Letter from the Institute of Chartered
Accountants in Australia (ADT 23)
The Institute of Chartered Accountants in Australia
(Institute) is pleased to have the opportunity to respond to the
above Call for Evidence. The Institute is Australia's premier
accounting body, which represents over 50,000 professional accountants.
Our members work in diverse roles across public practice, commerce,
industry, government and academia through Australia and internationally.
The Institute is a founding member of the international
accounting coalition called the Global Accounting Alliance (GAA),
which provides reciprocal arrangements with ten of the other leading
accounting bodies in the world. The Institute is the only Australian
accounting body within the alliance. The GAA represents more than
778,000 members world-wide and includes professional accounting
organisations from America, Canada, Hong Kong, England/Wales,
Ireland, Scotland, Japan, Germany, New Zealand and South Africa.
We have limited our comments in this response
to the issues and questions where we believe we can substantially
add to the richness of the evidence and to provide a non-European
perspective. We have not reflected on many of the questions relating
directly to the banking crisis of 2008. Australia was at the periphery
of the crisis but did feel the waves of impact primarily through
fragmentation of the global funding markets. Our banking and financial
systems served us well during the crisis.
The scale of international financial market
activities has grown substantially over the last 10 to 15 years.
In particular the growth of cross-border financial activity is
even more rapidinternational capital flows have been increasing
at over 10 per cent a year over the last 15 years. As business
and the financial markets have grown and become more international
there has been a strong desire from parts of the business community
to have one audit firmacross many jurisdictionsmeet
their needs. This desire has been a strong incentive to some firms
to continually build their global size.
In setting a context for our response, we wish
to outline three particular themes which we believe are important
Future of Auditthe global events
of recent years have shown that there is more work to be done
by all stakeholders to contribute to identifying, analysing and
responding to "systemic risk". Systemic risks stem from
the size and complexity of institutions and their relationships
with other parts of the financial systems. Many and varied proposals
about systemic risk have been brought forward. An auditor's current
practice with its clients is to identify risk within the company.
However it can be seen looking forward that there will be much
greater emphasis at country level as well as industry and company
level on business risks. Auditors are well placed to be involved
with the reporting on risks to the business model and the potential
for that model to fracture.
Continuous Assuranceenabling technology
now permits business to be conducted 24 hours a day, every day
of the year. While this dramatic change has occurred in the business
environment, the financial reporting and assurance model continues
to focus on the past, reporting in accordance with a historical
financial reporting framework. In our view there is merit in exploring
changes to this model to permit "closer to the event"
assurance in order to align the assurance model more closely to
the business model. The term "continuous assurance"
is used to describe such a model. It may well be that this type
of assurance is complementary to, but does not replace the current
historical financial reporting framework. We attach a copy of
our recent thought leadership paper on continuous assurance.
Audit QualityShareholders, company
directors, audit committee members, auditors and regulators all
agree that quality external auditing is fundamental to capital
market confidence. In just a few years the concept of audit quality
has evolved from being a relatively static concept, loosely discussed
and poorly acknowledged to having "real" substance and
understanding. The pace of evolution of Audit Quality is accelerating
and there are great opportunities for the audit firms and professional
bodies to influence the ongoing enhancement for the benefit of
all. For example in recent years there has been significant work
in clearly understanding the drivers of audit quality. That work
is then used by participants and stakeholders with the common
goal of continuing to improve audit quality. We produced The
Benefit of AuditA Guide to Audit Quality based upon
the drivers to enhance communication (in plain English) between
the audit committee and the external auditorit has been
well received. We attach a copy of our Guide.
Australian Treasury noted earlier this year
that our audit regime compares well with international best practice
and that the audit regulatory framework appeared to be functioning
effectively during the current uncertain economic conditions.
We believe that the above three themes are of sufficient importance
that we will be investing substantial resources in their further
Finally, in presenting an Australian perspective,
it is important to recognise the presence of Professional Standards
Legislation in our regulatory framework that places limits on
the liability of auditors. This is important in keeping audit
attractive to providers, because of its impact on reducing the
incentive or the need for auditors to exit public practice, as
well as reducing the barriers to entry. It is also an essential
driver of overall audit quality and in ensuring that the market
continues to receive quality audit services.
