Regulation of auditing in Australia: What does the future hold?

On 1 August 2019, the Senate referred an inquiry into the regulation of auditing in Australia to the Parliamentary Joint Committee on Corporations and Financial Services. The report of findings and recommendations was released on 11 November 2020.

One of the main themes acknowledged in the report, which forms the basis for recommendations, is that in this radically changing environment, independent and accurate external auditing is more critical than ever in helping determine efficient and effective capital allocation. Most would agree that recent headwinds – not the least being the COVID-19 pandemic – have created a heightened level of general uncertainty.

The report therefore makes recommendations which are expected to improve the business community’s ‘perception of the auditing profession’ in light of audit failures, perceived lack of visibility of accountability of auditors, and auditor independence considerations.

The report includes the following recommendations:

• The Australian Securities and Investments Commission (‘ASIC’) formally review how it publicly reports the findings of its audit inspection program, with a focus on the transparency and relative severity of identified audit deficiencies. This could include the findings being presented on ASIC’s website.
• The Financial Reporting Council (‘FRC’) and ASIC oversee consultation, development and introduction of defined categories and fee disclosure requirements in relation to audit and non-audit services, and a list of ‘explicitly prohibited’ non-audit services.
• The Corporations Act 2001be amended so that an auditor's independence declaration is expanded to require the auditor to specifically confirm that no prohibited non-audit services have been provided.
• Accounting Professional and Ethical Standards (‘APES’) Board consider revising the APES 110 Code of Ethics to include a safeguard that no audit partner can be incentivised, through remuneration advancement or any other means or practice, for selling non-audit services to an audited entity.
• ‘Auditor tenure’ be disclosed in annual financial reports.
• The Corporations Act 2001be amended to implement a mandatory tendering regime such that entities required to have their financial reports audited must undertake a public tender process every ten years; or explain ‘why not’.
• The FRC oversee a formal review of the sufficiency and effectiveness of reporting requirements under the Australian standards in relation to the prevention and detection of fraud, and management's assessment of going concern.
• The Corporations Act 2001be amended such that entities required to have their financial reports audited under the Act, must establish and maintain an internal controls framework for financial reporting. In addition, such amendments should require that management evaluate and annually report on the effectiveness of the entity's internal control framework; and the external auditor report on management's assessment of the entity's internal control framework.
• The Australian Government take appropriate action to make digital financial reporting standard practice in Australia.

There is significant work to be undertaken to further investigate and implement the above recommendations which will impact companies as well as auditors. However there is no doubt that there are changes afoot which will change the audit landscape – as auditors would say - ‘materially’.