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Chapter 3

Bodies established under Part 12 of the ASIC Act

3.1      This chapter considers the 2013–14 annual reports of the:

• Financial Reporting Council (FRC);
• Australian Accounting Standards Board (AASB); and
• Auditing and Assurance Standards Board (AUASB).

Financial reporting framework

3.2      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 objectives 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.[1]

3.3      Three agencies are established under Part 12 of the ASIC Act as the administrative arms of the financial reporting system; namely, the FRC, the AASB and the AUASB. All three bodies are required to advance and promote the object of Part 12 of the ASIC Act.[2]

3.4      ASIC is also involved in the administration of the financial reporting system. ASIC's role in oversighting auditor independence is set out under division 5A in the ASIC Act, which covers 'Audit deficiency notifications and reports'.[3] During the 2013–14 financial year, ASIC inspected three Australian audit firms jointly with the United States Public Company Accounting Oversight Board.[4]

3.5      The FRC annual report is required to include an analysis of its achievements against the objects of the financial reporting system.[5] The Chairs of AASB and AUASB must, as soon as practicable after the end of each financial year, prepare and give to the Minister, for presentation to the Parliament, reports of the operations of the AASB, the AUASB and their respective offices.[6]

Coordination between the FRC, the AASB and the AUASB

3.6      The ASIC Act requires interaction between the FRC, the AASB and the AUASB. Accordingly, the 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 required to:

• appoint members of the AASB and the AUASB, other than the Chair;
• determine the broad strategic direction of the AASB and AUASB;
• advise the AASB and the AUASB on the Boards' priorities, business plans and procedures;
• monitor the effectiveness of the Boards' consultative arrangements; and
• advise the Office of the AASB and the Office of the AUASB on the Offices' budgets and staffing arrangements.[7]

3.7      The ASIC Act also sets out restrictions on the FRC's oversight of the AASB and the AUASB:

The FRC does not have power to direct the AASB in relation to the development, or making, of a particular standard.

The FRC does not have power to veto a standard made, formulated or recommended by the AASB.

The FRC does not have power to direct the AUASB in relation to the development, or making, of a particular auditing standard.

The FRC does not have power to veto a standard made, formulated or recommended by the AUASB.[8]

Committee view

3.8      The committee notes the recommendation by the National Commission of Audit to merge the AASB and the AUASB and/or their offices.[9] The FRC noted that the Offices currently share many resources.[10] The committee has not examined the recommendation in detail, but will continue to monitor any further action on the recommendation. The committee considers that if the government moves to implement the recommendation, the government should give careful consideration to ensuring that the merged body:

• is set up with appropriate powers to undertake its role;
• has the necessary skills to cover accounting, audit and assurance standards; and
• is able to maintain or enhance its influence in the relevant international accounting, audit and assurance standards forums.

The Financial Reporting Council

3.9      The FRC was established in 1989 and operates pursuant to Part 12 of the ASIC Act 2001.[11] The FRC's role in the operation of Australia's corporations law includes:

• providing broad oversight of the processes for setting accounting standards and auditing standards in Australia; and
• advising the Minister on these matters.[12]

3.10         The ASIC Act also confers on the FRC 'specific accounting standards functions' and 'specific auditing standards functions'. The Corporations Legislation Amendment (Audit Enhancement) Act 2012 added provisions conferring 'specific auditor quality functions' on the FRC.[13]

3.11         The FRC's specific auditor quality functions direct the FRC to give the Minister strategic policy advice and reports on the quality of audits conducted by Australian auditors. In undertaking this function, the FRC is to advise the Minister on:

• systems and processes used by Australian auditors and professional accounting bodies in oversighting auditors;
• the procedures and outcomes of reviews;
• investigations and disciplinary procedures applied to Australian auditors;
• the adequacy of audit legislation;
• standard and codes of conduct; and
• the teaching of professional and business ethics.[14]

3.12         The FRC's specific accounting standards functions and the specific auditing standards functions recognise the position of Australia's financial system within the international economy.[15] The functions also reflect the object in section 224 of the ASIC Act which is 'facilitating the Australian economy by enabling Australian entities to compete effectively overseas'.[16] Accordingly, the FRC is required to:

• monitor developments in international accounting standards and auditing standards;
• 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.[17]

Annual report of the FRC

3.13         As detailed in the 2012–13 annual report, the FRC's view of its purpose and functions reflects its statutory responsibilities:

Under Part 12 of the ASIC Act one of the FRC’s functions is to provide broad oversight of the processes for setting accounting and auditing standards in Australia and to give the Minister reports and advice about these processes. Specific accounting and auditing standard setting functions for which the FRC was responsible in 2013–14 are contained in subsections 225(2) and (2A) of the ASIC Act. The activities of the FRC in executing these functions and responsibilities can be grouped as follows:

• activities in relation to the standards setting boards in Australia;
• activities in relation to developments in Australia; and
• activities in relation to international developments.

