestic and international stakeholders, including those with whom the FRC has established formal MOUs in relation to auditor independence matters, forms a vital component of the FRC’s information gathering.

Mr Richard Humphry AO, a trustee of the International Accounting Standards Committee Foundation, reports regularly to the FRC on developments at the Foundation. A number of FRC members were able to meet with the Chairman of the IASB, Sir David Tweedie, during Sir David’s visit to Australia in November 2005, and I was able to meet him earlier in that month in London.

Ms Judith Downes, a former member of the AASB, was appointed to the Standards Advisory Council (SAC) of the IASB in 2005. She has reported to the FRC on the meetings of the SAC held since her appointment. Mr Warren McGregor, an Australian who has been a member of the IASB since 2001, was reappointed to the IASB for a further five-year term in June 2006. Mr McGregor has permanent observer status on the AASB and provides useful advice to the FRC.

In conjunction with the FRC Secretary I undertook a series of meetings in Europe and North America in November 2005. Meetings were conducted with senior representatives of a broad range of policy making, standard setting, regulatory and professional accounting bodies. The meetings added significantly to our understanding of global trends in accounting and auditing standards, and audit independence matters. It was clear that there was a genuine commitment to convergence around the globe. The extent of mutual recognition between IFRS and US GAAP was becoming the cornerstone of consistent global standards.

In June 2006 I visited Japan, China and Singapore, where I met with policy makers, standard setters and professional accounting bodies as a follow-up to the IFRS Regional Forum held in Australia in October 2005.

In February 2006 I attended a joint Financial Stability Forum/International Accounting Standards Board/International Federation of Accountants Roundtable on Financial Reporting and Auditing held in Paris. Issues considered were implementation of international accounting standards, an update on convergence, fair value accounting and risk and vulnerabilities in the financial reporting process. In April 2006 I attended a National Institute of Accountants (NIA) conference in Malaysia on challenges facing the professional accountant.

Domestically, I met with Dr Ken Henry, Secretary of the Australian Government Treasury and Chair of the Heads of Commonwealth and State Treasuries, to discuss issues associated with GAAP/GFS. As reported above, I met with the new Chairman of the Audit Quality Review Board, Mr Andrew Rogers. Early in 2006 I met with the Hon Chris Pearce MP, Parliamentary Secretary to the Treasurer, and on 31 May 2006 I appeared before the Senate Economics Legislation Committee during hearings on the Budget estimates. During the course of the year I held my usual meetings with the professional accounting bodies, regulatory bodies including ASIC and APRA, and other stakeholders.

As reported above, the Council sought stakeholder input as part of its reporting to the Minister and to the AASB on IFRS implementation issues. Much of the liaison work was undertaken by FRC members in respect of the stakeholders that they represent on the Council.

At the June 2006 meeting of the FRC, members of the AUASB joined with the Council to listen to the report from the Chairman of the AUASB, Ms Merran Kelsall, and to engage in further informal discussions with FRC members over lunch. This proved to be a worthwhile event that I expect to be replicated with other stakeholder groups during 2006-07.

Ken Spencer Memorial

The FRC organised two events in memory of Mr Ken Spencer. Mr Spencer was Chairman of the AASB from 1994 to 1999 and was later a Trustee of the International Accounting Standards Committee Foundation and member of the FRC. He passed away in 2004.

The main Board room at the AASB — AUASB office was named in honour of Mr Spencer. A plaque was unveiled by Sir David Tweedie during his visit in November 2005. As well as Sir David, Professor Boymal made some remarks on behalf of the AASB and Elizabeth Alexander spoke on behalf of the FRC.

The Ken Spencer Memorial Lecture was held at the KPMG Lecture Theatre in Melbourne in April 2006. The lecture, organised by the FRC and co-sponsored by KPMG, was given by Mr Kevin Stevenson, of PricewaterhouseCoopers and formerly Technical Director at the IASB.

Mr Stevenson’s topic, ‘Global Accounting Standards: Has the Game Really Begun?’ was well-received by the audience of around 70, which included members of the Spencer family and many stakeholders from across business, standard setting and the accounting profession.

Mr Stephen Harrison (Master of Ceremonies), Mr Kevin Stevenson (Lecturer) and Mr Charles Macek (FRC Chairman) at the Ken Spencer Memorial Lecture, held in the KPMG theatrette in Melbourne on 27 April 2006.

