The Parliamentary Joint Committee on Corporations and Financial Services has released its interim report on the regulation of auditing in Australia, detailing 10 recommendations it believes will go to the heart of concerns around audit quality and independence.
It has called for ASIC to develop a revised framework for reporting audit inspection findings, noting that the regulator’s current inspection program has limitations.
ASIC has readily acknowledged that due to its risk-based methodology, the results of its audit inspection program may not be indicative of the entire audited population of listed and unlisted entities.
The corporate regulator’s most recent audit inspection found that 26 per cent of audit files across firms of all sizes were considered to be inadequate, with ASIC also revealing the big four’s individual results for the first time.
Once the revised framework has been adopted, the committee recommends that the government introduce legislation that will force ASIC to publish all future individual audit firm inspection reports on its website.
To address perceived threats to auditor independence, the committee has called for the Financial Reporting Council to require audited entities to disclose auditor tenure in annual financial reports.
Further, it has called for the Corporations Act to be amended to require a mandatory tendering regime that will dictate how audited entities have to undertake a public tender process every decade.
The regime, proposed to be implemented by 2022 for any entity that has had the same auditor for a continuous period of 10 years since 2012, will allow corporate entities to not undertake a public tender process as long as the reasons for not doing so are disclosed to shareholders.
However, the committee stopped short of calling for a mandatory firm rotation requirement, noting that a number of jurisdictions had reversed the policy because of cost and disruption concerns.
The committee has also called for the Corporations Act to be amended to require auditors to specifically confirm that no prohibited non-audit services have been provided.
CA ANZ reporting and assurance leader Amir Ghandar said the recommendations were a step in the right direction.
“We believe these measures will improve confidence and quality in audit, as well as provide cover for the risks facing Australians,” said Mr Ghandar in his speech at the Deakin Business School’s Auditing and Assurance Conference on Friday.
“Clarifying management accountability, auditing targeted at internal control and the risks of fraud and business failure signals a clear path forward for companies, regulators and the auditing profession.
“We’re optimistic that a holistic review of ASIC’s audit inspection program, including more graduated insights on the severity of findings, will lead to better outcomes and constant improvement in audit quality.
“We encourage the government, organisations and regulators to press forward with making these improvements in the framework.”
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Jotham Lian is the editor of Accountants Daily, the leading source of breaking news, analysis and insight for Australian accounting professionals.
Before joining the team in 2017, Jotham wrote for a range of national mastheads including the Sydney Morning Herald, and Channel NewsAsia.