17 November 2003

The Secretary
Parliamentary Joint Committee on Corporations and Financial Services
Room SG.64
Parliament House
CANBERRA  ACT  2600

Dear Dr Dermody

The Institute of Internal Auditors – Australia (IIA-Australia) appreciates the opportunity to offer comments to the Inquiry into the exposure draft -  CLERP (Audit Reform and Corporate Disclosure) Bill. 

We believe that our comments are a balanced representation of the views of our membership.

The IIA-Australia has 2000 members across all states and territories. Our members are in a diverse range of fields from public and private sectors, education, and also public practice and consulting.  The IIA-Australia is part of an international body (the Institute of Internal Auditors Inc), which has over 85,000 members in internal auditing, corporate governance, internal control, information technology audit, education and security.  The Institute has members in more than 120 countries and is the acknowledged leader in standards, certification, education, research and technology guidance for the internal auditing profession.  The Institute has a Code of Ethics and Standards for the Professional Practice of Internal Auditing.

The IIA-Australia has provided comment on the exposure draft CLERP (Audit Reform and Corporate Disclosure) Bill.  Our comments, attached, emphasise the areas of concern we have.

Yours sincerely

Christopher McRostie
Executive Director

1.	
The Bill’s focus is clearly not inclusive of Internal Audit.  The omission of Internal Audit and its role in improving corporate governance is of primary concern.

2.	The inclusion of the definition “Australian Auditor” serves to clarify the type of audits to which the bill relates i.e. a person firm etc that conducts Corporation Act audits.

2.1.	Despite this inclusion, confusion between Internal and External Audit and their respective roles is still possible, particularly as the bill also addresses non Corporation Act audits in some sections.

2.2.	To rectify this we recommend that a definition of Internal Audit ie

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. (The Institute of Internal Auditors)

and a distinction between the roles of Internal and External Audit also be included.  

2.3.	To also add clarity to the distinction between internal/external audit and internal auditor/registered company auditor, the relevant legislation should be amended to include reference to internal auditors who are accredited by a prescribed internal auditing body.

3.	There is much comment in CLERP 9 on the registration of external auditors.  With the emphasis on accreditation of Company Auditors it seems to be at odds with the theme of the bill to then allow an external auditor to provide internal audit services without requiring appropriate certification, experience, qualifications

The Institute of Internal Auditors – Australia believes that  
3.1.	Internal Auditing should be recognised as a profession and that this could be achieved partially through the use of ‘statutory appointment’ provisions.  This would assist in the understanding that internal audit is separate from external audit.
3.2.	The Certified Internal Auditor qualification (CIA) should be recognised as demonstrating competency in the Internal Audit function. 
3.3.	‘Chief’ Internal Auditors should be registered.  This would contribute to the recognition of their competence to undertake the role as internal auditor.

4.	
The Audit Committee 
4.1.	In addition to it being mandatory for the top 500 listed companies to have audit committees, we recommend that all other companies are to either have an audit committee or disclose the mechanisms in place to achieve the level of integrity of reporting had an audit committee been in place.

4.2.	Should be composed of all independent directors.  

4.3.	The CEO and CFO should not sit on the Audit Committee, as members, but would attend by invitation of the Audit Committee Chair only. This needs to apply to all companies under the Corporations Law.

4.4.	The Audit Committee should have the right to ‘hire and fire’ the Head of Internal Audit.  The ‘hire and fire’ right could be similar to the appointment of the External Auditor.

4.5.	The Head of Internal Audit should report directly to the Chair of the Audit Committee.  There would also be a line management reporting/liaison and working relationship.

4.6.	The Chief Audit Executive (Internal Auditor) should sign-off on all internal audits conducted on behalf of the Audit Committee.  This should then be reported in the Annual Report.

5.	Standards
5.1.	The use of and recognition of the Institute of Internal Auditor's Standards for the Professional Practice of Internal Auditing, which cover a range of non-accounting audit areas, should be taken up by the AUASB.

6.	Non-Audit Services
6.1.	The bill should include a Clause that prohibits internal and external audit services being provided by the same organisation.  

In relation to internal audit services, there is never an instance where auditor independence will not be compromised if the same organisation provides external and internal audit services.

6.2.	The Institute recommends that internal auditing services should be listed as a separate category of non-auditing services. 

6.3.	To ensure that there is no compromise of the Auditor (external), the Audit Committee must give prior approval for all contracting of non-audit services.