New Zealand

The relationship between the Council and its New Zealand equivalent, the Accounting Standards Review Board (ASRB) was maintained during the year, with Mr Warwick Hunt (Chair of the ASRB) and I attending the meetings of both the ASRB and FRC. Mr Hunt took over as Chair of the TTASAG at the beginning of 2006, and provided reports on TTASAG’s work to FRC members.

The New Zealand Government co-sponsored the IFRS Regional Policy Forum held in Sydney in October 2005, and a number of presentations were made by New Zealand representatives. I am pleased to note that the AASB and their New Zealand equivalent, the FRSB, have expanded the range of their joint activities on standard setting, which includes the establishment of a protocol of cooperation.

TTASAG has embarked upon a review of the legislative framework for financial reporting in Australia and New Zealand. This work is aimed at identifying differences between the frameworks with a view to informing policy development in this area so unnecessary differences between the two countries can be eliminated. Aligning financial reporting frameworks in Australia and New Zealand should assist in reducing compliance costs for companies with trans-Tasman operations.

Financial Reporting Council operational matters

A survey of FRC members on the operations and performance of the FRC was undertaken in July and August 2005. The results were examined by the Nominations Committee and the FRC at its September 2005 meeting. The survey revealed overall satisfaction with the Council’s performance.

The FRC agreed to follow up the survey with a special meeting of the FRC to consider only long-term strategic issues concerning the role of the FRC. The meeting was held in February 2006. Discussion ranged over the FRC’s progress to date and ways in which the FRC could better fulfil its mandate to provide guidance to the AASB and AUASB on accounting and auditing standards and to monitor the effectiveness of auditor independence requirements. Improvements to existing operations, as well as the inclusion of new tasks, were canvassed. A number of actions were agreed and these are being followed up and reviewed at regular FRC meetings. In particular, the FRC has identified a need to improve its communication with stakeholders and the public, and to formulate a consistent framework governing the issue of strategic directions to the standard setting boards. We plan to make progress on those matters in 2006-07.

Funding for standards setting activities

The FRC has the task of securing the funding needed to ensure effective standard setting by the AASB and AUASB.

For a number of years, the FRC employed a tri-partite funding model which has included contributions from the Australian Government, State and Territory governments, the professional accounting bodies, and the corporate sector. As a result of the extra responsibilities endowed to the FRC under CLERP 9, the Australian Government is providing an additional $19.2 million over four years from 2005-06 to support the FRC in its expanded role of overseeing auditor independence and auditing standards setting arrangements and for the continuation of the Financial Reporting Panel (FRP).

Firm funding commitments have been secured from the professional accounting bodies to 2008-09 and from the States and Territories to 2009-10. In view of the additional funding provided by the Australian Government, voluntary contributions from the corporate sector are no longer sought. I should however acknowledge the contribution that has been made over a number of years by the ASX which has enabled the standard setting Boards to enjoy appropriate accommodation.

These funding arrangements provide ongoing certainty for the FRC and the functions for which it is responsible.

The FRC once again showed its tangible support for international standard setting activities by approving a contribution to the IASCF of $1 million in 2005-06.

The FRC agreed to extend sitting fee payments to FRC members to cover attendance at FRC-related Committee meetings and related activities. The fees are payable for meetings held after 1 January 2006. In approving these payments, the FRC issued guidelines setting out the circumstances and amount of payment.

The FRC agreed, for the first time in some years, to increase the sitting fees payable to members of the AASB and AUASB for their Board meetings, and to review these amounts more regularly. The FRC also agreed to extend sitting fee payments to cover attendance by Board members at eligible Board Subcommittee meetings. Meetings relating to the AASB’s interpretations functions will be covered by these payments. Guidelines for payments to Board members for these meetings are based on those applying to FRC members for attendance at FRC-related Committee meetings.

Committees of the Financial Reporting Council

Four committees performed an extensive role in undertaking background work to allow the FRC to make informed decisions at its meetings. Committees operating in 2005-06 were:

the Finance Committee, which also acts as the AASB Audit Committee and AUASB Audit Committee when considering the budgets of the AASB and AUASB respectively;
the Nominations Committee;
the Audit Independence Subcommittee; and
the Sector Neutral Standards Steering Committee.

