AICD submission to Treasury consultation on positioning Australia’s financial reporting system for the future – draft legislation

Specifically, the draft legislation to merge the Australian Accounting Standards Board (AASB), the Auditing and Assurance Standards Board (AUASB), and the Financial Reporting Council (FRC) into a single body called External Reporting Australia (ERA).

The AICD’s submission focused on aspects of the draft legislation that are particularly relevant to AICD members, including the creation of a fit-for-purpose, internationally aligned, body that can oversee high quality corporate reporting including the development of standards.

As we enter a new era of standard setting, we made several policy recommendations, including implementing a more robust regulatory impact assessment process that truly reflects compliance costs and conducting mandatory post-implementation reviews of major regulation to ensure it is working as intended. It must be recognised that the AASB and AUASB have significant standard making powers, which entities must comply with under relevant primary legislation. Accordingly, it is critical that future standards developed by the ERA, as a form of legislative instrument, are afforded appropriate scrutiny and post implementation review.

The AICD made the following recommendations:

• Board size – We recommended implementing a minimum number of between 6-8 members for each of the three initial standard-setting boards (i.e. accounting, auditing and assurance, and sustainability), which retains the flexibility to increase its membership depending on the future technical needs. We also recommended increasing the upper limit of the Governing Council to 12 members, to help achieve the design principle of allowing greater flexibility for the ERA to meet future governance needs.
• Board composition – We recommended drafting that clearly outlines that appointments to the Governing Council and standard-setting boards should follow processes that are transparent, rigorous and driven by skills matrices.
• Appointments – We encouraged the government to take a considered approach that draws on any insights gained from the Briggs Review, rather than Treasury developing a model that may be misaligned with the findings of that process.
• Functions and powers – We recommended explicitly outlining international engagement and research as critical functions for the ERA to ensure the alignment of Australia’s standards globally.
• Cost/benefit analysis – We recommended extending cost/benefit analysis to material auditing and assurance standards for completeness. We also recommended specifying that the ERA must conduct a periodic cost/benefit analysis of the collective stock of accounting, auditing and assurance, and sustainability standards to ensure the volume of regulatory burden on entities is necessary and proportionate, mindful of the desire to maintain international alignment where possible.
• Broader reforms – We recommended government clarification of how there will be broader system oversight of audit quality. We noted the outstanding government response to the Parliamentary Joint Committee on Corporations and Financial Services inquiry into the audit, assurance and consultancy industry and last year’s Treasury consultation on the regulation of accounting, auditing and consulting firms in Australia. This has led to a significant period of policy uncertainty on fundamental aspects of Australia’s financial reporting system.Transitional provisions – We recommended establishing strong succession planning processes for key roles across the Governance Council and standard-setting boards, aided by an up-to-date board skills matrix.
• Transparency measures – We recommended including public accountability mechanisms such as ensuring the Minister issues a Statement of Expectations (SOE) and ERA publishes a refreshed Statement of Intent, as soon as practicable.
• Post-implementation review – We recommended mandating a post-implementation review of the ERA (i.e. powers, functions, composition) to ensure it is working as intended (for example after five years).