The ASIC Act provides that the FRC is to monitor international developments in auditor independence, assess the adequacy of the Australian auditor independence requirements provided for in the Corporations Act and the codes of professional conduct in light of those developments and give the Minister, and the professional accounting bodies, reports and advice on any additional measures needed to enhance the independence of Australian auditors.
During 2006-07, the FRC continued its ongoing programme of monitoring international developments through examination of publicly available inspection reports issued by overseas oversight bodies (such as the US Public Company Accounting Oversight Board, the Canadian Public Accountability Board and the Audit Inspection Unit of the UK Professional Oversight Board). In addition, other material placed on the websites of these oversight bodies and associated regulatory agencies was also examined.
One of the more significant international developments during the year was the establishment in September 2006 of IFIAR by the audit regulators of 18 countries, including Australia, Canada and the United Kingdom. In March 2007, the audit regulators of five other countries, including the United States, were admitted as members of IFIAR.
The objectives of IFIAR include:
- sharing knowledge of the audit market environment and practical experience of independent audit regulatory activity;
- promoting collaboration in regulatory activity; and
- providing a focus for contacts with other international organisations which have an interest in audit quality.
Mr Jeffrey Lucy AM, then Chairman of ASIC, was appointed the inaugural Chairman of IFIAR.
The FRC Chairman also met with representatives of overseas oversight bodies during visits to Europe and North America in July 2006 and April 2007.
In its last report, the FRC reported on a review of Australia’s requirements on auditor independence compared with those applicable in other major jurisdictions worldwide. The review, which was undertaken by the Treasury to provide assistance to the FRC, compared the Australian auditor independence requirements with the equivalent requirements applying in Canada, the EU, the UK and the US.
The overall conclusion of the review was that, notwithstanding differences in terminology, institutional arrangements and legal frameworks, there was a substantial underlying equivalence between the Australian auditor independence requirements and ‘best practice’ standards adopted internationally.
The FRC identified from the review the following areas in which some aspects of the Australian independence requirements differed from the requirements applicable in some or all of the other jurisdictions:
- employment and financial restrictions;
- employment restrictions applying to former audit partners and senior audit personnel (‘cooling-off’ periods);
- restrictions on multiple former partners of an audit firm; and
- auditor rotation.
- the multiple former audit firm partner restriction;
- The restriction applying to multiple former partners of an audit firm will no longer apply to a former partner who has ceased to be a member of the firm for five or more years.
- the former audit partner ‘cooling-off’ restriction;
- The way in which the existing two-year ‘cooling-off’ period applying to a former audit partner of a firm is calculated has been modified. It will be calculated from the date of the last audit in which the person participated rather than the date of departure from the firm.
- the adoption of a ‘covered person’ approach in relation to the existing financial relationship restrictions.
- The existing specific restrictions on financial investments applying to partners in a firm who are not involved in an audit and not in a position to influence the outcome of an audit were removed. In conjunction with this change, the definition of ‘professional member of an audit team’ was expanded to include any person who recommends or decides what the lead auditor is to be paid in connection with the performance of the audit and any person who provides, or takes part in providing, quality control for the audit.
These changes, which were included with a range of other reforms in the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007, applied from 28 June 2007.