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Review of annual reports of bodies established under Part 12 of the
Financial reporting framework
Part 12 of the Australian Securities and Investments Commission Act
2001 (the ASIC Act) establishes Australia's financial reporting system. As
outlined in section 224 of the ASIC Act, the objects of the financial
reporting system include:
- facilitating the Australian economy;
- maintaining investor confidence in the Australian economy;
- developing accounting standards that require the provision of
information that is relevant, reliable, easy to understand, allows investors to
make and evaluate financial decisions, and assists directors to fulfil their
statutory financial reporting obligations; and
- developing auditing and assurance standards that provide
Australian auditors relevant and comprehensive guidance in determining whether
financial reports comply with statutory requirements, and require auditors'
reports to be reliable and capable of being readily understood by investors.
Three agencies are established under Part 12 as the administrative
arms of the financial reporting system; namely, the Financial Reporting Council
(the FRC), the Australian Accounting Standards Board (AASB) and the Auditing
and Assurance Standards Board (AUASB). All three bodies are to monitor their
activities against the objects in section 224,
and to include in their annual reports an analysis of their achievements
against the objects.
While not established under Part 12 of the ASIC Act, the Australia
Securities and Investments Commission (ASIC) is also integral to the
administration of the financial reporting framework.
The Commission's contribution to the framework includes the enforcement of
auditor independence and audit quality requirements.
The Financial Reporting Council
The FRC was established by section 225 of the Australian
Securities Commission Act 1989 (the ASC Act 1989)
and was re-established in 2001 by Part 12 of the ASIC Act.
As part of the financial reporting system, the FRC's role in the operation of
Australia's corporations law is to:
provide broad oversight of the processes for setting accounting
standards and auditing standards in Australia;
- monitor the effectiveness of auditor independence requirements in
- advise the Minister on these matters.
The ASIC Act also confers on the FRC 'specific accounting standards
functions', 'specific auditing standards functions', and 'specific auditor
independence functions'. The FRC's specific auditor independence functions
direct the FRC to monitor and advise the Minister about the effectiveness of
Australia's auditor independence requirements. In undertaking this function,
the FRC is to monitor international developments in auditor independence,
assess the adequacy of the auditor independence requirements under the
corporations legislation and professional codes of conduct. The FRC is also
charged with assessing the overall adequacy of the investigation and
disciplinary procedures of professional accounting bodies applying to
The FRC's responsibilities do not extend to monitoring the disciplinary
procedures of CALDB or the FRP.
The Council's specific accounting standards functions and the specific
auditing standards functions recognise the position of Australia's financial
system within the international economy. The functions also reflect the object
in section 224 of 'facilitating the Australian economy by enabling
Australian entities to compete effectively overseas'.
Accordingly, the FRC is required to:
- monitor developments in international accounting standards and
- further the development of a single set of accounting standards
and auditing standards for world-wide use; and
- promote the continued adoption of international best practice
accounting standards and auditing standards if doing so would be in the best
interests of the private and public sectors of the Australian economy.
As detailed in the 2010–11 annual report, the FRC's view of its purpose
and functions reflects its statutory responsibilities:
The Financial Reporting Council (FRC) is the peak body
responsible for overseeing the effectiveness of the financial reporting
framework in Australia.
Its key functions include the oversight of the accounting and
auditing standards setting processes for the public and private sectors,
monitoring the effectiveness of the auditor independence regime, and advising
the Minister on these matters.
The Australian Accounting Standards
The AASB was established by section 226 of the ASC Act 1989,
and was re-established by Subdivision B, Division 1, Part 12 of the ASIC Act.
The AASB was established to raise the standards of accounting statements
through developing accounting standards and 'a conceptual framework, not having
the force of an accounting standard, for the purpose of evaluating proposed
accounting standards and international standards.'
Reflecting the object of promoting Australian entities in the international
the AASB is also tasked with contributing to the development of 'a single set
of accounting standards for world-wide use'.
