What exactly will the world look like when all the reformers presently running amok put some kind of cure in place to fix the problems they perceive to exist?
It is a question each concerned director, CEO, chief financial officer and auditor must turn their minds to, because during the next few months the consultations on the ninth tranche of the Corporate Law Economic Reform Program (CLERP) dealing with audit regulation and corporate disclosure are set to begin. These consultations will be a prime opportunity to shape federal government policy before draft legislation is produced and, of course, the customary village haggling begins in the Senate. The CLERP 9 discussion paper, due out in the next month, will be the Government's main piece on audit regulation. It will also be more overt than the initial consultations and discussions held with Professor Ian Ramsay by the profession and others last year. While Ramsay's appointment was known within professional circles, no formal call for public submissions was ever published. The findings, however, were published in October and the submissions sent in response to the report have no doubt been read by somebody in Treasury.
Add the HIH Royal Commission to the Ramsay Report and the recently convened public hearings by the Joint Committee of Public Accounts and Audit (JCPAA) into audit independence and you will probably have a solid body of material – much of it repetitive – for corporate archaeologists to dig over for years. The consultations, however, that matter will be the ones taking place as a part of the CLERP 9 process, because it is those discussions that will lead Senator Ian Campbell, the parliamentary secretary to the Federal Treasurer, down the path of setting policy and specifying what, if anything, must change. This round of consultations will take place at a better time that the ones leading up to Ramsay's report, because enough time has passed between the initial avalanche of publicity and analysis over the HIH collapse as well as the Enron saga for market players to not feel as though they are under siege. Some in the profession feared speedy action from legislators following the HIH collapse and other corporate calamities because they felt, quite rightly, that any response would be merely populist and unhelpful in the long-term.
These discussions are also taking place in an environment where the accounting profession is being asked to justify its arguments very publicly on issues that have been seen as being on the periphery at other times in the economic cycle. The focus on the profession has not been as intense over the past few years as it is now. That is also evident with the unprecedented increase in media coverage on accounting and auditing matters in recent times. Journalists have even discovered the existence of bodies such as the Audit and Assurance Standards Board, which for a time must have been the accounting profession's best-kept secret even though it has met in public for several years. Senator Campbell will need to tread warily through the minefield of reform in the area of audit regulation because there are many suggestions littered throughout the landscape and only few actually have some prospect of working. Some of the more curious suggestions may surface when any legislation in draft form filters its way through the Federal Parliament early in 2003.
That's one reason why the Charles Committee hearings on auditor independence have a high degree of utility. Many of the points made before the committee have been made elsewhere, so the interest will lie not in the responses of the witnesses appearing before the committee but the dialogue, attitudes and questions being asked by the parliamentarians themselves. Any strong bias, for example, on issues such as banning all or some non-audit services could be carried into broader debate when the legislation becomes subject to the scrutiny of parliamentary representatives. Andrew Lumsden, former chief of staff of the former minister for financial services and regulation, made a salient point during a recent presentation to a conference on future directions in accounting and auditing. He said participants in the lobbying process must remember the realities of political compromise. Understanding where the opposition parties are likely to sit on issues is just as important at this point as is understanding why the Government has opted for further consultation in the area of audit regulation and corporate disclosure.
An appreciation of those political dynamics inside and outside Federal Parliament is critical for those seeking to influence the process over the next six to nine months. Some media commentators have demonstrated an intolerance for the additional consultation period, preferring to see the Government play its hand immediately, rather than go through further dealings with the broad range of constituents. It is somewhat difficult to see where things are so broken and in such disrepair that impatience from the press and – to be fair – other market participants needs to be immediately satiated by legislative change. Little would be achieved, for example, if auditing standards were given the equivalent backing under the Corporations Act as is enjoyed by accounting standards. While the proposal is cosmetically appealing, it would achieve next to nothing in terms of ensuring audit quality. Statutory backing for accounting standards would also do little to impact on the content of the standards themselves. We are in the era of globalisation. Auditing standards dealing with financial statement audits are primarily being set by the international board known as the International Audit and Assurance Standards Board (IAASB).
That body produces material that is deliberated on by the domestic Auditing and Assurance Standards Board (AuASB). Statutory backing and, presumably, the creation of a statutory board to issue standards with statutory backing will have minimal scope to make alterations to the standards flowing from the international process. Another suggestion that has been thrown up during the recent JCPAA hearings by the JCPAA chairman Bob Charles is the concept that audit firms themselves should be listed on an exchange so they themselves are audited. All of the witnesses on the first day of the hearings were asked by the chairman to consider the potential impact of making audit firms listed companies. The chief executive of the Institute of Chartered Accountants in Australia, Stephen Harrison, indicated that the limited liability aspects of such a scenario would be appealing to the auditing profession. Some other things, however, might not. "My initial reaction is that we were talking about some of the effects of short termism in listed entities, because the marketplace sets the price and people behave to try and ensure that there is a healthy market price," Harrison asserts. "I am not sure that I would want to see that becoming a factor within accounting firms and audit partnerships."
Harrison's point is only one of the primary conundrums in the notion of having audit firms audited because they just happened to be listed companies. The appeal in the proposal is a listed audit firm might be perceived by some in the community to be going through a comprehensive review because it is undergoing an audit of its financial statements. While the suggestion has that superficial, cosmetic appeal it would do no more than assure users of financial statements that the audit firm has people working for it who are capable of bookkeeping and appreciate the need to follow and comply with accounting standards. A financial statement audit of an audit firm would not tell you how well the audit team on another listed company is fulfilling its task. It might report the results of doing poor client work if the revenue levels decline because clients are leaving as a result of poor audits being conduct. That is in itself a rash and flimsy assumption because a drop in revenue could occur because of the interplay between a wide-range of variables.
A drop in a reported result between one reporting period and the next could well mean that the audit firm has had to hire more audit staff to cope with greater complexities in the conduct of audits. There may also be a division of the firm that has broken away or been sold and, therefore, a previous revenue stream has disappeared as a consequence. Merely subjecting audit firms to an audit is not the answer to the central question of how best to create a catalyst to discourage complacency within audit firms and the general business community. That is counterintuitive. What the JCPAA chairman is presumably asking is how does the community develop and maintain a high degree of confidence in the work done by the auditing profession. This could only be achieved in the circumstances where there is a detailed review of the controls and procedures of audit firms, their audit manuals and any technology methodologies that are a part of the conduct of audits. What Bob Charles appears to be asking for is a performance appraisal of audit firms that would be achieved on through practice reviews or, put in the public sector audit vernacular, performance auditing.
This is a completely different form of assurance and seeks to assess auditor performance using other criteria that would not be within the scope of a traditional financial statement audit. Only such a performance audit or practice review would deliver what the JCPAA chairman wants: an assessment of the performance of auditors doing the audits of Australian companies. The role of oversight boards for the auditing side of the profession needs further consideration in the coming consultations so any oversight authority has some bite. Barking without having any power to back up the noise is a bit like a watchdog going into battle having left its dentures in a glass back at the kennel. Another question the profession and other market participants should be asking themselves is whether a body similar to the Companies' Auditors and Liquidators Disciplinary Board should deal with financial reporting matters impacting on the financial statements of individual companies. Such a board should be composed of a panel of accounting experts, directors and academics and be called on to determine what the appropriate accounting treatment should be in a circumstance where there is a dispute between the corporate regulator and a company.
That must be considered as an alternative to the rather prolonged and much delayed theatrics of a court of law where accounting issues are often decided by individuals that have at best a casual familiarity with the way such guidance is applied in practice.
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