Australia has comprehensive legislative and professional requirements concerning the independence of auditors. The principal requirements are:
- Division 3 of Part 2M.4 of the Corporations Act which sets out the requirements that have to be satisfied by the auditors of those entities that are subject to the audit requirements of the Act;
- Auditing Standard ASA 220 Quality control for audits of historical financial information, which was issued by the Auditing and Assurance Standards Board in April 2006;
- Section 290 of APES 110 Code of Ethics for Professional Accountants, which was issued by the Australian Accounting Professional and Ethical Standards Board (APESB) in June 2006;
- APES 320 Quality control for firms, which was issued by the APESB in May 2006.
Under the Corporations Act, all disclosing entities, public companies, large proprietary companies and registered schemes are required to prepare financial reports and have them audited. These audits must be conducted by auditors or audit companies registered by ASIC for that purpose.
ASIC may, in certain circumstances, relieve a large proprietary company of the obligation to have its financial report audited. On the other hand, the members of a small proprietary company that is not required by the legislation to prepare a financial report can require the company to prepare such a report and have it audited.
In 2004, amendments made to the Corporations Act by the CLERP 9 Act established a comprehensive regime on auditor independence. As a result of these amendments, which implemented recommendations of the Ramsay report (Independence of Australian Company Auditors) and relevant recommendations of the HIH Royal Commission, the Corporations Act contained the following measures to promote auditor independence during 2006-07:
- a general requirement of auditor independence;
- a requirement that auditors provide directors with an annual independence declaration;
- a prohibition of a number of specific employment and financial relationships between auditors and their clients which are considered to compromise independence;
- a ‘cooling-off’ period of two years for partners of an audit firm who are directly involved in the audit of an audit client before they can take up a directorship or senior management position with an audit client;
- consistent with the recommendations of the HIH Royal Commission, a restriction on more than one former audit firm partner becoming an officer of an audit client at any one time;
- a requirement for an auditor of a listed company to attend the company’s annual general meeting, and for shareholders to be able to submit written questions to the auditor concerning the auditor’s report, including the independence of the auditor;
- a requirement for audit partner rotation for auditors of listed companies after five consecutive years. ASIC has limited relief powers to modify the rotation requirements where they would impose an unreasonable burden on the auditor or audited body; and
- a requirement for listed companies to disclose in their annual directors’ report the fees paid to the auditor for each non-audit service, together with a description of the service. In addition, the annual directors’ report of each listed company must include a statement by directors that they are satisfied that the provision of non-audit services does not compromise the auditor’s independence.
During 2006-07, the Government made a number of changes to the auditor independence requirements as part of the package of reforms contained in the Simpler Regulatory System legislation.10 These amendments:
- addressed a number of anomalies and unintended consequences that were identified during the implementation of the CLERP 9 auditor independence requirements and were initially remedied by amendments to the Corporations Regulations or ASIC class orders. Further information about these amendments is included in section 3.5 of this report under ‘issues associated with the CLERP 9 reforms’;
- implemented refinements to the multiple former audit firm partner restriction, the former audit partner ‘cooling-off’ restriction and the adoption of a ‘covered person’ approach in relation to the existing financial relationship restrictions identified as a result of a comparative review of Australia’s auditor independence requirements. Additional information about these amendments appears in section 4 of this report under ‘comparative review of Australian requirements’.
To complement the legislative and professional requirements on independence of auditors, appropriate institutional arrangements have been put in place to monitor compliance with those requirements and, where necessary, take appropriate follow-up action. The principal organisations making up these institutional arrangements, and their respective roles, are listed below.
Australian Securities and Investments Commission
ASIC is the body that registers company auditors in Australia. To become a registered company auditor, an applicant must satisfy ASIC as to their qualifications, experience and competency in auditing.
ASIC conducts inspections of audit firms to assess their compliance with the audit requirements of the Corporations Act and auditing standards, including audit independence provisions.
