Taxpayers and people preparing financial statements today may not be aware that it is just over 20 years since the Australian Accounting Standards Board, the folks that set the standards that must be followed when accounts are prepared, was completely taken over by the Howard Government.
There was a Corporate Law Economic Reform Program (CLERP) and the government decided in its wisdom the first area they would decide to tackle in 1997 was the area of setting accounting standards.
Most people would find watching grass grow, paint dry and watching four flies sprint up a loungeroom wall more interesting than looking at accounting standards. But the process by which they are developed here and overseas can be intensely political because standard setters produce authoritative documents that tell companies where numbers must fall in their accounts.
That is why accounting standard setters are important and the way in which they are overseen even more so.
The Howard government created the Financial Reporting Council to sit on top of the accounting standards board. It was responding to a range of criticisms of the standard setting structure as it existed at the time.
These included people from grumpy corporates stating that accounting standards were being set by people who were too academic and not living in commercial reality. Some folks also wanted to implemented international accounting standards in Australia because they were perceived to have more options than domestic standards.
A more genuine, intellectually honest perspective was set down by people who argued that a structure that had a government board supported with technical expertise from the private sector was not tenable.
The standard setter prior to 1 January 2000 did not have its own staff. The function was outsourced to the Australian Accounting Research Foundation, which was the home of accounting and audit standard setting for more than three decades.
The AARF as it was known was funded by the major accounting bodies, CPA Australia and what was then known as the Institute of Chartered Accountants in Australia. The ICAA has since merged with its New Zealand cousins.
An FRC was meant to ensure the process was driven by the appropriate priorities and that the board was responsive to constituents over time.
The enduring problem is that the FRC was not a body that was required to be as accountable as the standard setter that it was overseeing because it did not meet in public.
It got more power after Enron collapsed in 2001 and the Australian government bundled the auditing standards board in under the FRC.
Those amendments that gave the FRC an expanded jurisdiction over audit standards and relate matters did not come with a legislated requirement that the oversight body meets in public.
Why is this a problem?
The FRC set directions for the standard setter in the early days in two notable areas: public sector accounting and the adoption of international accounting standards.
Those directions were agreed by the FRC without public present. These were directions that set the scope for technical content. They were decided behind closed doors and the standard setter that was so directed by the FRC had to deal with the outcome of those directions in public.
The entire process should originally have been made public so that everything that contributes to the development of accounting standards that are law is aired properly and transparently in the public domain.
This was a failure of the Howard government’s CLERP changes to standard setting and that failure continues to dog the oversight body today.
Controversy broke out over the past 12 months over remuneration arrangements PricewaterhouseCoopers has for retired partners because a former PwC partner, Bill Edge, is the chairman of the FRC.
The body has a function in monitoring and reporting on the state of play on issues of audit regulation, discipline and independence in the legislation. Edge is perceived to have a conflict because of the payment that comes to him from the FRC by various commentators that have made their views known in other media channels such as the Australian Financial Review.
The lack of public meetings for the FRC further creates a perception that deals are done behind closed doors by conflicted parties when in fact the agendas of the oversight body are about as interesting as watching the blade of grass grow on your front lawn.
Take it from someone who used to write briefing papers for people who represented a previous employer of mine at the FRC table. I’ve seen the type of material that lands on the FRC member’s desk. Most people have not had that opportunity so I view the debate through the eyes of seeing the process both as an outsider and understanding how the process works.
Public meetings would give journalists and other stakeholders a clear line of sight and it will assist to mitigate some of the perceptions that have been of concern to people. Instituting public meetings as a mandatory measure would also end 20 years of inaction by governments of all colours.
FRC members could argue that minutes are published but that is not sufficient in an era where meetings could be held in public or broadcast by Zoom or some other technological means and when the two standard setters it oversees are compelled by law to meet in public.
The failure of the oversight body to have public meetings will by default cause people to question how independent the standard setters overseen by the FRC truly are if the oversight body itself is not subject to the same level of sunshine.
You deserve to have independent standard setters. One way of ensuring that your standard setters are independent is to have a heightened level of transparency for the oversight body.
That is something that the parliamentary committee dealing with audit regulation should recommend because if it doesn’t it means that the committee at least in part wishes a shadow to continue to be cast over the independence of the standard setters in Australia.