Auditor independence revisited ASIC

Just how independent are your auditors from you and your company? 

Compare how you fare with the results of our survey of auditor independence, find out a little about the Ramsay Report, and even start thinking how you can improve auditor independence "in your own backyard"... Last year, we surveyed 100 of Australia's largest companies on their relationship with their auditors. Our survey was designed to find out the current situation in Australia and was carried out with the support of the Group of 100. The identity of all respondents is confidential in keeping with the voluntary nature of the survey. Out of the 100 companies surveyed, 67 responded with comprehensive replies.

What the survey revealed

While interpreting results of this limited survey requires caution, the findings are a useful addition to available data and support the following propositions:

• provision of non-audit services by audit firms to their Australian clients is widespread, at least for major corporates (almost all respondents to the survey confirmed having retained their audit firms to provide other services, particularly taxation advice)

• audit firms are earning substantial fees for non-audit services (on average, the non-audit fees accounted for nearly 50 percent of total fees paid)

• processes for dealing with potential conflicts of interest require attention (most companies lacked robust processes for ensuring that the independence of the audit was not prejudiced by the provision of non-audit services)

• rotation of audit partners remains inconsistent (less than half of the respondents required it) and rotation of firms is almost non-existent

• companies don't monitor investments in their securities by their auditors' superannuation funds

• only a few companies have former audit firms' partners on their board (and only a small number have employed ex-audit staff in the company as senior executives)

• the vast majority of respondents had an audit committee in place with appropriate operating guidelines.

Last year, while we were conducting this survey, the Commonwealth Government was also looking into the auditor independence issue, in commissioning the Ramsay Report.

The Ramsay Report

As you may know, the Commonwealth Government commissioned Professor Ian Ramsay to examine Australia's existing legislative and professional requirements for company auditor independence; compare them with equivalent overseas requirements; and propose measures to strengthen Australia's requirements. he report was prompted, not only by the listed corporate failures of 2001, but also by recent overseas work in the area of audit independence, especially in the US and Europe. The independence requirements of these regions are currently ahead of equivalent requirements in Australia. The Ramsay Report, published in October 2001, made many recommendations to strengthen auditor independence, including:

• amendments to the Corporations Act specifying employment and financial relationships with clients, which, if they exist, mean the auditor is not independent

• amendments to the ethical rules of the professional accounting bodies specifying business relationships which, if they exist, mean the auditor is not independent

• mandatory disclosure of non-audit services and the fees paid for those services

• strengthening the role of audit committees

• setting up an Auditor Independence Supervisory Board, to monitor audit firms, companies, the teaching of professional and business ethics; and to advise professional bodies on auditor independence issues.

Practical steps

While we all sit tight and wait to see how the Government responds to these recommendations, it's a good idea to start thinking now, what practical steps you can take to improve auditor independence in your own company. Public debate has already brought to light a number of different measures, some of which include:

• periodic rotation of audit firms by companies

• ensuring that the company's current audit firm discontinues provision of non-audit services, including tax services, during the time the firm is engaged as the company's auditor.

Once the Government makes its position known on the Ramsay recommendations, we will then be able to develop and finalise our view on potential regulatory measures. In the meantime, we will continue to work with the corporate community and the auditing profession to promote better understanding of the issues involved and better ways toward more independent auditors.

For additional background to our survey, including a summary of the responses, visit www.asic.gov.au. For a copy of the Ramsay Report, visit www.treasury.gov.au

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.