Australian Government, Financial Reporting Council

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Appendix F

Institutional arrangements for monitoring compliance with audit-independence requirements

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.

ASIC also conducts financial reporting and auditor surveillance activities in relation to compliance by auditors and companies with the independence disclosure requirements of the Act.

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.

Professional accounting bodies

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 or Public Practice Certificate. 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 program for auditors of listed entities.

The 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.

Accounting Professional and Ethical Standards Board

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 for an initial three year term 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 program were the Big Four accounting firms, which audit collectively 90 per cent by composition and 95 per cent by market capitalisation of the 300 largest listed entities on the ASX. Participation in the program 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 FRC understands that the future of the AQRB is currently being reviewed.

Companies Auditors and Liquidators Disciplinary Board

The CALDB, which is established under the ASIC Act, may take disciplinary action on the application of ASIC or 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.

Financial Reporting Council

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.

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