An outline of each of these three areas is provided in this and the following chapters in conjunction with information about the FRC’s performance of its functions in each area.[18]

3.14         The FRC reported on an increased international focus on audit, noting that reforms were introduced in Australia in 2012 through the Corporations Legislation Amendment (Audit Enhancement) Act 2012. The FRC noted that in the past, Australia had tended to make its regulatory regime similar in design to regulatory regimes of both the United States (US) and the European Union (EU). However, the EU and the US are taking quite different paths, with the EU taking a rules based approach, which include mandatory auditor rotation. In contrast:

...the US Congress has passed a law banning the Public Companies Accounting Oversight Board...from requiring audit firms rotation, and a Canadian review of audit quality in 2013 took a similar view against mandatory audit firm rotation. Thus it will be difficult for Australia to ensure its regulatory regime remains of a similar design to both the EU and North America.[19]

3.15         The FRC annual report indicates that as part of the government's deregulation agenda, the FRC has been asked to provide advice on potential areas for deregulation in the financial reporting sphere. The annual report notes that this work will continue for at least the remainder of 2014 and is complimentary to the work of the FRC’s existing Financial Report Taskforce which was established to examine the current financial reporting regime in Australia.[20]

3.16         The FRC noted in its annual report that since the global financial crisis there has been a group of users of financial reports seeking more forward-looking information and integrated reports. More attention is being given to the management discussion and analysis in annual reports, and ASIC has introduced a regulatory guide to assist companies in preparing annual reports. However, the FRC annual report notes that integrated reporting and forward-looking reporting requires information on how an organisation creates value over the short, medium and long term. The FRC is continuing to monitor developments and indicated that it is unlikely that such reporting will be mandated in Australia in the short term. The FRC noted that:

Full compliance with the principles of Integrated Reporting would require forward looking disclosures. Company directors continue to be concerned about the inherent uncertainty of forward looking disclosures and whether there are appropriate and adequate protections for corporations and directors when making these disclosures. They argue further protections are needed for directors to be able to make more meaningful forward looking disclosures.[21]

Committee view

3.17         The committee considers that FRC has fulfilled its regulatory and reporting responsibilities during the 2013–14 financial year.

The Auditing and Assurance Standards Board

3.18         The AUASB is established under Subdivision C, Division 1, Part 12 of the ASIC Act. The AUASB's responsibilities include facilitating an Australian financial reporting system that provides guidance to auditors about auditing standards and requirements.[22] The AUASB formulates auditing standards, in the form of legislative instruments, which operate under the Corporations Act 2001 (the Corporations Act).[23]

3.19         Consistent with the object in section 224 to 'enable Australian entities to compete effectively overseas', the AUASB is required to contribute to the 'development of a single set of auditing standards for world-wide use.'[24] The ASIC Act also establishes the Office of the AUASB, which provides technical services and administrative support to the AUASB.[25]

Annual report of the AUASB

3.20         The AUASB's statutory responsibilities are reflected in the Board's mission statement as contained in the 2013–14 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.

Sound public–interest oriented auditing and assurance standards are necessary to reinforce the credibility of the auditing process for those who use audited financial and other related information.

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 to develop a single set of auditing standards for worldwide use. Such involvement seeks to contribute ultimately to the quality of AUASB pronouncements.[26]

3.21         The main activities of the AUASB during 2013–14 included promoting audit quality and enhanced auditor reporting, as well as other initiatives to promote high quality independent audit and assurance services. The committee notes that the following outputs generated by AUASB that are intended to address audit quality:

• issuing a new auditing standard on the use of internal audit by external auditors;
• issuing a revised assurance standard on assurance engagements other than audits or reviews of historical financial information;
• a proposal for a new standard on internal controls;
• liaising with and making submissions to the International Auditing and Assurance Standards Board (IAASB); and
• the release of a Framework for Audit Quality that describes the different input, process, output, interactions and contextual factors relevant to audit quality at the engagement, firm and national levels.[27]

Global developments

3.22         The annual report indicates that the AUASB continued to contribute to the setting of international standards. This involved participating in IAASB international taskforces, making submissions to the IAASB on exposure drafts, participating in National Standard Setters meetings and harmonising Australian and New Zealand Auditing standards.[28]

3.23         The primary focus of the IAASB for the past few years has been the Auditor Reporting project. The project aims to enhance the relevance and usefulness of audit reports, by including further meaningful information in the reports. The AUASB made a submission to the IAASB project based on consultation with Australian constituents.[29]

