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Appendix C

Consultancy on quality review programmes of the professional accounting bodies

Statement of Work

The consultancy on the quality review programmes of the professional accounting bodies required the consultant to:

1. review the planning and performance of the quality assurance review programmes of the ICAA, CPA and NIA (to the extent that those reviews relate to auditor independence requirements) and the arrangements for monitoring the follow-up actions in respect of such reviews;
2. include, as part of the review referred to in (a) above, an examination of the activities of the AQRB, to the extent that they complement and support the quality assurance review programmes of the professional accounting bodies as related to auditor independence;
3. prepare a report for the FRC assessing the adequacy of the planning and performance of the quality assurance reviews (to the extent that those reviews relate to auditor independence requirements) and the adequacy of the follow-up actions taken in respect of such reviews;
4. make recommendations to the FRC concerning changes or other modifications that should be made in respect of the planning and performance of the quality assurance reviews and the monitoring of follow-up of actions taken in respect of such reviews; and
5. review whether auditors who are not members of a professional accounting body are subject to a quality review programme, establish in broad terms the quantum of auditors that fall under this category and make recommendations to the FRC on any changes that may be needed to address any gaps with respect to the quality assurance review programmes that should apply to those auditors.

The Statement of Work also provided that, without limiting the scope of the work to be performed, the consultant would:

1. consider the adequacy of the planning and performance of the professional bodies’ quality assurance review programmes having regard to:
   1. the requirements (if any) of IFAC for planning and conducting quality reviews; and
   2. the procedures used by professional accounting bodies in other jurisdictions for planning and conducting quality reviews;
2. consider the inter-relationship between the quality review programmes of the professional accounting bodies and the activities of the AQRB;
3. consider the inter-relationship between the quality review programmes of the professional accounting bodies and the audit inspection programme of ASIC;
4. have regard to international developments in accounting and other disciplines for planning and conducting quality reviews; and
5. review, and where appropriate have regard to, academic and other material concerning the planning and conduct of quality review programmes.

Consultants’ review

The ICAA, CPA and NIA each conduct quality reviews of the work of their members who are public practice certificate holders.

For those members who undertake audit and assurance work, the programmes test compliance with the requirements of the Corporations Act, auditing standards and professional pronouncements. The accounting bodies have well documented policies, procedures and guidelines to assist its members comply with the independence requirements. The reviewers utilize comprehensive checklists and work programmes to ensure key areas are assessed and supporting information is obtained to corroborate review conclusions.

The Institute of Chartered Accountants in Australia

ICAA has a membership of about 43,900, of whom some 7,500 hold a CPP. A total of 4,100 CPP holders are registered company auditors. Under ICAA rules, members who undertake audits are required to hold a current CPP.

ICAA members who conduct listed audit engagements are required to undergo a full quality review, regardless of their level of fees, once every three years. Other practices are reviewed once every five years. Practices that have serious breaches noted are subject to a follow-up review within 12 months of the initial review.

The audit quality reviews are undertaken by cooperative arrangement with members holding a CPP.

Practitioners are selected for quality reviews on a random basis, unless they had previously been reviewed, in which case the next review will be based on the date from the practitioner’s last review.

In order to maintain confidentiality, ICAA destroys all correspondence, questionnaires and work paper files relevant to the member’s review on successful completion in accordance with the Quality Review programme policy. The only record retained with the Quality Review database is a memorandum note that the review has been completed and the outcome achieved.

CPA Australia

CPA has approximately 108,000 members, of whom 5,284 hold a PPC. Some 873 holders of a PPC are registered company auditors. It is believed that the majority of these auditors are also members of ICAA.

From 2007, the review cycle will be based on a risk assessment of practitioners on a 12 months, three year or four year cycle for each practitioner depending on whether the practitioner conducts audits.

To maintain confidentiality of the Quality Review programme, all correspondence, questionnaires and work paper files relevant to the member’s review are destroyed upon successful completion of the review. A record is maintained on the Quality Review database showing that the review has been completed, and the outcome achieved.

National Institute of Accountants

The NIA has a membership at 30 June 2006 of approximately 14,352, of whom 2,316 hold a PPC. Fifty-three of the PPC holders are registered company auditors, with about half of them believed to be also members of either ICAA or CPA.

All NIA members who hold a PPC are normally subject to a quality assurance review every five years. However, if they audit a public listed company they are subject to a review every three years. The NIA retains all records and working papers created during a quality control review.

The practitioners are selected for quality reviews on a random basis.

Audit Quality Review Board

As noted earlier, the AQRB, was established during February 2006 to monitor the processes by which participating firms seek to ensure their compliance with applicable professional standards and legal obligations in relation to independence and audit quality with respect to financial statement audits of publicly listed entities.

To obtain standardised information on the quality control processes of procedures adopted by the firms, the AQRB has developed a Quality Control Report format. The Quality Control Report contains sections for each element of quality control based on the topic headings from APS 5. For each sub-element of quality control, firms are required to submit a description of their relevant policies and practices.