Australian Securities Exchange
The ASX is required under the Corporations Act to ensure that the listed company markets are fair, orderly and transparent. Since 1 July 2006, the key supervisory operations of the ASX have been undertaken by ASX Markets Supervision Pty Ltd (ASXMS), a subsidiary company under a charter to undertake principles-based market supervision. ASXMS is responsible for monitoring the conduct of market users and compliance with ASX Operating Rules, enforcing the Operating Rules, and ensuring that sufficient resources are allocated to it to perform its supervisory functions.
The ASX Corporate Governance Council principles recommend that an audit committee should oversee the appointment of auditors and their independence of listed companies. ASX Principle 4: ‘Safeguard integrity in financial reporting’ requires the company to have a structure that independently verifies and safeguards the integrity of the company’s financial reporting. This would include, for example, a review and consideration of the accounts by the audit committee, and a process to ensure the independence and competence of the company’s external auditors.
A declaration of compliance with the auditor independence requirements under section 307C of the Corporations Act or of any applicable code of professional conduct in relation to the audit must be made by the auditor and be included in the directors’ report. The ASX monitors compliance with auditor independence certificate requirements and advises ASIC of any breaches.
The professional accounting bodies (the ICAA, CPA Australia and the NIA) undertake regular mandatory quality reviews of members who have a Certificate of Public Practice (CPP) or Public Practice Certificate (PPC). The reviews include ensuring their members are complying with the accounting, auditing and assurance standards and the code of ethics issued by the APESB. The reviews take place on a rolling three-year programme for auditors of listed entities.
The Audit Quality Review Board (AQRB) monitors firms that audit publicly listed companies (currently its role is limited to the Big Four firms) to assess whether they comply with professional standards and the law.
Each of the professional accounting bodies has entered into a Memorandum of Understanding with the AQRB under which they share information where appropriate, consult regularly and promote discussion on issues such as quality control and independence in the auditing of publicly listed companies. Since June 2007, the AQRB has been represented on the ICAA’s Quality Review Committee.
The APESB was established in February 2006 by the ICAA and CPA Australia as an independent body to set the code of ethics and the professional standards by which their members are required to abide. The NIA has subsequently become a member of the APESB.
Audit Quality Review Board
The AQRB is a not-for-profit company limited by guarantee that was established in December 2005 at the initiative of, and with the commitment of, the four largest accounting firms, to act as an independent review body. The AQRB, which is chaired by Professor the Hon Andrew Rogers QC, has up to 10 members who have broad knowledge and experience in legal, regulatory, business and auditing affairs.
The Board has established a Constitution, Code of Conduct and Rules, which provide the framework for its operations.
The initial participants in the AQRB’s review programme are the four largest accounting firms, which audit collectively 88 per cent by composition and 96 per cent by market capitalisation of the 300 largest listed entities on the ASX. Participation in the programme is voluntary and available to all Australian audit firms which audit listed companies.
The AQRB’s primary purpose is to monitor the processes by which participating audit 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. In its 2007 reviews the AQRB has expanded its scope to cover ‘public listed entities’, which it has defined as public listed entities, unlisted disclosing entities, APRA regulated bodies and large proprietary companies (as defined in the Corporations Act).
The AQRB has stated that it aims to enhance the credibility and integrity of the Australian auditing framework, to improve public confidence in that framework and to contribute to the continual improvement of the audit profession for the benefit of the Australian public.
The CALDB, which is established under the ASIC Act, may take disciplinary action on the application of ASIC or the Australian Prudential Regulation Authority (APRA) against an auditor or liquidator. The CALDB has power to admonish or reprimand a person; require a person to give an undertaking to engage in, or to refrain from engaging in, specified conduct; require a person to give an undertaking to refrain from engaging in specified conduct except on specified conditions; and suspend or cancel a person’s registration. The CALDB does not have the power to initiate disciplinary actions on its own.
Since July 2004, the FRC has been responsible for monitoring the effectiveness of auditor independence requirements in Australia and giving the Minister reports and advice about those requirements. The FRC has been given information gathering powers to support its auditor independence monitoring role.
10 Corporations Legislation Amendment (Simpler Regulatory System) Act 2007.