No.

Recommendation

Action to date

1

The committee recommends that ASIC:

formally review the manner in which it publicly reports the periodic findings of its audit inspection program, giving appropriate consideration to approaches used internationally; and

based on this review, develop and implement, by the end of the 2020–21 reporting period for its audit inspection program, a revised framework for reporting inspection findings, with a focus on the transparency and relative severity of identified audit deficiencies.

‘ASIC consulted the six largest firms on a severity categorisation framework…ASIC issued Regulatory Guide 260 explaining its approach to communicating audit quality findings to directors and audit committees…’[1] In October 2023, ASIC completed its first integrated report, covering both audit and financial reporting findings. ASIC also writes to company directors and auditors on the review findings.[2] Financial report reviews decreased from 290 in 2020 to 180 in 2023. Audit inspections decreased from 58 in 2019 to 15 in 2023.[3] In May 2024, ASIC announced an expanded program to review auditors’ compliance with independence and ethical standards.[4]

2

The committee recommends that the Australian Government introduce, by the end of the 2020–21 financial year, through appropriate legislation, a requirement that ASIC publish all future individual audit firm inspection reports on its website once ASIC has adopted a revised reporting framework referred to in Recommendation 1.

Between June 2020 and June 2022, ASIC published individual inspection reports for the six largest firms.[5] Individual firms' results have been reported to international bodies, but since 2022, the firms’ results have not been published in Australia.[6] ASIC also noted that there is no legislative requirement for it to undertake these reviews.[7]

3

The committee recommends that the FRC, in partnership with ASIC, by the end of the 2020–21 financial year, oversee consultation, development and introduction under Australian standards of:

defined categories and associated fee disclosure requirements in relation to audit and non-audit services; and

a list of non-audit services that audit firms are explicitly prohibited from providing to an audited entity.

The Australian Accounting Standards Board (AASB) published a report on auditor remuneration in February 2021. ASIC requested the six largest firms to encourage listed clients to align audit fee disclosures with the AASB report. Independence requirements for fee disclosure and prohibitions of non-audit services in APES 110 were increased with effect from 1January 2023.[8] The FRC agreed to make recommendations to the Minister to pursue legislative change on disclosure of audit fees in directors’ reports.[9]

4

The committee recommends that the Corporations Act be amended so that an auditor's independence declaration is expanded to require the auditor to specifically confirm that no prohibited non-audit services have been provided.

In May 2024, Treasury released a consultation paper on the Regulation of the Big Four firms in Australia, which includes a consultation question on options to improve auditor independence.[10] EY indicated that it has voluntarily adopted the recommendation.[11]

5

The committee recommends that the Accounting Professional and Ethical Standards Board consider revising the APES 110 Code of Ethics to include a safeguard that no audit partner can be incentivised, through remuneration advancement or any other means or practice, for selling non-audit services to an audited entity.

In December 2022, APESB made significant amendments to independence standards under APES 110[12] to prohibit audit partners from being incentivised to provide non-assurance services to audit clients of the firm.[13]

6

The committee recommends that the FRC, by the end of the 2020–21 financial year, oversee the revision and implementation of Australian standards to require audited entities to disclose auditor tenure in annual financial reports. Such disclosure should include both the length of tenure of the entity's external auditor, and of the lead audit partner.

In September 2022, A Periodic Comprehensive Review of the External Auditor – Guide for Audit Committees ‘… recommended that the incumbent auditor’s tenure is publicly disclosed by listed companies…’.[14]The FRC agreed to make recommendations to the Minister to pursue legislative change on disclosure of auditor tenure.[15]

7

The committee recommends that the Corporations Act be amended to implement a mandatory tendering regime such that entities required to have their financial reports audited under the Act must:

undertake a public tender process every ten years; or

if an entity elects not to undertake a public tender process, the entity must provide an explanation to shareholders in its annual report as to why this has not occurred.

The committee further recommends that such a tender process be implemented by 2022 for any entity that has had the same auditor for a continuous period of ten years since 2012.

The Periodic Comprehensive Review of the External Auditor – Guide for Audit Committees recommended that listed companies review the external auditor every five years. Audit tender activity has also increased in the ASX200 market.[16] In May 2024, Treasury released a consultation paper on the regulation of accounting, auditing and consulting firms in Australia, which included issues and questions on auditor tenure.[17]

8

The committee recommends that the Financial Reporting Council oversee a formal review, to report by the end of the 2020–21 financial year, of the sufficiency and effectiveness of reporting requirements under the Australian standards in relation to:

the prevention and detection of fraud; and

management's assessment of going concern.

The International Auditing and Assurance Standards Board is updating standards on fraud and going concern assessment, and the AUASB is issuing related consultations in Australia.[18] The FRC agreed to make recommendations to the Minister to pursue legislative change on directors’ declarations about ‘assessments of ongoing concern’.[19]

9

The committee recommends that the Corporations Act be amended such that entities required to have their financial reports audited under the Act must establish and maintain an internal controls framework for financial reporting. In addition, such amendments should require that:

management evaluate and annually report on the effectiveness of the entity's internal control framework; and

the external auditor report on management's assessment of the entity's internal control framework.

The AUASB has been engaging with the Australian Securities Exchange Corporate Governance Council about whether Chief Executive officer and Chief Financial Officer declarations should be enhanced.[20] In May 2024, Treasury released a consultation paper on the regulation of accounting, auditing and consulting firms in Australia, which included questions on governance.[21]

10

The committee recommends that the Australian Government take appropriate action to make digital financial reporting standard practice in Australia.

In May 2024 Treasury released a consultation paper on the regulation of accounting, auditing and consulting firms in Australia, which included a question on digital financial reporting.[22]