The ASIC Act also establishes the Office of the AASB, to provide the AASB
administrative and technical support.
As detailed in the 2010–11 annual report, the AASB's mission statement
captures the Board's statutory responsibilities and role in Australia's
financial reporting framework:
The mission of the AASB is to:
- develop and maintain high-quality
financial reporting standards for all sectors of the Australian economy; and
- contribute, through leadership and
talent, to the development of global financial reporting standards and to be
recognised as facilitating the inclusion of the Australian community in global
The Auditing and Assurance
The AUASB is established under Subdivision C, Division 1, Part 12 of the
ASIC Act. Chief among the AUASB's responsibilities is the task of facilitating
the objective of an Australian financial reporting system that provides clear
guidance to auditors about auditing standards and requirements.
The AUASB formulates auditing standards, in the form of legislative
instruments, that operate under the Corporations Act 2001 (the
Consistent with the object in section 224 to 'enable Australian entities
to compete effectively overseas', the AUASB is also tasked with contributing to
the 'development of a single set of auditing standards for world-wide use.'
The ASIC Act also establishes the Office of the AUASB, which provides
technical services and administrative support to the AUASB.
The Board's 2010–11 annual report provides further details of the functions of
the Office of the AUASB:
The Office of the AUASB is structured to meet one outcome:
the formulation and making of auditing and assurance standards and guidance
that are used by auditors of Australian entity financial reports or for other
auditing and assurance engagements.
The AUASB's statutory responsibilities are reflected in the Board's
mission statement as contained in the 2010–11 annual report:
The mission of the AUASB is to develop, in the public
interest, high–quality auditing and assurance standards and related guidance,
as a means to enhance the relevance, reliability and timeliness of information
provided to users of audit and assurance services...
The AUASB contributes to public confidence in the financial
reporting and corporate governance frameworks by issuing auditing standards, which
are legally enforceable for audits and reviews of financial reports required
under the Corporations Act 2001, other auditing and assurance
pronouncements and related guidance.
The role of the AUASB also extends to liaison with other
national standard setters and participating in standard setting initiatives of
the IAASB [the International Auditing and Assurance Standards Board] to develop
a single set of auditing standards for worldwide use. Such involvement seeks to
contribute ultimately to the quality of AUASB pronouncements.
Coordination between the FRC, the
AASB and the AUASB
The ASIC Act also requires significant coordination between the three
bodies charged under Part 12 of the ASIC Act with the administration of the
financial reporting framework. Accordingly, FRC's specific accounting standards
functions and specific auditing standards functions also include oversight of
certain activities of the AASB and the AUASB. The FRC is to:
- appoint members of the AASB and the AUASB, other than the Chair;
determine the Boards' broad strategic direction;
- advise the AASB and the AUASB on the Boards' priorities, business
plans and procedures;
monitor the effectiveness of the Boards' consultative
advise the Office of the AASB and the Office of the AUASB on the
Offices' budgets and staffing arrangements.
The ASIC Act requires the AASB and the AUASB to have regard to the FRC's
advice concerning the bodies' priorities, business plans, procedures and
However, as acknowledged in the FRC's annual report, in conducting its
oversight duties the FRC is not permitted to undermine the independence of the
AASB or the AUASB:
The ASIC Act expressly limits the FRC’s ability to become
involved in the technical deliberations of the AASB and AUASB. In particular,
it provides that the FRC does not have power to direct the AASB or AUASB in
relation to the development, or making, of a particular standard, or to veto a
standard formulated or recommended by the AASB or AUASB. This provision is
designed to ensure the independence of the standard setters.
In addition to the oversight provided by the FRC, the interaction
between the bodies is furthered by the administrative arrangements of the AASB
and the AUASB. As is evident from the presentation and format of the agencies'
annual reports, the AASB and AUASB share administrative resources. As detailed
in the 2010–11 annual reports of both bodies, the AASB and the AUASB operate
according to a shared service agreement under which seven of the AASB's eight
administrative staff concurrently work for the AUASB.
