BREAKING NEWS | G100 response to the Interim Report into the Regulation of Auditing in Australia

The Group of 100 (G100) has released a response to the Interim Report of the Inquiry into the Regulation of Auditing in Australia by the Parliamentary Joint Committee on Corporations and Financial Services, please see below. Some of these comments were included in an article in the Australian Financial Review and in the AFR online on 11 March 2020.

Janelle Hopkins, Chair of the G100 and CFO of REA Group, and Andrew Porter, Immediate Past Chair of the G100 and CFO of AFIC, who led the G100’s response to the Auditing Regulation Inquiry, made the following comments:

“Overall, we think that the recommendations are well-measured, sensible and strike the right balance between the need for continuous improvement and development in this area whilst recognising that we and others believe, anecdotally, that the audit quality experienced by Australian corporates is fundamentally of a very high standard, as noted in our submission.

We think that most of the recommendations that will impact the large listed companies that are the majority of our members should be able to be implemented without much additional cost burden. The request for the FRC to define categories of audit and non-audit services and a list of non-audit services that are to be prohibited is welcome. It should act to further clarify matters for Audit Committees. We would assume that the FRC would consult with the APESB (the Accounting Professional and Ethical Standards Board) on this issue.

For our members, the recommendation that external audits are subject to a public tender process every 10 years (or, in the spirit of the ASX Corporate Governance Guidelines, on an ‘if not, why not’ explanatory basis) should not be too burdensome – many of them undertake such processes as a matter of course. 

The recommendation that the FRC finalise a formal review into the sufficiency and effectiveness of reporting requirements in relation to the prevention and detection of fraud and the assessment of going concern will, we think, actually be quite a long and involved exercise and, whilst we welcome the opportunity to have that discussion, we believe that the timeline may need to be longer, particularly as the Final Report is not due out until closer to the end of this calendar year.

With regards to the recommendation that the Corporations Act be amended to require that companies must establish and maintain an internal controls framework for financial reporting, this is already a requirement for listed companies under the ASX Corporate Governance Guidelines – Recommendation 4.2 of the 4th Edition – “the board of a listed entity should, before it approves the entity’s financial statements for a financial period, receive from its CEO and CFO a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed based on a sound system of risk management and internal control which is operating effectively.

Importantly, this has been achieved without the high-cost and unwelcome burden of the Sarbanes-Oxley requirements in the US.

What is new is the requirement that this opinion and declaration itself be subject to external audit. This will take some time to work through – what the scope of the extension of the audit will be, what the standards and guidelines will be in terms of the type of audit work that will need to be done, how will it actually be reported on and what should the report actually say. This may lead to some increased cost to shareholders but may well provide additional comfort to them and to Boards and Audit Committees as long as the cost and potential disruption do not outweigh the benefits. We will look to work with the industry as this develops.

Finally, the recommendation that digital financial reporting is made standard practice is interesting. Digital Financial Reporting is easier in jurisdictions such as the US with its quarterly reporting requirements and far more standardised reports. In Australia, companies have had more flexibility to report their results (whilst always in accordance with the relevant Accounting Standards) in ways that best suits them, the industry that they are in and the needs of their stakeholders. Such reporting is more difficult to be ‘shoe-horned’ into digital templates. It can be done, but larger listed companies will still need to present their reports in a way that meets their and their stakeholder needs, and more cost and time may be incurred in populating such templates and explaining why surface comparisons are perhaps not relevant,” they said.