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2. Quality review programmes and disciplinary procedures of the professional accounting bodies

Under the ASIC Act, the FRC is required to monitor and assess the nature and overall adequacy of the systems and processes used by the professional accounting bodies for planning and performing quality assurance reviews of audit work undertaken by Australian auditors, to the extent that those reviews relate to auditor independence requirements and subsequent follow-up actions by both auditors subject to such reviews and the professional bodies. In addition, the FRC is required to monitor and assess the nature and overall adequacy of the investigation and disciplinary procedures of the professional accounting bodies as those procedures apply to Australian auditors.

In light of the reviews of the quality review programmes and disciplinary procedures of the professional accounting bodies undertaken by consultants in 2005-06, the FRC confined its work in this area during 2006-07 to obtaining relevant information at periodic meetings with the professional accounting bodies and to reviewing publicly available material issued by those bodies.

This information included the ICAA’s annual report on its quality review programme for the year ended 30 June 2007. The report summarises the results of 478 reviews, of which 32 were practices that audit publicly listed companies. As at 30 June 2007, a further 518 practices were under review including 16 that audit publicly listed companies.

Independence compliance formed only a part of the ICAA reviews. It is pleasing to the FRC that the ICAA found that the majority of reviewed practices are meeting independence standards. The Institute did note the following breaches:

  • Some members were auditing the self-managed superannuation fund (SMSF) of a partner in their practice or the fund of a close family member. In other cases, employees were auditing the superannuation fund of a partner in the firm.
  • Some practices did not appear to have policies and procedures in place on assurance engagement requiring documentation of threats to independence and any related safeguards in accordance with APES 110 Code of Ethics for Professional Accountants.

To address these issues, the ICAA continued to promote its online education guide designed to assist auditors who perform audits of SMSFs. It also conducted related training seminars across Australia, and will be updating its guidance on independence in 2007-08.

The ICAA’s findings about independence are not as critical as ASIC’s as far as the smaller firms are concerned but reinforce ASIC’s conclusion that after three years of CLERP 9 being in force, some of the firms should be better prepared to comply with the legislative requirements. The FRC is pleased that independence has continued to be a focus of the ICAA over the last twelve months. Initiatives of the ICAA have included:

  • updating the ICAA’s Independence Guide: Interpretations in a co-regulatory environment, which explains the requirements of the code of ethics contained in APES 110 Code of Ethics for Professional Accountants, Section 290 — Independence Assurance Engagements, and gives practical examples of issues faced by accountants and auditors;
  • updating an auditor independence checklist identifying relationships which may lead to independence issues in terms of the Corporations Act;
  • regular commentary about independence in Charter, the ICAA’s magazine.

Each of these initiatives has been promoted to members through member events, online newsletters, the ICAA’s website and by quality reviewers themselves.

In its report, the ICAA acknowledges the need to assess and, if appropriate, place reliance on reviews by other bodies, such as the AQRB, to avoid duplication and minimise disruptions and costs to practices. The FRC encourages these initiatives and would also encourage the ICAA and ASIC to agree on other initiatives to streamline the process as set out in section 2.

As a result of this work, the FRC did not become aware of any matters that would cause it to conclude that there were deficiencies in either the systems and processes used by the bodies for planning and performing quality reviews of audit work, or the overall adequacy of the ICAA’s investigation and disciplinary procedures.

Research by the FRC

During April 2006, the Treasury, in consultation with the FRC, engaged consultants to review the quality review programmes and disciplinary procedures of the professional accounting bodies. Messrs Graeme MacMillan and Michael Cain of CiptaNet International Pty Ltd examined the bodies’ quality review programmes while Mr William J Bartlett examined their disciplinary procedures. A summary of the findings and recommendations made by each of the consultants was published in the FRC’s Report on Auditor Independence 2005-06.

In its 2005-06 report, the FRC indicated that it intended to examine the findings and recommendations of the consultants as part of its 2006-07 work programme. Following preliminary consideration of the consultants’ findings and recommendations and feedback that had been received by the FRC from its stakeholder bodies, the Council concluded that the recommendations should be reviewed to ensure they:

  • clearly identify the need for a change to current policies, procedures or regulations by the professional accounting bodies, the Government or other stakeholders in order to better meet stated policy objectives in an efficient and effective manner;
  • establish, when Government intervention is recommended, a policy rationale for the proposed intervention which is consistent with the Government’s legislative and policy frameworks; and
  • include consideration and assessment of alternative means to meet the stated policy objectives.

