5. Compliance with audit-related disclosure requirements
The FRC is required by paragraph 225(2B)(b) of the ASIC Act to monitor the overall compliance by companies, registered managed investment schemes and disclosing entities with audit-related disclosure requirements of the Corporations Act and the accounting standards.
The principal audit-related disclosure requirements of the Corporations Act and accounting standards are:
- paragraph 298(1)(c) of the Corporations Act, which requires a company, registered managed investment scheme or disclosing entity to include in its directors’ report for each financial year a copy of the auditor’s independence declaration under section 307C in relation to the audit for the financial year;
- section 300 of the Corporations Act, which requires the following information to be included in the directors’ report of a listed company:
- if a registered company auditor plays a significant role in the audit of a listed company for a financial year in reliance on a declaration made under section 342A6, subsection 300(11A) requires the report for the company to include details of the declaration;
- in relation to each auditor:
- details of the amounts paid or payable to the auditor for non-audit services provided, during the year, by the auditor (or by another person or firm on the auditor’s behalf);
- a statement whether the directors are satisfied that the provision of non-audit services, during the year, by the auditor (or by another person or firm on the auditor’s behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act;
- a statement of the directors’ reasons for being satisfied that the provision of those non-audit services, during the year, by the auditor (or by another person or firm on the auditor’s behalf) did not compromise the auditor independence requirements of the Corporations Act;
- subsection 306(2) of the Corporations Act, which provides that the directors’ report of a disclosing entity must include a copy of the auditor’s independence declaration under section 307C in relation to the audit or review for the half-year; and
- paragraphs Aus 126.1 and Aus 126.2 of accounting standard AASB 101 Presentation of Financial Statements, which require an entity or economic entity to disclose in its financial report the remuneration of:
- the auditor, showing separately amounts for audit and non-audit services (including, in the case of the latter, the nature and amount of each of the non-audit services provided by the auditor); and
- a practice related to the auditor’s firm for non-audit services provided in relation to the entity or economic entity (including the nature and amount of each category of non-audit service).
In its 2004-05 independence report, the FRC indicated that it planned to undertake a detailed examination of the audit-related disclosure requirements as part of its 2005-06 work programme. The FRC undertook this task with the assistance of information provided by ASIC and ASX.
The MOU that the FRC has entered into with ASIC provides for ASIC to give the FRC regular reports identifying matters arising from its financial reporting or auditor surveillance activities in relation to compliance by auditors and companies with the independence disclosure requirements in Part 2M.3 of the Corporations Act. The MOU with ASX also provides for that body and the FRC to exchange information.
ASIC has informed the FRC that, as part of its 2005-06 accounts surveillance programme, it reviewed 295 financial reports of listed entities for the year ended 30 June 2005. As part of that review, ASIC considered the following specific audit-related disclosure issues:
- Did the directors’ report include (including by way of cross-reference to an attached document) an auditor’s independence declaration?
- Where the directors’ report includes details of non-audit services, did it include an unqualified statement that these services had not affected the auditor’s independence?
The results of ASIC’s review showed that the majority of financial reports complied with the auditor-related disclosure requirements examined as part of the review. There were, however, a small number of financial reports that failed to comply with these disclosure requirements. Nineteen entities failed to include an auditor’s independence declaration and 20 entities failed to include an unqualified statement that non-audit services had not affected the auditor’s independence.
In addition, ASX informed the FRC that it had reviewed financial reports filed by listed entities with ASX under the listing rules for the financial period ending on 31 December 2005. ASX’s review included an examination of the form and location of the auditor independence declarations required under section 307C and disclosed by directors under sections 298(1) and 306(2) of the Corporations Act. The review indicated that the preferred format was for the declaration to be presented as a separate attachment to the directors’ report.
As part of its 2006-07 work programme, the FRC will review, and analyse, the level of compliance with audit-related disclosure requirements by considering the information provided by the MOU bodies.
6 Section 342A of the Corporations Act outlines the circumstances, and manner, in which ASIC may modify the auditor rotation requirements contained in section 324DA of the Act.