Lecture Governance and auditors and Audit Regulation

Week 2 Governance and auditors and Audit Regulation

1. Week 2 Week 2 Governance and auditors and Audit Regulation

2. Professional independence The cornerstone of the auditing profession. Integrity, objectivity & strength of character. s.290 of the Code defines independence and stipulates principles, rules and guidelines. The Corporations Act contains extensive provisions concerning independence. 2

3. Independence of mind and appearance Independence of mind State of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement. Requires accountant to exercise scepticism and act with integrity and objectivity. 3

4. Independence of mind and appearance Independence in appearance The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s or professional accountant’s integrity, objectivity or professional scepticism had been impaired. 4

5. Threats to independence Financial interests. Loans and guarantees. Close business, family and personal relationships. Employment relationships. Recent service and serving as an officer on the board of assurance clients. Long association. 5

6. Threats to independence (continued) Provision of non-assurance services to assurance clients. Appointment and removal of auditors. Fees and pricing. Compensation and evaluation policies Gifts and hospitality. Actual or threatened litigation 6

7. Statutory provisions enhancing auditor independence The auditor who conducts an audit of the financial report for a financial year or half- year must form an opinion about whether the financial report is in accordance with the Corporations Act. Includes compliance with accounting standards and showing a true and fair view of the financial state of affairs of the audited body. 7

8. Statutory provisions enhancing auditor independence Corporations Act 2001 updated with CLERP Act 2004 to reflect a set of provisions concerning auditor independence. Shareholders are permitted to provide written questions to the auditor within 5 days before the AGM and the auditor must attend to AGM. Auditors independence declaration required . 8

9. Statutory provisions enhancing auditor independence Special rules for retiring partners of audit firms and retiring directors of audit companies. 2 year cooling period for such personnel to become engaged as an officer of the audited body. Rotation obligation required for individual auditors, audit firms and audit companies limited term of 5-7 years for auditors who play a significant role in audit. 9

10. Monitoring auditor independence Under the Corporations Act, ASIC has the responsibility for surveillance, investigation and enforcement of the regulatory requirements for auditor independence. 10

11. The audit inspection program To promote high quality eternal audits. Reviews compliance with audit quality and audit independence requirements. Emphasis is on firms auditing publicly listed or public interest entities. Undertaken every 18 months. 11

12. Corporate collapses and reform Enron HIH Insurance Ltd Parmalat Akai Holdings Lehman Brothers More recent cases in Australia 12

13. Corporate law economic reform program Key areas relating to auditors: Auditor appointment, independence and rotation. Annual general meetings. Expansion of duties. 13

14. Audit quality Technical competence Compliance with: Accounting standards and auditing guidance statements. Standards for taxation, insolvency and management consulting services. Ethical competence Compliance with Code of Ethics 14

15. Quality control in auditing firms A multi-level regulatory framework developed by profession and regulators to assure quality audits: Standard setting Firm regulation Self-or peer regulation Government regulation 15

16. Quality control elements Leadership responsibilities Ethical requirements Acceptance and continuance of client relationships Human resources Engagement performance Monitoring and quality control review 16

17. Professional discipline Value of the auditor’s opinion is enhanced by the public’s recognition of high standards of professional practice and conduct by: High entry standards for membership; High standards of performance and conduct required by members; and Power to discipline. 17

18. Regulation of Auditing The legal environment Litigation related to alleged audit failures have caused some concern in the profession. The requirement to hold a practising certificate imposes an obligation on auditors to carry professional indemnity insurance for possible liability to their clients and members of the public. This source of compensation (insurance) creates a perception that auditors have ‘deep pockets’ and, arguably, contributes to the extent of claims filed against them. There have been major changes in the legal environment concerning auditor liability in the last few years.

19. The professional standards legislation The Treasury Legislation Amendment (Professional Standards) Act 2003 was passed by the Commonwealth Government on 24 June 2004. The Act adapted the Professional Standards Legislation at the State and Territory level to limit civil liability for misleading and deceptive conduct. It does this through the Commonwealth’s Trade Practices Act 1974 , the Australian Securities and Investments Commission Act 2001 and the Corporations Act 2001. It replaces joint and several liability with a national model of proportionate liability.

20. The following key points relate to subsequent State-based legislation to enact the Commonwealth based reforms: Limitation caps are calculated with reference to a multiple of fees charged. The cap does not apply to liability arising from claims for death, personal injury or any conduct involving a breach of trust, fraud or dishonesty. A minimum cap of $500 000 applies but can vary within and between occupational groups.

21. The impact of the CLERP 9 Act CLERP 9 allows companies to register as independent auditors provided they have adequate and appropriate professional indemnity insurance.