Review of the 2010–11 annual report of the Financial Reporting Council
The FRC noted in its 2010–11 annual report that it had introduced a
strategic plan. The annual report records that following the appointment of FRC
Chairman Ms Lynn Wood in March 2011, the Council adopted the
Strategic Plan 2011–2014, which provides an action plan for the FRC against
strategic issues relevant to the financial services sector.
The plan includes a Strengths, Weaknesses, Opportunities and Threats (SWOT)
analysis of Australia's financial reporting framework, which identified the following
areas of weakness in, and threats to, Australia's financial reporting system.
Figure 3.1: Extract from FRC's SWOT analysis of the financial reporting
SWOT analysis – Financial Reporting Framework
- Not all areas given equal
attention and priority in developing international standards
- Risk of fragmentation of the
global IFRS [International Financial Reporting Standards] community
- Exclusive focus on financial
reporting, neglecting to some extent the wider context in which economic
- Discussion of radical proposals
to regulate audit practices, for example in the European Union
- Complexity and length of annual
Failure of a big 4 accounting
firm, potentially leading to a lack of competition in the audit market
- Level of financial literacy
among users, including company directors, leading to issues such as expectation
gaps for audit reports
- Plethora of narrow additional
financial reporting burdens being advocated, for example as part of a
Corporate Social Responsibility or Environmental, Social and Governance
Agenda, without consideration as to their broader appropriateness
- Complexity caused by Australia's
The annual report also provides further information about the state of
Australia's financial reporting system. Notably, the FRC has concluded that the
'independence framework in Australia continues to operate effectively'.
As the report elaborates:
[o]n the basis of its work during the period covered by this
report, the FRC has not become aware of any evidence to suggest that the
systems and processes used by audit firms to ensure compliance with auditor
independence requirements are not working effectively.
However, the annual report highlights two potential areas of concern
with the auditor independence framework. First, the risk of duplication and
regulatory overlap. The annual report indicates that in conducting its
auditor-independence functions, the FRC places a high reliance on the
activities of ASIC:
During 2010-11 the FRC continued to monitor the effectiveness
of Australia's auditor independence requirements. The FRC performs this work
primarily through the use of information obtained from the Australian
Securities and Investments Commission (ASIC) and the other bodies with which it
has a Memorandum of Understanding (MOU) and through periodic meetings with
those bodies and other stakeholders such as auditing firms.
The summary of the process by which the FRC conducts is auditor
independence oversight functions is consistent with Treasury's findings
outlined in its March 2010 consultation paper Audit quality in Australia: A strategic
review. Treasury concluded that the 'FRC's annual Auditor Independence
Report is largely based on the annual report that ASIC prepares on its Audit
Accordingly, Treasury has proposed that the option of transferring the FRC's
auditor independence functions to ASIC should be explored.
The second potential area of concern is the issue of whether the auditor
independence framework is sufficient to deliver audit reports that meet the
statutory objects of reliability, relevance and user-friendliness. The annual
report also states that the FRC's key strategic issues include 'how to monitor
the effectiveness of auditor independence and other audit quality drivers'.
The annual report notes that the veracity of audit reports is a topic of
growing national and international interest:
A key international and local focus affecting auditing and
assurance over the past year has been the debate on auditing related issues
following the global financial crisis. These issues include audit quality, the
role of the auditor and auditor reporting. There is also a considerably
heightened focus on the independence of auditors and greater scrutiny over the
scepticism and professional judgement exercised by auditors, and as a
consequence, growing international pressure for greater regulation of auditors.
Treasury noted that concerns have been raised about the 'expectation
gap' between public understanding of the nature of audit reports and the audit
profession's view of their audit responsibilities.