3.24         The new and revised Auditor Reporting Standards were released by the IAASB in January 2015 and come into effect from December 2016.[30] The AUASB anticipates that the corresponding new and revised Australian standards will be released mid-2015 and are likely be in effect for periods commencing on or after 1 January 2016. The AUASB annual report noted that:

The most substantial of the impending changes is that auditors will be required to communicate in the auditor’s report Key Audit Matters, those matters that in the auditor’s judgement were of most significance in the audit of the financial statements. This new requirement is to be applied in the audit of listed entities.[31]

3.25         During the 2013–14 the AUASB released a revision of Auditing Standard ASA 610 Using the work of internal auditors. This standard clarifies the AUASB position on direct assistance by explicitly prohibiting the use of internal auditors to provide direct assistance in an audit or review. The AUASB considers that this prohibition reinforces the principle of auditor independence, which is critical to overall audit quality and the integrity of the external audit process.[32]

3.26         In May 2014 the IAASB released an exposure draft on addressing disclosures in the Audit of Financial Statements. This focuses on increasing the opportunity for disclosures throughout the audit process.[33]

Local Developments

3.27         During 2013–14 the AUASB issued new assurance engagement standards including:

• assurance engagements other than audits or reviews of historical financial information; and
• assurance Engagements on General Purpose Water Accounting Reports.[34]

3.28         The Clarity standards, introduced in 2009–10, are intended to improve the consistent application of International Auditing Standards worldwide. Forty-three revised auditing standards were amended as part of a three-year review process.  The AUASB continued to monitor and facilitate the implementation of the Clarity standards as one of its ongoing activities. The committee previously requested that an assessment of the impact of the Clarity standards be included in AUASB annual reports.[35] The committee welcomes the following AUASB assessment in the 2013–14 annual report that the AUASB’s Clarity standards:

• have been properly incorporated into legislation;
• conform to the International Standards on Auditing;
• are used by auditors and other assurance practitioners, where required; and
• contribute positively to promoting relevant and reliable auditor reports as well as to the quality of audit generally.[36]

Committee view

3.29         The committee considers that the AUASB has fulfilled its regulatory and reporting responsibilities during the 2013–14 financial year. The committee notes that the AUASB has implemented previous recommendations of the committee and the Senate Economics Legislation Committee relating to including information in its annual report on external scrutiny, staff classification levels and salary ranges, disability reporting, environmental performance and a glossary of terms.[37]

The Australian Accounting Standards Board

3.30         The AASB was first established in 1989 and is currently established by Subdivision B, Division 1, Part 12 of the ASIC Act 2001.[38] The AASB's role is to develop and evaluate accounting standards based on a conceptual framework. The AASB contributes to the development of 'a single set of accounting standards for world-wide use'.[39] The ASIC Act also establishes the Office of the AASB, to provide the AASB administrative and technical support.[40]

Annual report of the AASB

3.31         As detailed in the 2013–14 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:

1. develop and maintain a high quality conceptual framework for all sectors of the Australian economy;
2. develop and maintain high quality accounting (i.e. financial reporting) standards for reporting entities in those sectors; and
3. contribute, through thought leadership and participation, in the development of global financial reporting standards and standard-setting.[41]

3.32         The annual report indicates that throughout the 2013–14 period the AASB completed a review of its five-year strategic plan. This review confirmed the core strategies set out in the 2012–13 annual report that the AASB has been pursuing:

1. Responding to criticisms emanating from the global financial crisis (GFC) through the completion of core standards on financial instruments, revenue, leasing and insurance;
2. Working through its domestic agendas, to improve reporting in the public sector and not-for-profit private sector, as well as revising the financial reporting requirements for superannuation plans; and
3. Contributing significantly in the revision of the Conceptual Framework for financial reporting.^[42]

3.33         During 2013–14, the AASB has completed work on significant projects including the following:

• general hedge accounting and the impairment of financial assets;
• a discussion paper on macro-hedging;
• a major revision of the standard on revenue from contracts from customers;
• a new standard for reporting by superannuation plans;
• guidance standards for the public sector and not-for-profit sector in relation to applying consolidation standards.[43]

3.34         The annual report recognised that progress on developing standards for leasing and insurance has been slower.[44]

3.35         The annual report indicates that during 2013–14 the AASB had 66 active projects and 11 inactive projects. Of the 66 projects, 11 were not in the 2013–14 work program, but were additional projects initiated during the year.[45] The work program for 2014–15 provided in the annual report lists 25 projects.[46]

Committee view

3.36         The committee considers that the AASB has fulfilled its regulatory and reporting responsibilities during the 2013–14 financial year. The committee notes that the AUASB has implemented previous recommendations of the committee and the Senate Economics Legislation Committee relating to including information in its annual report on external scrutiny, staff classification levels and salary ranges, disability reporting, and environmental performance.[47]

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