1. Why did auditing become so concentrated
on four global firms? For example, do economies of scale make
it too difficult for smaller firms to compete?
The emergence of four major audit firms over
the last 10 years is due to a number of factors. Firstly the increasing
globalisation of business and clients' preference for engaging
one firm of auditors in all the jurisdictions in which they operate.
Clients do value all of their operations being subjected to independent
external audit using the same approach and methodology. The globalisation
of business has also led to dominance of certain providers of
other types of commercial activitiesoutside of auditingsuch
as investment banks.
Secondly the rapid demise of Arthur Andersen
in 2002 left a considerable limit on audit firm options.
Thirdly the ascent of significant engagement
and public commentary by audit regulators has led to some rationalisation
of audit providers. Some practitioners in Australia have considered
it more beneficial to change their business models to move away
from auditing services to the delivery of other types of accounting
services. We have seen a contraction in the Australian market
of audit firms and registered company auditors.
However, the first question being asked could
infer that only the four major audit firms are capable of servicing
multinational clients. The Institute's experience is that this
is not the case, and many firms other than the four majors can,
and do, provide quality auditing services to multinational clients.
2. Does a lack of competition mean clients
are charged excessive fees?
Whilst the Australian listed market's audits
are dominated (by market capitalisation) by the four major firms
there are approximately 100 different audit firms currently engaged
with a listed client. There is not a lack of competition amongst
audit firms in Australia. There is strong contest around audit
and current evidence showing aggressive fee reductions to encourage
clients to change auditors or incumbent auditors to retain clients.
This strength of fee competition has recently
led our audit regulator to take certain actions to preserve the
delivery of quality auditing. The Institute has warned our members
that audit files of entities which have changed auditors and where
a substantial fee reduction is evident, will attract closer scrutiny
under our quality review program to ensure fee reductions do not
lead to a reduction in audit quality.
5. What is the role of auditors and should
it be changed?
Notwithstanding many years of work on the clarity
of communication, the role of external auditors in general is
not well understood by many stakeholderseven by groups
who have regular on-going contact with their auditors. The "expectation
gap" ie the differences between what auditors do and what
stakeholders perceive they do is very much aliveand potentially
growing wider. The statutory audit reporta primary output
of an auditis important to stakeholders in terms of the
fundamental assurance it provides, enhancing the credibility of
information reported on. However the current model of audit needs
to change and expand. Part of this change lies in the general
annoyance that audit is seen to be only focused on the past and
"why didn't the auditor see this beforehand?"
The role of the auditor has been, and continues
to be, to provide an independent professional opinion on whether
the financial statements of the entity present fairly the entity's
state of affairs and financial results for the period. The financial
position and operating results directly reflect the results of
the decision of management and the Board of Directors of the entity.
We believe that the role of the auditor should
be expanded to focus on:
(i) the reporting of risks to the business model
(ii) "closer to the event" assurance.
We have outlined these themes in more detail
in our opening comments to this response.
7. What, if anything, could auditors have
done to mitigate the banking crisis? How can auditors contribute
to better supervision of banks?
As mentioned above, it is not currently the
responsibility of auditors to assess and report on risks to the
business model. That area has clearly been the responsibility
of the entity's Board of Directors and management. However if
that role of the auditor could be expanded we believe that it
would assist with the identification of systemic risk and the
supervision of the banking sector.
10. Do conflicts of interest arise between
audit and consultancy roles? If so, how should they be avoided
Conflicts of interest can arise between audit
and consultancy roles being performed by the same audit firm.
The conflicts could be real or perceived. However the main issue
here is how the firm and individual practitioner identify and
responds to those conflicts.
Our members of the Institute are obliged to
comply with the IFAC Code of Ethics for Professional Accountants.
The Code is principles based and adopts a "threats and
safeguards" approach to potential conflicts of interest.