These concerns have lead to recommendations for increased FRC activity. For
example, the Australian National Centre for Audit and Assurance Research has
recommended the FRC establish a taskforce to address the factors that may be
contributing to the expectation gap.
While not directly referenced in the annual report, it appears that the FRC is
responding to these concerns. As detailed in the annual report, as part of its
strategic plan in 2010–11 the FRC introduced the Audit Quality Task Force:
In 2011 the FRC decided that audit quality is a strategic
issue for the FRC and the Audit Quality Task Force was established to focus on
this issue. The Task Force identified recent key publications, reports and
other initiatives in relation to audit quality in Australia, in other
jurisdictions and at the international level for the purpose of formulating its
work program for 2011-12.
The committee is satisfied with the annual report. The FRC's strategic
plan appears broadly consistent with the role of the FRC as envisioned under
the ASIC Act. The committee considers that future annual reports should
evaluate the priority projects under the strategic plan against the objects in
section 244 which underpin Australia's financial reporting system.
The committee draws to Parliament's attention the identified areas of
weakness in, and threats to, Australia's financial reporting system. The
committee will monitor developments in these areas with interest.
The committee notes Treasury's strategic review of audit quality in
Australia and the proposal to transfer the FRC's audit independence functions
to ASIC. The committee considers that the audit quality framework must promote
auditor independence and require audit reports to be transparent, accurate and
reliable. The committee is concerned that unnecessary duplication between the
functions of ASIC and the FRC is avoided. The committee may seek the views of
ASIC on this matter, as part of the committee's oversight of the Commission. It
will also monitor the work of the FRC's Audit Quality Task Force and may seek
the FRC's advice about the progress of the Task Force's work.
Review of the 2010-11 annual report of the Auditing and Assurance Standards
As the committee has previously noted, the 2009-10 financial year marked
the introduction of the Clarity standards–43 revised auditing standards
amended as part of a three-year review process.
The 2010-11 annual report notes that the AUASB 'monitored and facilitated' the
introduction of the standards during the 2010–11 financial year.
However, the report does not contain an assessment of how the Clarity
standards have measurably contributed to achieving a transparent and reliable
financial reporting framework.
From the information obtained in the annual report, it is evident that Clarity
responds to, and is consistent with, international developments in auditing
standards following the global financial crisis. As noted in the annual report:
...a major focus of the International Auditing and Assurance
Standards Board (IAASB) and the AUASB over the past three to four years has
been the revision and re-issue of the Australian Auditing Standards (ASAs) in Clarity
format. The IAASB issued its suite of Clarity auditing standards in
2009 effective for reporting periods beginning on or after
15 December 2009, and the AUASB released confirming Clarity
accounting standards in 2009, operative for financial reporting periods that
commenced on or after 1 January 2010. These revised auditing standards significantly
increased the requirements on auditors in a number of areas of concern,
including accounting estimates, using the work of experts, group audits and
communication with audit committees. These standards, which are now applied by
auditors, address many of the areas of concern raised during the crisis.
While not referenced, the committee notes that this approach accords
with the views of Treasury that 'global consistency is a critical goal that
must always be borne in mind in considering any changes to the standard audit
Treasury further concluded that 'it will be essential for the Auditing and
Assurance Standards Board (in accordance with the FRC's strategic direction) to
continue to base the Australian Auditing Standards on the standards issued by
the International Auditing and Assurance Board'.