The first three of these are standing committees with their own charters which are reviewed from time to time. The Sector Neutral Standards Steering Committee was established for the specific purpose of providing oversight on the sector neutral accounting standards project.

The Finance Committee provides advice to the FRC on the funding and expenditures of the FRC and its constituent bodies, the AASB and AUASB, while the Audit Committees assist the directors of the AASB and AUASB (the members of the FRC) in discharging their responsibilities under the Commonwealth Authorities and Companies Act 1997. The Finance Committee oversights the business plans of the two Boards and preparations for the FRC/AASB/AUASB annual reports, and advises the Council on significant payments to external bodies such as to the IASC Foundation. In 2005-06 the Finance Committee also took responsibility for organising the Ken Spencer Memorial Lecture.

The Nominations Committee undertook a comprehensive selection exercise for both AASB and AUASB membership, culminating in a series of appointments at the FRC meeting held on 16 December 2005. A further appointment to the AASB was made during the first half of 2006. The Nominations Committee undertook a performance assessment of AASB and AUASB members based on a peer survey, and provided feedback on this to the Board Chairs.

The Audit Independence Subcommittee assists the FRC to perform its auditor independence functions. It works closely with a consultant, Mr William Bartlett, employed by the FRC to assist on auditor independence issues. Subcommittee members attend meetings with those bodies with which the FRC has MOU agreements with, and oversights production of the FRC annual report on its auditor independence functions. In 2005-06, the Subcommittee played a key role in appointing consultants to undertake the audit independence projects I refer to earlier in this report, and in oversighting the work of those consultants.

The Sector Neutral Standards Steering Committee was responsible for recommending the appointment of Mr Simpkins to undertake the research into sector neutral standards, and met with him regularly in the months leading up to the presentation of the report at the June 2006 FRC meeting, to define the parameters of the research and provide general guidance.

Membership

I thank all of my colleagues for the work that they have put into the FRC and its Committees during 2005-06. Their commitment has permitted the Council to tackle some interesting and important issues through the course of the year. The leadership provided by the Committee Chairs, Ms Elizabeth Alexander AM (Audit Independence Subcommittee), Mr Graeme McGregor AO (Finance Committee) and Mr Phillip Prior (Nominations Committee and Sector Neutral Standards Steering Committee), together with the contribution of other Committee members, should be recognised.

Retiring from the FRC during 2005-06 were Mr Tom Pockett and Mr Brian Scullin. Both provided considerable expertise to the Council with their respective backgrounds in business and finance.

With the FRC permitting proxy voting at individual meetings, alternate members are no longer appointed. The terms of alternate members, Mr Roger Cotton, Mr Stephen Harrison and Mr Mike Rawstron ended in 2005-06, and I thank them for their contributions. There are now no alternate members on the Council.

New appointments to the Council in 2005-06 were Mr Bruce Brook, Mr John Gethin-Jones, Mr Eric Mayne, Mr John Stanhope and Mr Lee White. Mr Brook is the nominee of the Business Council of Australia, taking over from Mr Pockett, while Mr Gethin-Jones was nominated by the Investment and Financial Services Association, taking over from Mr Scullin. Mr Mayne and Mr White were nominated respectively by the Australian Stock Exchange and the Australian Securities and Investments Commission, both of which have traditionally been represented on the Council. Mr Stanhope is the nominee of the Group of 100 Inc, which represents Chief Financial Officers. It is the first time that the Group has had a nominee appointed to the Council.

Three members — Mr Jim Murphy, Ms Catherine Walter AM and Mr Klaus Zimmermann — were reappointed to further terms on the Council.

Assistance to the Council

Thanks are due to the Chair of the AASB, Professor David Boymal, and the Chair of the AUASB, Ms Merran Kelsall for their work in keeping the Council informed of developments. Both provide valuable input, often at Committee level, on matters of direct relevance to their Boards such as appointments and budgetary matters. They are ably assisted by their staff members.

The FRC Secretary, Mr Jorge del Busto, and his Secretariat have enabled the work of the Council and its Committees to be carried out in a timely and effective manner.

I am gratified by the Council’s recent achievements in furthering its aims and objectives, and expect that 2006-07 will provide many challenges on both the domestic and global fronts. The Council and I are confident of meeting those challenges with a high degree of capability.

