Analysis: Where are the problem solvers?

Tom Ravlic

Discussions of audit and financial services regulation often focuses on the more sensational aspects.

Real or perceived conflicts of interest, which people mostly believe they understand, gets prominence. Ineffective monitoring or surveillance measures rightfully gets a mention.

Allegations of inappropriate behaviour in the conduct of engagements that people believe should be the subject of regulatory intervention will get top billing.

What rarely gets any kind of attention is how you resolve issues because the skill of system design is rather different from the next to no skill required to point at things that look suspect, with or without evidence.

Let’s take the example of the way auditors are regulated. Why are people not looking at the way tax is regulated in order to resolve some of the issues that they have with auditor registration, monitoring, assessment of independence and other matters?

This is because the people looking at this are focused on the controversy that is pointed out to them like some shiny object to be fascinated with for a while rather than looking at solutions.

How do we fix the problems people identify? Are the things at which fingers are being pointed at really problems or do the issues lie elsewhere?

A further question that needs greater contemplation is who in fact needs to champion the change and that is a question that seldom gets proper discussion.

Let’s go back to August 2019 when people started talking about conflicts related to bank risk management frameworks and perceived conflicts in a bank using its external audit firm to do a review of risk management frameworks.

The amount of time this scenario has occupied this last year (aided by theatrical bursts during the parliamentary committee looking at audit regulation) is ridiculous.

A simple answer exists if people believe there is a problem with the prudential guidance. All that has to happen is for our prudential regulators APRA and ASIC to change the relevant prudential standards and guidance notes so that there is a prohibition on a firm currently doing the external audit of financial statements from doing the triennial deep dive into the risk management framework.

Or many others, however handy it may seem to bank managers to turn to an audit firm that already knows its way around systems and people.

There is no need for any other reform other than this simple one, in regard to APRA regulated entities anyway.

Another area that sees ongoing media coverage is the work done by the corporate regulator, ASIC, on audit inspections and the oversight role on audit played by the Financial Reporting Council.

A policy solution that provides a way to decouple the area of oversight and regulation of auditor independence and auditor registration is to create a separate body that is similar to the Tax Practitioners Board.

Put all of the audit registration, quality control monitoring and disciplinary tasks into a single body to handle all of these issues.

Remove the legislated remit that the Financial Reporting Council has for overseeing aspects of audit quality, independence and discipline and park it with a new body.

This means the FRC would then only deal with the setting of pronouncements and not overseeing the way the auditing profession behaves.

This also helps kill the notion of conflicts for a chairman of the FRC that has occupied people’s attention, because you change the FRC’s remit as an agency as it exists in the law. The problem disappears.

Political theatrics in Senator Deborah O’Neill’s joint committee settings that result in scant viable solutions is distracting affair, O’Neill’s work so far seeming like it will solve little.

Politicians, bureaucrats and representatives of the media need to do better and focus on how things can improve.

It is rather boring watching or reading people point out there is plenty wrong in the world. What creative or innovative steps are being taken to right the wrongs in the closed world of audit and accounting?