The committee also notes that Ms Merran H Kelsall, Chairman, AUASB, was
appointed a member of the IAASB, and the IAASB task force, from
1 January 2011.
The AUASB did not report any concerns with the FRC's activities in
setting the Board's strategic direction, procedures and priorities. The annual
report does not provide an evaluation of the merit of the interaction between
the FRC and the AUASB as contemplated under Part 12 of the ASIC Act. The annual
report did, however, note that the FRC is integrated within the AUASB's broad
Figure 3.2: AUASB organisational structure
The annual report also comments that during the 2010–11 financial year,
there were no parliamentary committee reports relating to the Board's
The committee is satisfied with the annual report of the AUASB. The
committee expects that future annual reports will include an assessment of the achievements
of the Clarity standards in promoting relevant and reliable auditor
As the committee has noted, it is concerned with any divergence between auditors'
statutory requirements and public expectations about auditors' role within Australia's
financial services system. The committee will closely monitor developments in
this area and may seek the AUASB's advice on the efficacy of Australia's
The committee draws the Board's attention to the reports on annual
reports prepared by this committee and the Senate Economics Legislation
Committee. It would be appropriate for these reports to be referred to in the
discussion in the annual report regarding the external scrutiny of the AUASB.
Review of the 2010–11 annual report of the Australian Accounting Standards
As Treasury noted in its consultation paper Audit quality in
Australia: A strategic review, the implications of the global financial
crisis extend to accounting standards at the domestic level:
There have been a number of significant developments relating
to accounting standards at the international level. The G-20 has requested that
the two global accounting standard setters, the International Accounting
Standards Board (IASB) based in London and the US Financial Accounting
Standards Board (FASB), address a range of accounting issues that have arisen
during the global financial crisis. These issues include fair value
measurement, the simplification of the standard relating to financial
instruments, the treatment of off-balance sheet exposures and enhanced
disclosure of complex financial products. The G-20 has also urged the IASB and
FASB to work towards a single set of global accounting standards.
Consistent with the object of promoting Australian entities within international
markets, the 2010–11 annual report notes that developments in domestic
accounting standards have been shaped by events at the international level.
As documented in the annual report, the international community's response to
the global financial crisis has influenced the responsibilities of the AASB in
delivering accounting standards that promote transparent and reliable
Most of the revised Standards issued were to maintain
conformity with International Financial Reporting Standards (IFRSs) issued by
the International Accounting Standards Board (IASB). Many of these can be
attributed to the IASB's ongoing response to the global financial crisis.
Similarly, most of the AASB Exposure Drafts issued incorporated IASB proposals.
During the year, the Board made submissions to proposals of both the IASB and
the International Public Sector Accounting Standards Board (IPSASB). The AASB
had regard to not–for–profit and public sector issues in the process of
developing the new and revised Standards.
The report does not evaluate the effect the revised standards, as the
standards had not commenced as of 30 June 2011. As Mr Kevin Michael Stevenson,
Preparers and auditors can take some comfort from the fact
that none of the major changes coming will have an early application date.
There will be a number of years in which to make transitions.
As the committee has previously noted, during the 2009–10 financial year
the AASB revised the accounting reporting framework for 'non-public accountable
The annual report does not present an analysis of the impact of the new
framework, known as the Tier 2 Australian Accounting Standards–Reduce
Disclosure Requirements, as the standards are not due to commence until
In detailing the AASB's management and accountability structures, the
2010—11 annual reports notes the statutory responsibilities of the FRC to
appoint Board members and provide the Board strategic direction and advice. The
annual report includes the following diagram showing the FRC's position within
the Board's operational matrix:
Figure 3.3: AASB organisational structure
The AASB did not report any concerns with the FRC's activities in
setting the Board's strategic direction, procedures and priorities.
The annual report also comments that during the 2010-11 financial year
there were no parliamentary committee reports regarding the Board's activities.
The committee was satisfied with the annual report. The committee draws parliament's
attention to the work of the AASB to improve accounting standards to take
account of the issues raised by the global financial crisis. The committee
expects that as these standards commence operation, future annual reports will
include an assessment of the contribution that they have made to promoting
reliable account and, ultimately, commercial certainty.
The committee draws the Board's attention to the reports on annual
reports prepared by this committee and the Senate Economics Legislation Committee.
It would be appropriate for these reports to be referred to in the discussion
in the annual report regarding the external scrutiny of the AASB.
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