It is understood that the AQRB will make public the information provided to it.

Other findings from the consultants’ review

The consultants’ major findings in respect of the quality review programmes of the professional accounting bodies included that:

• The quality review programmes for reviewing members that undertake audits comply with IFAC and Australian professional pronouncements, although the consultants stated that they did not view samples of the review files as part of their engagement.
  • The consultants recommend that the review files from the quality review programmes of the ICAA should be available to the FRC so that it can sight evidence that the professional accounting bodies’ quality review policies and procedures, as they relate to auditor independence, have been followed.
• A limitation of the professional accounting bodies’ review of independence is that the review findings are largely based on quality review questionnaires completed by the reviewed practitioner which are then confirmed with the practitioner by subsequent interview. The reviewer undertakes testing of the files to confirm the appropriateness of the questionnaire answers.
  • The consultants recommend that the professional bodies quality reviews could further test check, where practicable, practitioner responses to questions on auditor independence against external confirmatory evidence.
• The quality review of the Big Four accounting firms by the ICAA conducted in 2005 consisted of one different person allocated to each firm for approximately 300 hours per firm at a cost of approximately $50,000 each, and a further 100 hours spent by the ICAA reviewing the quality review files. The people conducting the reviews were former partners of major firms. This contrasts with the audit investigation resources of ASIC, which has approximately 25 qualified staff members for their programme. Each ASIC inspection has a team of four to six members, and has allocated approximately 1,000 hours to complete each review. As the Big Four firms audit approximately 92 per cent of public listed companies by market capitalisation, it might be expected that more time and resources should have been devoted to the review of these practices by the ICAA. However, the planning of ICAA’s reviews needs to be considered in the context of the results of their previous review programmes and other reviews conducted, or proposed to be conducted, on the Big Four firms as follows:
  • the commencement of ASIC inspections in 2004-05;
  • audit quality reviews being conducted by the newly formed AQRB from early 2006; and
  • extensive internal quality assurance and independence checking procedures instituted by the firms to meet their professional membership obligations and local and international regulatory requirements.

Although not strictly related to the area of auditor independence, which is the FRC’s oversight mandate, the consultants have also noted results from recent international audit research. This evidence shows that the mandatory peer review programmes of accounting bodies are effective in predicting audit quality. The consultants have recommended that the FRC’s monitoring of the professional accounting bodies review programmes should be extended to cover audit quality as well as independence.

In other observations and findings by the consultants, they noted that emerging issues involving the auditing profession (arising from their review of quality review programmes as they related to auditor independence) included that:

• the overall structure of the Australian audit industry is complex with a number of regimes applying to different entities (such as corporates, superannuation funds, self-managed superannuation funds and the public sector, among others). This complexity is reflected in terms of different regulators in charge of approving and reviewing the work of auditors (see Figure 1 for a schematic summary of the regimes applying across the audit industry);
• there is no significant recognition of the audit specialisation by the professional accounting bodies other than through requiring auditors in practice to hold a CPP and the requirement to undertake at least 40 per cent of the minimum Continuing Professional Education (CPE) requirement in each of the appropriate speciality areas; and
• it is not necessary to be a member of the ICAA, CPA or NIA and to have a practicing certificate from those bodies to style oneself as an ‘auditor’ or to conduct an audit in Australia (although only a registered company auditor can conduct Corporations Act audits).

Recommendations made by the consultants in respect of these other findings included that:

• the Australian accounting profession consider introducing an individual audit practicing certificate requiring regular renewal as a means of ensuring quality in audit is maintained (which would imply reviewing ASIC’s current role for the registration of auditors and the requirement for the lodgement of an annual statement);
• the government consider reserving the designation ‘auditor’ to persons who hold an audit practicing certificate, a move that would be consistent with government policy for other professions;
• only persons approved and registered by a professional accounting body should be able to use the designation ‘auditor’, applicable also for public sector audits;
• the accounting profession should extend the definition of an audit assignment requiring a member to hold an audit practicing certificate; and
• the FRC consider the UK model of auditor oversight whereby the responsible government body accredits and regularly reviews the professional accounting bodies in the exercise of their functions to qualify all practising auditors, based on those bodies’ admission, continuing education, monitoring, quality review and disciplinary programmes.

Commenting on the structure of the Australian auditing industry, the consultants have noted that the major change on the supply side since 2001 has been the concentration of audit expertise among the Big Four firms. It is noted that the auditing of large corporations has become a complex international industry requiring substantial investment in technical expertise and training to compete on a global basis. The consultants have also highlighted the concentrated structure of the Australian auditing industry around the Big Four accounting firms, and recommend further research on the structure of the industry.

The FRC is aware that similar concerns are held in other jurisdictions and that the UK FRC is conducting research on means to promote competition and choice in the UK audit market. The FRC intends to monitor progress of these initiatives.

The FRC intends to examine the findings and recommendations of the consultants as part of its 2006-07 work programme, including consultations with the professional accounting bodies and other stakeholders.