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Appendix D

Consultancy to review recommendations about quality review programmes and disciplinary procedures of the professional accounting bodies

This Appendix contains:

  • the statement of work for the consultancy to review recommendations about quality review programmes and disciplinary procedures of the professional accounting bodies; and
  • the consultant’s recommendations.

As noted elsewhere in this document, the consultant’s report will shortly be published on the FRC’s website (www.frc.gov.au) as a discussion paper for the purpose of seeking public comments on the recommendations.

Statement of work

1. The purpose of the consultancy is to assess the conclusions and recommendations made by the consultants who reviewed the quality review programmes and disciplinary procedures of the professional accounting bodies (‘the short-term consultants’) in terms of whether 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.

2. The Consultant will:

  • where Government intervention is proposed, consider if the recommendations of the short-term consultants represent sound and realistic proposals for reforming existing Government policies, having regard to:
    • where legislative amendments are needed to implement any recommendations, whether the Commonwealth Government has the necessary constitutional powers (including the corporations powers referred to the Commonwealth by the States and Northern Territory) to enact that legislation;
    • whether any recommendations would, or would have the potential to, conflict with the requirements of other Commonwealth legislation, including legislation dealing with privacy, trade practices and work-place relations; and
    • whether the underlying objectives of some, or all, of the recommendations could be achieved by alternative means such as reforms to existing legislative provisions or institutional arrangements; and
  • prepare a report for the Financial Reporting Council (FRC) detailing their findings and including recommendations for further actions that could be considered by the FRC.

3. Without limiting the scope of the work to be done, it is expected that in examining the recommendations the consultant will:

  • consider feedback on the short-term consultants’ findings and recommendations received by the FRC from its stakeholder bodies;
  • consult, as appropriate, the stakeholder bodies to clarify any issues associated with their feedback on the short-term consultants’ findings and recommendations;
  • seek the views of:
    • representatives of those who ‘consume’ audited financial reports (including shareholders and company directors); and
    • those who have some direct experience of the quality review programmes and disciplinary procedures of the professional accounting bodies; and
  • consider the experience of the United Kingdom Financial Reporting Council in implementing arrangements equivalent to those recommended by the consultants.

Consultant’s recommendations

The recommendations made by the consultant in its report to the FRC are listed below.

1: 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 their 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 specifically, their view of any gap in confidence relative to the optimal level, and the level of understanding of the existing regulatory framework for auditor independence.

The data produced would then provide the basis for thorough assessment of proposed changes to the existing regulatory framework within the standard framework of regulatory analysis.

The survey work should not commence until 2007-08 — at least one year from the introduction of the Audit Standards into the Corporations Act.

2: Market understanding of the regulatory framework

That the FRC advise the Minister that:

  • an information programme 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 and the rationale for the CALDB’s establishment under the same statute in particular, be undertaken; and
  • the CALDB’s recent information sessions on its role may provide an example to be applied more broadly.

3: Coverage of 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, and consider whether there is a case for regulatory change in light of the risk to market confidence in auditor independence supported by this data.

4: Efficiencies in quality review effort

That the FRC recommend that, following completion of the AQRB’s initial reviews, 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 while maintaining an acceptable level of market confidence in auditor independence.

5: Enabling FRC’s quality review monitoring

That the FRC formally request that each professional accounting body seek consent, including amendment to existing undertakings if required, 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.

6: 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, both conceptually and in practice as reflected in the activities of both regulators and professional accounting bodies.

7: 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.

8: Considering elements of the UK model

While adoption of the UK model is not warranted, 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. In particular, that the FRC consider the scope to enhance transparency and provide greater information on disciplinary decisions made by regulatory decision makers by:

  • adoption of public hearings for CALDB hearings as for the UK Accountancy Investigation and Disciplinary Board; and
  • support for the proposed requirement that the CALDB publish the full reasons for its determinations on its website.14

14 Following the preparation of this recommendation by Allen Consulting, the Government amended section 1296 of the Corporations Act to provide that if the CALDB decides to exercise any of its powers under section 1292 to cancel or suspend the registration of a person as an auditor, the Board may take such steps as it considers reasonable and appropriate to publicise the decision and the reasons for the decision (including making the decision and reasons available on the internet).

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