Australian Government, Financial Reporting Council

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1. Executive Summary

This report outlines the work undertaken by the Financial Reporting Council (FRC) during 2007-08 in the performance of its auditor independence functions. The report also sets out the findings of the FRC as a result of that work and, where appropriate, the action taken by the FRC in respect of those findings.

During the year, the FRC addressed each of the core issues that, together, make up its auditor independence functions.

The overall conclusion reached by the FRC as a result of its 2007-08 work on auditor independence is that the independence framework continues to operate effectively. No systemic issues were identified as a result of the work undertaken by the various parties. This outcome is consistent with the conclusions reached in the period since 1 July 2004 when the FRC first became responsible for monitoring auditor independence requirements.

Systems and processes of Australian auditors

  • In 2007-08, the FRC undertook its work on monitoring the systems and processes used by audit firms to ensure compliance with auditor independence requirements by gathering information from the Australian Securities and Investments Commission (ASIC), reviewing reports published by the Audit Quality Review Board (AQRB) and The Institute of Chartered Accountants in Australia (ICAA), requesting relevant information from the professional accounting bodies and through meetings with the four largest audit firms (the Big Four') and three other firms. In reaching the overall conclusion referred to above, the FRC noted:
    • ASIC's 2007-08 audit inspection program report in which ASIC indicated that, overall, firms have shown commitment towards meeting their independence obligations. In relation to issues raised in prior year inspections, ASIC notes that all major issues have been addressed and good progress has been noted in most areas;
    • the AQRB's 2007 report which concluded that all of the Big Four firms have established policies and procedures that are designed to enable them to complete effective audits within the framework of current Australian legal and professional requirements;
    • that during the course of its meetings with audit firms the FRC did not become aware of any systemic issues in relation to the effectiveness of the systems and processes used by firms to ensure compliance with the audit independence requirements; and
    • that the quality assurance reviews conducted by the professional accounting bodies did not reveal any serious breaches of the audit independence requirements.
  • As a result of the inspections by ASIC1 and reviews by the AQRB2 and the professional accounting bodies3 the FRC formed the view that the systems and processes used by audit firms to ensure compliance with independence requirements are working effectively. However, the FRC notes that the work by ASIC has revealed that a number of the smaller firms need to make improvements to their systems to ensure that the systems are robust and comply with all the legislative requirements.

Activities of professional accounting bodies

  • During 2007-08, the FRC continued its work on monitoring and assessing 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 audit firms; and
    • the investigation and disciplinary procedures of the professional accounting bodies as those procedures apply to audit firms.
  • Based on the information provided by the professional accounting bodies, the FRC did not become aware of any deficiencies in either the systems and processes used by the bodies for planning and performing quality reviews of audit work, or in the overall adequacy of the professional accounting bodies investigation and disciplinary procedures.
  • The FRC also continued to monitor the adequacy of the teaching of ethics by the professional accounting bodies.
  • The FRC based its observations on information supplied by the professional accounting bodies in response to a request from the FRC and through information gained at periodic meetings with those bodies. Based on its examination of this information, the FRC is satisfied that the teaching of ethics by each of the professional accounting bodies is adequate. That said, as part of its work program going forward, the FRC will continue to encourage the professional bodies and other stakeholders to participate in the debate on ethical behaviour within the profession, particularly on the issue of ethics as it relates to auditor independence.
  • As a result of its work, the FRC did not become aware of any matters that would cause it to be concerned about the adequacy of the activities of the professional accounting bodies during 2007-08.

Consultants

  • In 2006 and 2007, the FRC engaged a total of five consultants to examine and make recommendations to the FRC in the areas of disciplinary procedures, the teaching of professional and business ethics, the practical application of professional and business ethics by audit firms and quality review programs.
  • During 2007-08, the FRC considered these recommendations, and considered the adoption (if not already adopted) of these recommendations into the FRC's current and future work programs. In doing so, the FRC also considered the need for it to make any recommendations to the Minister and the professional accounting bodies about issues arising out of the consultants' reports. To facilitate this process, the FRC sought feedback on the recommendations from stakeholders and other interested parties.

Other matters

  • Information provided to the FRC by ASIC and the Australian Securities Exchange Ltd (ASX) shows that the majority of financial reports complied with the audit-related disclosure requirements examined as part of their reviews. There were, however, a small number of financial reports that failed to comply with these disclosure requirements: the directors' reports of 11 entities did not include an unqualified statement that non-audit services had not affected the auditor's independence. As part of its 2008-09 work program, the FRC will continue to review, and analyse the level of compliance with audit-related disclosure requirements by considering the information provided by the bodies with which the FRC has signed a Memorandum of Understanding (MOU bodies).
  • As part of its 2007-08 work program, the FRC undertook further analysis of the quantum of fees for audit and non-audit services that were received by audit firms from their clients4. This work carries on from the preliminary work undertaken in 2006-07. The FRC considers that the 2007-08 data does not suggest any problematic trends for auditor independence.

1 An ASIC inspection seeks to enhance public confidence in capital markets through raising the standard of audit quality independence in the profession. It is designed to focus on audit quality and independence by promoting compliance with the requirements of the Corporations Act 2001, (the Act) Australian auditing standards, and professional and ethical standards. [ASIC Audit Inspection program public report for 2006-07, p 4]. An inspection includes reviews of documentation, interviews with partners and staff, limited testing and verification of systems and processes, and reviews of aspects of a sample of individual audit and review engagements for compliance with the firm's stated audit methodology and applicable auditing standards as at the date of each audit or review.

2 The AQRB's role (as an independent body funded by audit firms) is to monitor the processes by which audit firms seek to ensure their compliance with audit standards and legal obligations relating to independence and audit quality. AQRB's overarching commitment in examining, assessing and reporting on audit firms' quality assurance processes is to contribute to the improvement in audit quality. [AQRB Report on 2007 reviews, p 4].

3 The ICAA, for example, as part of its quality review program assesses the quality control policies and procedures that are implemented in an accounting practice. The reviewer considers the quality control procedures that the practice has established by covering the elements of quality control set out in APES 320 Quality Control for Firms. [ICAA Annual Report on the Quality Review Program for the year ended 30 June 2008, p 7].

4 This information was provided by CGI Glass Lewis Pty Ltd. Any observations about, or conclusions drawn from, this information reflects the views of the FRC and not CGI Glass Lewis.

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