SIGNED

Charles Macek
Chairman of Financial Reporting Council
26 September 2006

Financial Reporting Council governance

Establishment, functions and powers

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 Programme (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 both 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 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;
monitoring:
- 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, overall adequacy and effectiveness 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.

Membership and meetings

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 2005-06, 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, no alternate members were appointed in 2005-06. The terms of alternate members have now all expired and there are no longer any alternate members.

Operations and activities

Appointments to the Australian Accounting Standards Board and Auditing and Assurance Standards Board

The Nominations Committee is responsible for recommending appointments to the AASB and AUASB. In making recommendations, the Committee reviews written applications, interviews candidates, and takes into consideration the past performance and future needs of the two Boards. The Committee is also given other tasks from time to time; for example, in 2005-06, the Committee provided oversight of the FRC’s performance assessment.

In 2005-06, 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, Ms Jan West and Mr Klaus Zimmermann. The Nominations Committee formally met three times during the year. In addition, the Committee met over two days in November 2005 and again in June 2006 to conduct interviews for appointment to the AASB and AUASB.

The FRC appointed Ms Jan McCahey, Mr John O’Grady, Mr Colin Parker and Mr Brett Rix to the AASB during 2005-06. AASB members re-appointed were Mr Glenn Appleyard, Mr Brett Kaufmann, and Ms Joanna Perry. The re-appointment of Ms Perry, who is Chair of New Zealand’s Financial Reporting Standards Board, was made at the recommendation of the Trans-Tasman Accounting Standards Advisory Group.

The FRC appointed Mr Chris Hall, Mr David Simmonds, Mr Mike Blake, Mr Greg Pound, and Ms Elizabeth Johnstone to the AUASB during 2005-06. Mr Ian McPhee, Auditor-General of the Commonwealth of Australia, was re-appointed to the AUASB.

Overseeing the Australian Accounting Standards Board and Auditing and Assurance Standards Board

The FRC’s responsibilities include reviewing and approving the AASB’s and AUASB’s priorities, business plan, budget and staffing arrangements.

During 2005-06, the FRC Finance Committee, meeting as the AASB Audit Committee and the AUASB Audit Committee, undertook the detailed reviewing of the budgets, business plans and work programmes of the two Boards. Further information on the work programme for the AASB is contained in Appendix E. Further information on the work programme for the AUASB is contained in Appendix F.

The Chairmen of both the AASB and AUASB provided updates on the operations, including staffing matters, at each meeting of the FRC.

Audit independence

Under amendments made to the ASIC Act by the CLERP 9 legislation, the FRC has responsibility for monitoring the effectiveness of auditor independence requirements in Australia and giving the Minister reports and advice about those requirements.

A detailed report on the FRC’s performance of the auditor independence functions has been prepared separately from this Annual Report.

Communication and consultation

The FRC regularly issues bulletins that communicate decisions taken at its meetings and other important developments in accounting and auditing standard setting. These bulletins are available on the FRC website.

During the year, FRC Chairman, Mr Charles Macek and other members of the FRC consulted with representatives of corporations, business organisations, other stakeholder bodies and accounting and auditing organisations. The FRC Chairman travelled overseas and consulted widely with executives from corporate and accounting bodies on matters relating to international accounting and auditing standards, developments in respect of accounting and auditing standards, and matters regarding auditor independence.

Financial Reporting Council consultants

During 2005-06, Mr William Bartlett continued to assist the FRC in the performance of the auditor independence functions conferred on the Council by the CLERP 9 legislation. Mr Bartlett, a retired partner of accounting firm Ernst & Young, was initially appointed in December 2004.

In November 2005, Mr Kevin Simpkins was engaged by the FRC to undertake research into how adequately a ‘sector neutral’ approach to the development of accounting standards can meet the information needs of users of financial statements and the public interest more generally. Mr Simpkins was Deputy Controller and Auditor-General of New Zealand for three years until May 2005, having previously held other positions in the Office of the Auditor-General, Ernst & Young and the New Zealand Institute of Chartered Accountants, where he was Technical Director. Mr Simpkins' report was tabled at the FRC meeting held in June 2006.