To undertake this project for the FRC, the Treasury engaged The Allen Consulting Group Pty Ltd. The key requirements of the statement of work for this consultancy are set out in Appendix D of this report.

In its report, Allen Consulting found that, while a number of issues were raised that require further investigation, currently available evidence does not warrant specific change to the current regulatory framework as recommended in the two previous reports to the FRC. In these circumstances, Allen Consulting did not recommend any immediate change to the regulatory framework. Allen Consulting did, however, identify a number of areas for further investigation by the FRC and these are listed below:

  • Analysing market confidence in auditor independence: that the FRC sponsor:
    • a stakeholder mapping of different segments of users of audited financial information; and
    • a survey of stakeholder confidence that company-issued audited financial reports reflect actual business performance, the basis for this confidence, the confidence in the auditor’s independence from the company’s interests, stakeholders’ view of any gap in confidence relative to the optimal level, and the level of understanding of the existing regulatory framework for auditor independence.
  • Market understanding of the regulatory framework: that an information programme be undertaken to improve the understanding of the current regulatory framework, explain the specific roles of the various parties and the inter-relationships between these parties, and focus on improving the understanding within the profession of the roles of ASIC and the CALDB and their statutory requirements in fulfilling those roles.
  • Coverage of registered company auditors (RCAs): that the FRC recommend that Government collect information on the number and nature of the audits undertaken by the 13 per cent of RCAs who are active and do not have membership with any of the professional accounting bodies, and the professional development training they undertake.
  • Efficiencies in quality review effort: that the FRC recommend that key stakeholders review the resources, scope and outcomes of all quality reviews undertaken to identify any opportunities to reduce the review burden on audit firms whilst maintaining an acceptable level of market confidence in auditor independence.
  • Enabling FRC’s quality review monitoring: that the FRC formally request that each professional accounting body seek consent from each of its members to permit the FRC and its agents to examine files held by audit firms for the purposes of monitoring quality review processes.
  • FRC focus on audit quality: that the FRC propose that its role be revised to target overall audit quality in order to reflect that audit independence is just one element of audit quality.
  • Robustness of auditor independence regulation: that the FRC examine further the nature and extent of risks to compliance with current regulatory approaches to audit independence presented by the increasing concentration of firms in audit services, including alternative approaches to regulating auditor independence which mitigate identified risks and provide for market confidence in a robust way into the future.
  • Considering elements of the UK model: that the FRC examine further the costs and benefits of particular aspects of the UK model that could improve the performance of the Australian regulatory framework or its contribution to market confidence in auditor independence.

A full list of Allen Consulting’s recommendations is contained in Appendix D.

The FRC has already decided to explore further several of the recommendations made by Allen Consulting. While the Allen Consulting report concluded that adoption of the UK financial reporting model is not warranted, it proposed that the FRC examine the costs and benefits of particular aspects of the UK model that could improve the performance of the Australian regulatory framework or its contribution to market confidence in auditor independence and an extension of the FRC’s functions to include audit quality (recommendations 6 and 8). The FRC proposes undertaking this work in two stages. During 2007-08, a consultant may be engaged to undertake a mapping of the reporting supply chain, identifying all participants, their role, inter-relationships and the reward-punishment incentives which shape their behaviour. In the second stage, to be undertaken in 2008-09, the FRC would compare the existing Australian and UK models against the conceptual framework to determine whether there is a need to make recommendations to the Minister for refinements to the Australian model.

As part of its 2007-08 work programme, the FRC may also consider whether there is a need for it to make any recommendations to the Minister and the professional accounting bodies about the quality review programmes and disciplinary procedures of the bodies. To facilitate this process, the FRC will shortly publish the Allen Consulting report as a discussion paper on the FRC’s website for the purpose of seeking feedback on the recommendations (other than recommendation 8 which, as noted above, will be considered separately) from stakeholders and other interested parties.

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