6. Other independence-related issues
Specific issues with CLERP 9
This section details issues raised by the MOU parties, accounting firms and other stakeholders with respect to the implementation of CLERP 9. The FRC will consider these issues as part of its work programme for 2006-07 with a view to submitting appropriate recommendations for consideration by the Government. These issues, which are covered in more detail in the following section dealing with ‘International Developments in Auditor Independence’, are:
- employment and financial restrictions, including adopting a covered person7 test;
- amending the cooling off restrictions applying to former audit partners and senior audit personnel;
- reviewing the multiple former audit partner restrictions, which has already been announced by the Government; and
- amending audit rotation rules to relieve the burden which sometimes arises with smaller firms and also with all firms when the audit involves specialised industries.
Unintended consequences
The 2004-05 report dealt with unintended consequences which arose during the first year of the implementation of CLERP 9.
There has been excellent cooperation between Treasury, ASIC, the accounting bodies and the accounting firms in resolving the unintended consequences. There are still a few minor issues outstanding and FRC encourages the various stakeholders to resolve them in due course.
Hiring issues
The 2004-05 report referred to an issue raised by the accounting profession in terms of hiring of talented young people and lateral partners and senior executives. We have been advised that there is a major skill shortage of graduates entering the profession. The strict rules surrounding the holding of financial interests in audit clients of the audit firm may need to be examined further in this context. The FRC recommends that this issue be considered when deliberations are held concerning the possibility of amending the requirements in any consideration of a covered person test.
Reducing the regulatory burden on business
On 7 April 2006 the Government announced its interim response to the Report of the Taskforce on Reducing Regulatory Burdens on Business — Rethinking Regulation (‘the Banks report’), which looked at ways to reduce the red tape affecting Australian businesses. In its interim response, the Government noted that over-regulation is a major concern to all businesses and especially small businesses. In its final response to the Banks report, issued on 15 August 2006, the Government addressed the report’s 178 recommendations, which should significantly reduce the red tape on business. On 14 August 2006, the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce, announced the most comprehensive package of corporate law reform proposals since the commencement of the Corporate Law Economic Reform Programme, which will be progressed through the Simpler Regulatory System Bill.
The FRC welcomes these initiatives and, with the aim of contributing to the reduction of the red tape affecting the auditing profession in Australia, intends to examine, as part of its 2006-07 work programme, whether any scope exists for reducing the overlap of auditor review responsibilities between the firms, professional accounting bodies and regulators. Any recommendations in this area will be submitted for the consideration of the Government. Consideration will be given on how to optimise the environment in Australia given the lesser depth and diversity of auditing resources compared with the US and Europe.
Proposed legislation increasing ASIC’s inspection powers
In its 2004-05 independence report, the FRC noted that ASIC’s powers of inspection in relation to audit firms needed to be clarified. It also noted the release of a consultation paper by the Commonwealth Treasury containing proposals for law reform in this respect. The FRC understands that consultations on this topic are now completed and that the corresponding Bill will be introduced later in 2006 for consideration by Parliament.
Auditors who are not members of an accounting body
The 2004-05 independence report included an observation that an issue that needs to be considered further is the case of registered company auditors who are not members of a professional accounting body and, therefore, are not subject to any of the professional development requirements, ethical requirements, or disciplinary procedures of those bodies.
The consultants reviewing issues associated with quality review programmes, disciplinary procedures and the teaching of ethics have each made recommendations concerning the need for auditors to be members of a professional accounting body.
The FRC, in consultation with ASIC and the professional accounting bodies, is currently reviewing the register of company auditors for the purpose of ascertaining the number of registered company auditors who are not members of a professional body. The FRC anticipates that this project will be completed during the first half of 2007.
7 A ‘covered person’ is defined in the Securities and Exchange Commission (SEC) Rules to mean the following members of an accounting firm: (a) the engagement team; (b) the chain of command; (c) any other member of the firm who has provided ten or more hours of non-audit services to the audit client for the period beginning on the date such services are provided and ending on the date the accounting firm signs the report on the financial statements for the fiscal year during which those services are provided, or who expects to provide ten or more hours on non-audit services to the audit client on a recurring basis; and (d) any other member from an office of the accounting firm in which the lead audit engagement partner primarily practices in connection with the audit.
The ‘chain of command’ concept in the definition of a ‘covered person’ is defined in the SEC Rules as all persons who: (a) supervise or have direct management responsibility for the audit, including at all successively senior levels through the audit firm’s chief executive; (b) evaluate the performance or recommend the compensation of the audit engagement partner; or (c) provide quality control or other oversight of the audit.