The Financial Reporting Council has delivered a scathing assessment of the current state of auditor disciplinary functions, with 18 recommendations aimed towards ASIC, the Companies Auditors Disciplinary Board (CADB) and the professional bodies.
Among the recommendations include CADB publishing the commencement of proceedings including naming the registered company auditor (RCA) subject to the proceedings and his or her firm, and the naming of firms that are found by ASIC’s audit inspection program to have conducted audits that do not meet Australian standards.
The corporate regulator and the FRC will also work together to devise a study that would track audit quality over time.
Audit quality has been in the hot seat in recent times, with ASIC’s latest audit inspection finding that, in 24 per cent of the key audit areas reviewed, RCAs had not obtained reasonable assurance that the financial report was free of material misstatement.
The review, made in response to the recommendation of the Parliamentary Joint Committee on Corporations and Financial Services, examined the RCA discipline process, the effectiveness of the CADB, ASIC’s audit inspection program, and the professional accounting bodies’ disciplinary processes for audit misconduct.
The review noted that ASIC had only referred six matters to CADB in the last eight years and only commenced one matter in court, due to RCAs voluntarily cancelling their registration prior to a CADB referral or decision, or ASIC’s preference to negotiate an outcome because of the formal and lengthy CADB processes.
As such, the government has accepted that the CADB should adopt a less formal approach and be allowed to publish the commencement of proceedings including naming the RCA.
However, the government has not agreed with the recommendation of ASIC announcing when an RCA voluntarily cancels his or her registration while under investigation, noting that naming RCAs while under investigation could cause reputational damage to the RCA without due process.
Instead, the CADB will be empowered with additional disciplinary powers, including powers to suspend registration during a CADB proceeding and impose fines against individual RCAs or the firms that employ them, and ensure disciplinary action can still take place even where an auditor voluntarily cancels his or her registration.
The FRC pointed out that ASIC’s audit inspection program was “generally focused on educative efforts with the firms, rather than being enforcement‐oriented or imposing disciplinary consequences on firms”.
“While these general goals are laudable, the FRC suggests that the outcomes from the audit inspection program be more directly linked to ASIC’s enforcement goals of deterring and punishing misconduct, as this may help to improve audit quality,” the review said.
As such, the corporate regulator has been called to publish firms’ names to improve transparency for the public and provide a market‐based incentive for RCAs and firms to improve the quality of their audits.
The government will also consult on reforms to empower ASIC to compel remediation of defective audits.
With ASIC adopting a “why not litigate?” approach in the wake of the royal commission, the review believes there will be fewer negotiated outcomes and a greater number of court actions or referrals to CADB.
CA ANZ currently has the largest number of RCAs in its ranks, with 3,234 RCAs out of its 82,250 members. CPA Australia has 1,945 RCAs out of its 163,750 members, while the IPA has 29 RCAs out of its 17,665 practicing members.
RCAs may be members of more than one professional body.
According to the FRC, the professional bodies are limited in their remit and power due to their inability to influence an auditor’s status as an RCA and control over members who resign their membership during an investigation.
Despite the limitations, the FRC has recommended that the professional bodies refer to ASIC all matters relating to RCAs where it appears there may be a breach of the law; accurately record all disciplinary processes, including those that lead to no substantive action; and formalise processes for advising each other and the FRC of their disciplinary proceedings, particularly regarding RCA.
Doubts over audit quality have seen the government announce an $800,000 funding boost over three years from 2019–20 to the Auditing and Assurance Standards Board.
The funding, announced in the federal budget, aims to give increased support for the FRC’s Audit Quality Action Plan, and to support the chair’s three-year appointment to the International Accounting Standards Board.