Underwhelming is the only word that can fully describe the final report of the Joint Parliamentary Committee of Corporations and Financial services into the regulation of audit.
The committee has failed to make any substantive inroads into reform of the standard setting structure and has completely bypassed the fact that the oversight body, the Financial Reporting Council, meets in private and has done so for more than two decades since its creation.
The standard setters that sit under the Financial Reporting Council and deal with auditing and accounting must meet in public, and the parliamentary committee muddled through this exercise without addressing transparency at the level of the oversight body.
Some Senators were all too happy to have a crack at the chairman of the FRC, Bill Edge, because he receives a payment from his old firm in terms of retirement.
The perception of conflicts in this situation can be dealt with in part by opening up the FRC meetings and having all of the conflicts that may be – or not be – present on display. It is a grave disappointment that the committee failed to improve the process by recommending an amendment to the legislation to force the FRC to meet in public.
The failure of the committee to make even this recommendation indicates that it was largely about maintaining the status quo with a few tweaks here and there just to improve the discipline in corporate regulation around audit inspections and enhance transparency for accounting firms and companies in their reports.
It is all too easy to pick on Edge. What is harder is actually being sufficiently clever about what you can do to improve the process. Cleverness was in short supply this time round.
Greens senators decided the system needed to be turned inside out, upside down, shaken and stirred to the point of no recognition in their dissenting report. They called for a merging of standard setters and a change in the way auditors are regulated. That cannot work as recommended by the Greens even though change is necessary, because they suggest that the “regulatory regime for auditing be simplified, with a single body being responsible for accounting, auditing and assurance standards; and another body being responsible for enforcement, currently ASIC”.
Contemplating a merger of audit and accounting standard setting is ridiculous as both sets of guidance are different. Calling for it reveals a stunning lack of comprehension of the framework for which the parliament is itself responsible.
The Federal Government should reconsider the structure of auditor registration and regulation by creating an audit version of the Tax Practitioners Board rather than have aspects of regulation, oversight, inspection and discipline sitting across several organisations.
There is a Greens recommendation that suggests a firm auditing a certain proportion of companies capitalised or operating in Australia should be prohibited from providing non-audit services. Good luck with getting that kind of threshold in place.
The committee did make the point that its initial recommendations back in the interim report have stood the test of time and did not need further work, but there were qualifiers built into the final report given the bout of pandemic paralysis that we have gone through in Australia.
Recommendations such as a move to do audits of internal controls as a part of the financial statement audit were reiterated but it was noted by the parliamentary committee that insisting on increasing the costs of audit to companies by mandating the audit of internal controls at a time of recession is probably not the brightest idea.
This is probably sensible but bear in mind that such statements could also result in specific recommendations becoming the can that just gets kicked up the road.
Better internal controls are always valuable and having them looked at more closely during a time of financial distress is a good idea. That won’t be happening in the short to medium term given the circumstances.
The committee has clearly drunk the kool aid when it comes to being critical of the standard on asset impairment. That was not the job of a non-expert committee to delve into recommending a look at the impairment standard. The recommendation embedded in the final report pre-empts what the standard setters do anyway. It is an indication that the committee does not understand the complete processes that standard setters undertake and it would be useful if committee members understood the notion of post-implementation reviews.
Those reviews are done by standard setters as a matter of routine. To waste committee resources babbling on about post-implementation reviews of impairment rules because some people have moaned about standards being too complex is beyond a joke.
The committee also observed that some of the firms published their ASIC inspection reports, which should have been made publicly available in the first place, and that there have been oversight bodies or reporting structures implemented by firms.
The latter is nothing new. Both KPMG and PricewaterhouseCoopers had various reports done by experts or reviews by a board in the early 2000s after Enron collapsed and Andersen disappeared. These measures are not novel and they are one way of improving the monitoring of quality
While the interim report did contain recommendations designed to improve ASIC inspections and detailed disclosure related to auditor tenure and prescribe the things auditors should not do for clients for which external audits are done, the final report demonstrates that the committee has shied away from any sense of creativity where regulatory design is concerned.