Chairman's report
The past year has been a very challenging period for the world's capital markets, with the global financial crisis (GFC) impacting on the economies of all countries. For the FRC, this has meant that we have had to monitor the Australian financial reporting framework to see that it continues to be robust and that we contribute towards international developments and the initiatives of international standard setters. New opportunities have appeared for countries to meet, share experiences and consider new international practices to address the GFC and to discuss ways to reduce the risk of future financial shocks.
Achievements
With the uncertainties arising out of the GFC, and its consequent impact on financial reporting, the FRC has been active in monitoring Australia's financial reporting framework to see that it continues to be robust and consistent with international best practice.
In November 2008, the FRC commissioned a report on accounting issues emerging from the GFC following the G-20 discussions in Washington. The report canvassed the views of Australian banks on a range of topical accounting standard issues relating to the GFC. It was presented to the International Accounting Standards Board (IASB)/Financial Accounting Standards Board (FASB) round table in Tokyo in December 2008 and was influential in guiding the debate on these issues.
The FRC, in partnership with the Group of 100 (G100), conducted a workshop on International Financial Reporting Standards (IFRS) in Sydney during August 2008 which Sir David Tweedie, Chairman of the IASB, attended. The workshop gathered ideas on the development and application of disclosure requirements in financial reports. The G100 is currently developing a paper to assist the IASB to determine the type and nature of disclosures that should be included in a financial report.
The GFC has resulted in an increased focus on the availability of credit to business and reporting and valuation issues. The FRC concluded that there was a need for updated guidance on the use of the going concern assumption, and supported the work of relevant stakeholder bodies to provide that guidance.
During the year, we met with senior representatives of overseas regulatory and oversight bodies. These discussions were invaluable in ensuring that Australia contributed to global standard setting issues including in relation to the GFC, fair value accounting, convergence of international accounting standards, the proposed IFRS for small and medium-sized entities (SMEs) and auditor independence.
The FRC was instrumental in the creation of the Asian-Oceania Standard Setters Group (AOSSG) in early 2009. The AOSSG is due to conduct its first formal meeting in Malaysia in November this year and this meeting will bring together many of Australia's neighbours to discuss accounting standards and is expected to enhance cooperation within the region, including the expanded use of IFRS, and increase the region's influence in accounting standard setting.
In May 2009, I spoke at the Asian Development Bank (ADB) forum in Bali on international trends in accounting and audit regulation and what it means for Asia-Oceania. My presentation reaffirmed the importance of international accounting and auditing standards and the benefits of understandable audited financial statements in promoting efficient global financial markets.
Domestically, the FRC held a public sector accounting workshop in Canberra in November 2008 which attracted standard setters and other interested stakeholders from Australia and New Zealand to discuss issues facing the sector.
The 2009 Ken Spencer Memorial Lecture was held on 11 March 2009 at KPMG's Melbourne offices. The guest speaker for the Lecture was Mr Mark Olson, Chairman of the Public Company Accounting Oversight Board (PCAOB) of the United States. The topic of his lecture was 'Independent Audit Oversight — its evolution and implications for global capital markets'. The topic was well received by the audience, which included members of the Spencer family and relevant stakeholders.
The FRC has also been monitoring differential reporting and held a special FRC meeting in August 2009 to progress the issue.
Revised governance arrangements for the accounting and auditing standards setters
On 1 July 2008 the AASB and AUASB moved from the Commonwealth Authorities and Companies Act 1997 (CAC Act) to the FMA Act. The FRC continues to have strategic oversight responsibilities for the two bodies but now has an advisory role in relation to their priorities, business plans, procedures, budgets and staffing arrangements. The Council will continue to appoint members (other than the Chairs) to each Board and provide guidance, support and assistance to both Boards as part of its general functions.
I would like to thank retiring AASB Chairman, Professor David Boymal, and outgoing members Ms Jan McCahey (AASB), Mr Colin Parker (AASB) and Mr Ian McPhee (AUASB) for their commitment and contribution during their tenure as members.
Auditor independence
The period under review was the fifth year for which the FRC has had responsibility for monitoring the effectiveness of the auditor independence requirements in Australia. As in prior years, the overall conclusion reached by the FRC as a result of its work on auditor independence is that the independence framework continues to operate effectively.
The FRC performs the auditor independence function primarily through obtaining information from the Australian Securities and Investments Commission (ASIC) and the other bodies with which it has a Memorandum of Understanding (MOU) and through periodic meetings with those bodies and other stakeholders, such as auditing firms. In these circumstances, it might be argued that the FRC adds minimal value to the work already undertaken by ASIC and the other MOU bodies.
I have therefore proposed that Treasury review the FRC's auditor independence functions for the purpose of considering whether this role should be maintained into the future.
Outlook for 2009-10
Twelve months ago, I said that I expected the financial market turmoil of 2007-08 to continue in 2008-09 and that it would provide many challenges on both the domestic and international fronts. However, no one could have expected the severity of the crisis or the implications for financial reporting either here in Australia or internationally. This volatility in the markets may persist through 2009-10, and people will look to accounting and auditing standards to reinforce confidence in the world's capital markets.
The GFC has prompted governments, regulators and international financial bodies to question the effectiveness of current systems, frameworks and standards. The main focus for the FRC in the coming year will be to influence the implementation of changes to the global financial system to ensure Australia's financial reporting framework remains effective and relevant in the changing global environment.
One of the main challenges continues to be for Australia to maintain its international influence in standard setting as more countries adopt IFRS. Australia's substantial direct financial support to the IASB, membership and participation in the various arms of the international governance framework and, most importantly, substantial high-quality technical input into the standard setting process provide us with a strong platform moving forward. Domestically, differential reporting and public sector accounting form key elements of the FRC's forward agenda together with monitoring going concern issues.
Acknowledgements
I thank all of my colleagues for the hard work and time they have put into the FRC and its Committees during 2008-09. Their expertise and tireless commitment have enabled the Council to focus on important issues.
I welcome the appointment of Mr Michael Dwyer, Ms Noelle Kelleher, Ms Merran Kelsall, Mr Kevin Simpkins and Mr John Trowbridge to the FRC and sincerely thank retiring members Professor David Boymal, Ms Catherine Walter AM, Mr Warwick Hunt and Mr Lee White for their expertise and their commitment to the Council during their tenure.
I would like to thank the previous Chair of the AASB, Professor David Boymal (until November 2008), the Acting Chair of the AASB, Mr Bruce Porter (November 2008 to June 2009), and the Chair of the AUASB, Ms Merran Kelsall, for their work in leading their agencies and in keeping the FRC informed of developments.
On behalf of the Council, I want to thank the Secretariat for enabling the work of the Council and its Committees to be carried out in a timely and effective manner and to thank the outgoing FRC Secretary, Ms Suzanne Howarth, for her contribution and efforts from July 2007 to June 2009.
Finally, I welcome Ms Genevieve Watson as the new FRC Secretary and Mr Kevin Stevenson as AASB Chairman from 1 July 2009.
The coming year promises again to be challenging. I look forward to working with all stakeholders in ensuring that the FRC continues to show leadership on emerging issues both here in Australia and internationally.
SIGNED
Jeffrey Lucy AM
Chairman of the Financial Reporting Council
14 October 2009