3. Oversight of Australian standards setting
3.1 Introduction
Under the Australian Securities and Investments Commission Act 2001 (ASIC Act), the FRC's functions are to provide broad oversight of the processes for setting accounting and auditing standards in Australia and to give the Minister reports and advice about these processes. Specific accounting and auditing standard setting functions for which the FRC was responsible in 2008-09 are contained in subsections 225(2) and (2A) of the ASIC Act. An outline of each of these functions is provided in this section of the report in conjunction with information about the performance of the function.
With the commencement of the Governance Review Implementation (AASB and AUASB) Act 2008 on 1 July 2008, the governance arrangements for the AASB and AUASB were transferred from the CAC Act framework to the FMA Act framework.
The change in the governance framework for the AASB and AUASB resulted in changes in both the role of FRC members and the FRC's oversight functions. During the period in which the Boards were under the CAC Act framework, FRC members performed the role of directors of the Boards. This situation was a consequence of the FRC being responsible for approving the budgets, staffing arrangements, priorities and business plans of the Boards. However, with the change to the FMA Act framework, the FRC's role in respect of the Boards (and their Offices) became one of providing advice or feedback about these matters and the FRC members ceased to be directors of the Boards.
3.2 Appointment of members to Boards
The ASIC Act provides that the FRC is responsible for appointing the members of the AASB and AUASB (other than the Chairs, who are appointed by the Minister). In addition, the Act provides that the members of the Boards (other than the Chairs) hold office on the terms and conditions determined by the FRC.
The FRC is assisted in the performance of these functions by a Nominations Committee which, among other things, is responsible for seeking expressions of interest from persons interested in being considered for appointment to either the AASB or AUASB and interviewing and evaluating candidates on the basis of merit.
During 2008-09, the members of the Committee were: Mr Klaus Zimmermann (Chair), Ms Kathryn Campbell, Mr Don Challen, Mr Mark Coughlin, Mr Jeffrey Lucy AM, Mr Eric Mayne (from May), Ms Jan West AM and Mr Lee White (until December). In addition, the Chairmen of the AASB and AUASB are ex-officio members of the Committee for consideration of matters relating to their respective Boards. Further information about the Committee and the criteria for appointment to the Boards is available on the FRC's website (http://www.frc.gov.au/guidelines/).
On 26 November 2008, the FRC approved the following appointments and re-appointments for terms commencing on 1 January 2009 and ending on 31 December 2011:
- AASB: appointment of Mr Victor Clarke and Mr Ian McPhee and re-appointment of Mr Glenn Appleyard and Mr John O'Grady; and
- AUASB: appointment of Mr Colin Murphy and re-appointment of Mr Mike Blake, Mr Chris Hall, Ms Elizabeth Johnstone, Mr Greg Pound and Mr David Simmonds.
As at 30 June 2009, the AASB had 12 members while the AUASB had 13 members. The stakeholder backgrounds and/or experience of the members of the Boards are detailed in the following table.
| Stakeholder background/experience | AASB | AUASB |
|---|---|---|
| Chairman | See note (a) | 1 |
| Corporate | 2 | 1 |
| Public sector | 5 | 2 |
| Accounting firms (major) | 4 | 4 |
| Accounting firms (other) | 0 | 2 |
| Academic | 0 | 1 |
| Legal | 0 | 1 |
| User | 0 | 1 |
| NZ appointee | 1 | 0 |
- Mr Kevin Stevenson's appointment as Chairman of the AASB commenced on 1 July 2009. Prior to Mr Stevenson taking up his appointment, Mr Bruce Porter acted as Chairman.
During 2009-10 the Nominations Committee, in consultation with the Chairs of the Boards, will review the existing composition of the Boards having regard to their current work programs and make appropriate recommendations to the Council concerning the desirable background and experience of future appointees to the Boards.
3.3 Giving advice or feedback to the Boards and their Offices
The FRC's functions include giving the AASB and AUASB advice or feedback on their priorities, business plans and procedures and giving the Offices of the AASB and AUASB advice or feedback on their budgets and staffing arrangements (including level, structure and composition of staffing).
Under its function of providing broad oversight of the processes for setting Australian accounting and auditing standards, the FRC monitored the priorities, business plans, procedures, budgets and staffing arrangements of the Boards and their respective Offices during 2008-09.
The FRC did not provide any advice or feedback under paragraph 225(2)(b) or (ba) or (2A)(b) or (ba) of the ASIC Act during the period to which this report relates.
3.4 Broad strategic directions of Boards
The FRC's functions include determining the broad strategic directions of the AASB and AUASB. The FRC has developed guidelines to be applied in the development of any strategic directions that are issued to the Boards (see http://www.frc.gov.au/guidelines/strategic_directions.asp). The guidelines envisage that, in developing and issuing new and revised strategic directions, the Council will take into account:
- the Australian Government's stated policies and priorities;
- relevant international and domestic considerations impacting on the setting of accounting or auditing standards; and
- the public interest in the context of the Australian economy.
Since its establishment, the FRC has made three determinations concerning the broad strategic directions of the AASB and AUASB. These directions sought to achieve the following key outcomes:
- to require the AASB to work towards the adoption in Australia of accounting standards that are the same as those issued by the IASB, to ensure their applicability to Corporations Act 2001 (Corporations Act) entities for accounting periods beginning on or after 1 January 2005 (Direction approved 5 September 2002);
- to require the AASB to pursue as an urgent priority the harmonisation of Government Finance Statistics (GFS) and Generally Accepted Accounting Principles (GAAP) reporting (Direction issued 18 December 2002); and
- to require the AUASB to develop Australian auditing standards that have a clear public interest focus and are of the highest quality and to use, as appropriate, International Standards on Auditing (ISA) of the IAASB as a base from which to develop the Australian standards (Direction approved 4 April 2005).
