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Appendix D

Consultancy on disciplinary procedures of the professional accounting bodies

Statement of Work

The consultancy on the disciplinary procedures of the professional accounting bodies required the consultant to:

1. review the investigation and disciplinary procedures of the ICAA, CPA and NIA as those procedures apply to Australian auditors;
2. consider the inter-relationship between the investigation and disciplinary procedures of the professional accounting bodies and the disciplinary arrangements for auditors contained in the Corporations Act;
3. prepare a report for the FRC assessing the overall adequacy of the investigation and disciplinary procedures of the professional accounting bodies; and
4. make appropriate recommendations to the FRC concerning changes or other modifications that should be made to the present framework for taking disciplinary action against Australian auditors, including those that are not members of a professional accounting body, having particular regard to the procedures used by the professional accounting bodies, the arrangements contained in the Corporations Act (including the activities of the CALDB, ASIC and APRA) and the scope (if any) for rationalising that framework.

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 investigation and disciplinary procedures of Australia’s professional accounting bodies having regard to:
   1. the requirements (if any) of IFAC concerning the investigation and disciplinary procedures to be adopted by its member bodies;
   2. the investigation and disciplinary procedures of:
      1. Australian self-regulatory organisations in respect of disciplines other than accounting; and
      2. professional accounting bodies in other jurisdictions;
2. consider whether, and in what circumstances and manner, a professional accounting body should announce that it is investigating the conduct of one of its members;
3. have regard to international developments concerning the investigation and disciplinary procedures of self-regulatory organisations;
4. review, and where appropriate have regard to, academic and other material concerning the investigation and disciplinary procedures of self-regulatory organisations; and
5. examine whether, and in what circumstances, investigation and disciplinary procedures could be initiated against a registered company auditor either by a professional accounting body or under the Corporations Act prior to the conclusion of any civil or criminal proceedings against the auditor.

Consultant’s review

In addition to considering the adequacy of the investigation and disciplinary procedures of Australia’s professional accounting bodies, the consultant also considered the investigation and disciplinary procedures of Australian self regulatory organisations in respect of disciplines other than accounting, including medical practitioners in Victoria, legal practitioners in New South Wales and Victoria, and actuaries in Australia.

The consultant has reported that his examination revealed that the disciplinary procedures of each body could be described as adequate. The bodies do appear to handle most of the matters before them adequately. Each of the bodies displayed significant evidence of internal review and reform in recent years leading to improvements in their investigation and disciplinary procedures. As well, the relevant officers of the accounting bodies displayed a very professional attitude to investigation and disciplinary matters.

However despite these very positive aspects the consultant has also reported the following:

• The investigation and disciplinary procedures of each of the professional accounting bodies are compromised by a perceived lack of independence. Whilst there is an appearance of ‘co-regulation’ by the professional bodies and ASIC/APRA it is not correct to characterize them as ‘self-regulating’. These bodies are not formally regulators, but membership bodies. In most cases this lack of independence is not problematic, although it does lead to a confusion of responsibilities, duplication of effort and uncoordinated responses to events which have auditor involvement and are in the public interest;
• The procedures are not consistent with trends in the regulation of other professionals, both in Australia and internationally, toward the establishment of an independent statutory authority with legislative power to investigate and discipline professionals (for example medical practitioners in Victoria). These changes have come about largely as a result of public pressure to regulate professionals who have an impact on the social, physical or financial wellbeing of members of the public. The general theme running through at least some of the parliamentary speeches which introduced the legislation establishing the statutory authorities is the need to have robust, transparent and independent regulation of professional organisations;
• The effectiveness of the procedures is also compromised by a low level of communication between the professional accounting bodies and ASIC in the past. All parties have recently attempted to improve the level of communication;
• The most significant issue that exists in the current ‘framework’ is that there is in fact no ‘framework’ or system for there is no inter-relationship between the investigation and disciplinary procedures of the professional accounting bodies and the disciplinary arrangements for auditors contained in the Corporations Act. Each of the professional and regulatory bodies act independently of one another and may not be aware of the steps, if any, taken by the others in respect of the same person and the same conduct. Apart from some very informal meetings and ad hoc monitoring of websites, all these bodies co-exist with no framework for inter-relationship. The FRC notes, though, that the CALDB has a standard practice to notify a professional accounting body where one of its members is a respondent before the CALDB. This is done when a Notice of Decision is published; and
• The professional accounting bodies are currently dealing with the issues of the initiation of any processes against members whilst a legal proceeding is on foot, in different and inconsistent ways. This is unsatisfactory from a number of aspects, including that given that some auditors are members of more than one professional accounting body, the one individual can be subject to a different interpretation of the law relating to contempt and sub judice, and therefore different disciplinary responses. This will also lead to duplication of effort and additional costs. There is also the very real potential that for some conduct, no actions are taken, as the registered auditors do not belong to any professional body. Account should also be taken of the very real public interest in having a fully informed market, that is the public being informed of concerns in relation to a particular auditor’s conduct. This needs to be balanced against an individual’s right to a fair trial The consultant recommends that the professional accounting bodies publicise that they are investigating such a member and reserve the right to themselves, in particular matters of high public interest, to suspend a member’s membership rights until the matter is dealt with by the courts and the professional accounting body. He notes that some of these steps are currently taken by some of the professional bodies, but it is not consistent across the profession. Legal advice has been received by some professional bodies concerning suspension and natural justice obligations which makes it difficult to implement some of the steps.

As a result of the above, the consultant has concluded that the present framework in respect of disciplinary action against Australian auditors is sub-optimal. In particular, he has noted that:

• The functions and operation of the CALDB are potentially compromised by their funding and staff being provided by ASIC;
• Whilst ASIC could use the Annual Statement by an Auditor to ascertain, monitor and scrutinize the conduct of registered company auditors who are not members of any professional accounting body, it is not currently doing so; and ASIC and APRA have different powers in relation to disqualifying auditors; and
• ASIC refer very few cases to the CALDB preferring to deal with any auditor disciplinary matters via their own legislative powers (a view which is disputed by ASIC). APRA have referred no cases to the CALDB again preferring to use their own legislative powers.

Against the above findings, the consultant has recommended that consideration be given to the establishment of a new and independent body. The features of such a new body would be:

• Independence from ASIC and APRA;
• The ability to initiate actions, particularly in the public interest, not requiring referrals from ASIC or APRA; and
• Adequately resourced and funded from sources other than through ASIC.

The consultant has also noted that an alternative approach would be to change the mandate of the CALDB to incorporate the above features.

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