There are a range of responses that a firm may use with different
circumstances including not accepting work or terminating an engagement
if a conflict arises. Furthermore, some jurisdictions have prohibited
specific activities or relationships which are considered to impair
In Australia the Corporations Act 2001
prohibits audits being undertaken where certain conditions are
With the increasing focus on conflicts of interest,
audit firms have invested heavily in developing systems, policies
and processes to record and identify any potential conflicts of
interest. They also have well developed approaches to responding
once a conflict is identified. Also with the ascent of audit regulators
in recent years, a considerable amount of their work has been
focused on understanding how the independence of audit services
is delivered and the focus on conflicts of interest. All of these
initiatives have added greatly to managing conflicts of interest.
Also we would bring focus onto the important
role that the Audit Committee has to play in monitoring any non
audit services that may be provided by the auditor's firm and
determining whether there any threats to the independence of the
auditor. The Audit Committee must work with their external auditor
to ensure that conflicts of interestreal or perceivedare
12. Should the role of internal auditors
be enhanced and how should they interact with external auditors?
The role of internal audit is an essential contribution
to the accountability and governance arrangements of a company.
It plays an essential function of being "the eyes and ears"
for the audit committee. Our analysis shows that there are a number
of areas of better practice in the way internal audit operate
and those should be further developed and adopted. For example
the reporting lines for internal audit should be appropriate and
there should be clear alignment and integration with risk management
Also the role of the internal auditor could
become even more effective if the current reporting and assurance
model is supplemented by closer to the event assurance. Our thought
leadership paper Continuous Assurance for the Now Economy,
". . . the emerging field of Continuous
Assurance attempts to better match internal and external auditing
practices to the reality of the IT-enabled entity in order to
provide stakeholders with more timely assurance." The
paper further suggests that most large organisations have several
audits (internal, fraud, compliance, quality assurance, Basel
II) which often have different structures and platforms and do
not share findings. "Rationalisation of these audit-like
functions, closer coordination and technology integration with
external audit, and common platforms for audit/compliance, etc
would create efficiencies and substantial improvement in the handling
As more experience is gained in closer co-operation
it is likely that the audit model will evolve to extend reliance
on the work of internal auditors in certain circumstances.
We believe there is great benefit in exploring
this thinking for the role of internal audit further.
13. Should the role of audit committees be
An independent audit committee is a fundamental
component of a sound corporate governance structure. Importantly
it brings together in one place non-executive directors, management,
external audit, internal audit and advisors. The role of the audit
committee has evolved significantly in the last 10 years and will
continue to evolve. It has moved from being a fairly limited function
primarily focused on the completion of the audited financial statements
to a much broader and integrated focus of responsibilities. Drivers
of this evolution include regulatory expectations, market expectations
and better practice initiatives members and auditors gain in closer
We believe that further enhancements can and
should be made to the role of the audit committee. An essential
element of the audit committee's role is to interact effectively
with the external auditor towards obtaining a quality audit. In
order for this to happen the audit committee needs to be equipped
to understand what a quality audit entails and to engage with
their auditor meaningfully. We are assisting with this goal and
have a range of initiatives underway to assist the director and
audit committee community. To support these initiatives we have
used The Benefit of Audit: A Guide to Audit Quality.
We also believe some further analysis needs
to be undertaken about potential "barriers" to effective
audit committees and how those barriers may be overcome. This
could include what potential changes could be made to the law
(if any) to allow auditors to provide more meaningful reports
for the better performance of the audit committee.
Communication between auditors and the audit
committee is important, as is communication between the audit
committee and the company's stakeholders. In our view there is
merit in exploring an enhanced role for the audit committee in
external communication and contributing to an improved understanding
of what auditors do.
14. Is the auditing profession well placed
to promote improvement in corporate governance?
Yes. In short, the training and experience auditors
receive make them invaluable in promoting improvements in corporate
governance. In addition it is the auditor who is able to engage
with a client in a close and meaningful way but still retain that
view of independencethat is a rich and unique perspective.
The IFAC Code of Ethics for Professional
Accountants is the foundation on which the work of professional
accountants and auditors is constructed. More particularly, the
Code embodies the fundamental principles of integrity, objectivity,
professional competence and due care, confidentiality and professional
behaviour, which are integral in all the professional work undertaken
The auditing profession in Australia already
makes a substantial and broad contribution to improving corporate
governance practice and that contribution should be developed
further for the benefit of all.
Mr White: I can, thank you. Good morning, or
should I say good afternoon?