Each of these directions is still current.
During 2008-09, the FRC monitored the activities of both Boards and formed the view that there was no need to issue any new directions or amend the existing directions.
3.5 Development of international accounting and auditing standards
The ASIC Act confers on the FRC the following functions associated with the development of international standards:
- monitoring the development of international accounting and auditing standards and the accounting and auditing standards that apply in major international financial centres; and
- furthering the development of single sets of accounting and auditing standards for world-wide use with appropriate regard to international developments.
The FRC's Secretariat obtains information about international developments by monitoring media reports and the internet websites of overseas organisations (including public-interest oversight bodies, standards setters and regulatory agencies). This information is used to prepare a summary of key international financial reporting developments which is circulated to Council members on a regular basis. The Secretariat is currently examining legal and other issues associated with an FRC proposal to publish the key developments document on the FRC's website.
Information about international developments in the setting of accounting and auditing standards is also obtained during overseas visits by the FRC Chairman. In 2008-09, these visits were to China and Japan during October 2008 and to North America, Europe and China during March and April 2009. More detailed information about these visits appears in section 2 of this report.
During 2008-09, the FRC Chairman was also actively involved with furthering the development of single sets of accounting and auditing standards for world-wide use. Apart from actions taken in his capacity as a Trustee of the IASC Foundation, the FRC Chairman participated in TTAASAG, the third IFRS Regional Policy Forum, a preparatory meeting of the Asia Oceania Standards Setters Group and the 2009 annual general meeting of the ADB. Further information about these activities appears in section 2 of the report.
3.6 Monitoring Australian developments
The FRC has the following specific responsibilities in respect of Australian accounting and auditing standards:
- promoting the continued adoption of international best practice in the Australian accounting and auditing standard setting processes if doing so would be in the best interests of both the private and public sectors in the Australian economy; and
- monitoring the operation of accounting and auditing standards to assess their continued relevance and their effectiveness in achieving their objectives in respect of both the private and public sectors of the Australian economy and the effectiveness of the consultative arrangements used by the AASB and AUASB.
During 2008-09, the FRC monitored the operation of accounting and auditing standards through reports presented at FRC meetings by the Chairs of the AASB and AUASB, stakeholder reports provided to FRC meetings by Council members, meetings between the FRC Chairman and stakeholder bodies and media reports about the operation of accounting and auditing standards.
In the area of adoption of international best practice in Australia, the FRC's primary focus has been on the IAASB's 'clarity' standards and the 'going concern' principle.
- In May 2009, the FRC endorsed Australia's adoption of the clarity standards in accordance with the 1 January 2010 timeline previously proposed by the AUASB. In taking this action, the FRC noted the then recent decision of the UK Auditing Practices Board to update the UK and Irish auditing standards for the new clarified ISAs and the likelihood that other jurisdictions in the European Community, such as the Netherlands, will adopt the new standards from January 2010. The FRC also noted the publication of several reports undertaken for the European Commission (cost benefit analysis of ISAs and a comparison of ISAs and PCAOB standards) which were supportive of the IAASB clarity standards. It was also noted that a number of other jurisdictions outside of Europe, such as Canada, New Zealand and South Africa, will adopt the clarity standards in line with the IAASB timeframe.
- The clarity standards to be issued by the AUASB will also include a new standard on quality control, ASQC1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports, Other Financial and Other Assurance Engagements. This standard has been based on the equivalent international quality control standard ISQC1, issued by the IAASB.
- With the uncertainties arising out of the global financial crisis, and their consequent impact on financial reporting, the FRC concluded that there was a need for updated guidance on the use of the going concern assumption. Subsequently, the AUASB issued a Bulletin2 providing guidance on this subject and, in conjunction with the AICD, released a publication on the responsibility of directors to perform a going concern assessment and for auditors to review and consider that assessment when forming their opinion on the financial statements.3
3.7 Funding of the Boards
Under the ASIC Act, the FRC also has the following functions concerning the funding of the AASB and AUASB:
- seeking contributions towards the costs of the Australian accounting and auditing standards setting processes; and
- monitoring the level of funding, and the funding arrangements, for those processes.
With the transfer of the Boards to the FMA Act framework, they are now subject to the Australian Government's normal budget funding processes, which are developed by the portfolio department and subject to the oversight of the Treasurer through the Expenditure Review Committee.
Consequently, while the FRC monitored funding issues associated with standards setting processes during 2008-09, it formed the view that it was not necessary for it to take any substantive action on funding-related issues during the period.
In 2008-09, funding for the AASB and AUASB was provided through appropriations from the Australian Government and contributions from CPA Australia, the ICAA, the National Institute of Accountants (NIA), Australian Securities Exchange (ASX), state and territory treasuries and the Companies and Unclaimed Monies Account.
2 AUASB Bulletin: Auditing Considerations in an Uncertain Economic Environment, Auditing and Assurance Standards Board, Melbourne, 2009.
3 Going concern issues in financial reporting: a guide for companies and directors, Auditing and Assurance Standards Board and Australian Institute of Company Directors, Melbourne and Sydney, 2009.