In April 2006, three consultants were engaged to undertake short-term consultancies associated with the Council's auditor independence function. The International Accounting and Auditing Institute provided consultancy services in respect of the quality review programmes of the professional accounting bodies. The principals of the Institute, Mr Graeme Macmillan and Mr Michael Cain, have experience in large accounting practices both in Australia and overseas and have provided a wide range of consultancies on topics associated with financial reporting.

Henderson Walton Consulting provided consultancy services in respect of the teaching of professional and business ethics by, or on behalf of, the professional accounting bodies. Ms Jane Walton, the principal of the company, has extensive experience in the development and teaching of courses on ethics.

Mr Bartlett also provided consultancy services in respect of the disciplinary procedures of the professional accounting bodies, assisted by Ms Anne Dalton of Melbourne legal firm Sparke Helmore.

Finances

The 2003-04, 2004-05 and 2005-06 Australian Government Budgets each contained measures designed to strengthen the financial position of the FRC and the standard setting bodies it oversees. In brief, these measures were:

the 2003-04 Budget provided $4 million over four years to support the expanded functions of the FRC under the CLERP 9 reforms;
the 2004-05 Budget provided an additional $3.4 million to assist with the implementation of the expanded role of the FRC under CLERP 9, including the reconstitution of the Auditing and Assurance Standards Board, and for the establishment of the Financial Reporting Panel; and
the 2005-06 Budget provided funding of $19.2 million over four years to support the FRC in its expanded role of overseeing auditor independence and audit standards-setting arrangements and for the continuation of the Financial Reporting Panel (which does not fall under the oversight of the FRC).

Total Australian Government funding provided to the FRC through Treasury (including funding of $1 million per annum for the Financial Reporting Panel) is $5.8 million in both 2005-06 and 2006-07. A review of ongoing Australian Government funding for the FRC will be undertaken by October 2006 as part of the planning for the 2007-08 Budget.

The States and Territories provided $500,000 in 2005-06 and have committed themselves to funding at the same level through to 2009-10.

In 2005-06, the professional accounting bodies provided contributions totalling $1.75 million. CPA Australia, and the Institute of Chartered Accountants in Australia (ICAA) contributed $750,000 each while the National Institute of Accountants contributed $250,000. The professional bodies have advised that their funding commitment would fall to $1.5 million in 2006-07, $1.25 million in 2007-08, and $1 million in 2008-09. The rationale given for this reduction in funding is that the professional bodies themselves require increased resources to address obligations stemming from their membership of IFAC, including enhanced requirements in respect of quality control and disciplinary areas. In addition the professional accounting bodies are funding the newly established Accounting Professional and Ethical Standards Board.

In view of the funding from Australian Government sources, the FRC no longer seeks voluntary contributions from the business community. Due to the importance of financial reporting matters to listed companies, the ASX continued to provide an annual grant to the standard setting bodies.

During 2005-06 the FRC approved payments to the IASCF totalling $1 million. This amount was finalised following agreement between the AASB and the IASCF concerning access to IASCF publications that supplement the IFRS-based standards. The IASCF is currently reviewing its funding model, which may have implications for the level of contribution expected from Australian bodies in the future.

As noted above, in 2005-06 the Government provided $4.8 million to support the role of the FRC and to contribute towards the activities of the bodies it oversees (excluding the $1 million set aside for the Financial Reporting Panel). In 2005-06, a total of $2,284,897 of FRC’s own expenditure was paid by Treasury out of this appropriation. This consisted of:

$1,000,000 of 2006 contributions to the IASCF;
$492,327 in staffing costs;
$351,501 on consultants;
$79,182 on the Chairman’s salary (including superannuation);
$39,143 in sitting fees for FRC members (other than the Chairman), including sitting fees for attendance at Committee meetings;
$205,794 on travel; and
$116,950 on overheads.

The 2005-06 appropriation from the Australian Government was also used to supplement the funding of the AASB and AUASB (as noted in the adjunct 2005-06 AASB financial report and AUASB financial report).

Freedom of information

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.

No applications under the Freedom of Information Act 1982 were received by the FRC in 2005-06.

Contacting the Financial Reporting Council

Post:	Secretary Financial Reporting Council c/- The Treasury Langton Crescent PARKES ACT 2600
Telephone:	(02) 6263 3144
Facsimile:	(02) 6263 2770
E-mail:	frcsecretary@treasury.gov.au

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