Wednesday 08 November 2006 LAWFUEL – Law News, Law Jobs Network – Th…

Wednesday 08 November 2006 LAWFUEL – Law News, Law Jobs Network – The Australian Securities and Investments Commission (ASIC) today advised that its’ ongoing audit inspection process will pay particular attention to auditor rotation requirements. As well as continuing to focus on the effectiveness of the audit firms’ systems to ensure independence and quality, the next round of inspections will also examine how firms are managing the practical application of the auditor rotation requirements, which became effective from 1 July 2006.

ASIC’s Executive Director of Compliance, Ms Jennifer O’Donnell, said rotation was a foundation element of ensuring auditor independence and ASIC would be interested in how firms are not only meeting the independence requirements but also documenting how they are complying with them. ‘In addition, given the legal enforceability of auditing standards and new professional and ethical standards from 1 July 2006, our inspections will focus on how the firms are managing this transition,’ Ms O’Donnell said.

ASIC will conduct follow-up inspections of all Big Four and Mid-Tier firms visited in 2005-2006. These inspections will assess the actions taken by the firm resulting from the previous inspection’s findings. There will also be a focus on each firm’s quality control systems to ensure these are still operating effectively. Ms O’Donnell said this year’s inspections would include visiting offices of Big Four firms not previously covered in the first and second-year inspections. ‘We will also conduct inspections of other partnerships of the Mid-Tier firms previously visited and other firms not included in the last inspection.

‘Our inspections will include reviewing the firms’ processes to prepare for the changes recently introduced by the International Federation of Accountants, which has broadened the definition of ‘network firm’ effective for audit reports dated on or after 31 December 2008. ‘ASIC will significantly increase the number of audit engagement file reviews, with particular focus on those auditing standards, which our previous inspections showed were poorly applied,’ Ms O’Donnell said. To ensure ASIC’s inspection methodology is as relevant as possible, it is aligned with that of other international regulators, such as the Public Company Accounting

Oversight Board (PCAOB), the United Kingdom Financial Reporting Council (UK FRC) and the Canadian Public Accountability Board (CPAB). The Federal Parliament is considering a bill to amend legislation to allow ASIC to enter ‘co-operative audit arrangements’ with foreign corporate regulators such as the PCAOB. ASIC will continue to liaise with the PCAOB and other international audit oversight bodies with the intention that we will conduct work jointly with them in respect of the Australian audit firms that are registered with them.

‘The PCAOB has indicated its desire to develop cooperative arrangements which rely on ASIC’s regulation to the maximum extent possible,’ Ms O’Donnell said. During 2005-2006, ASIC inspected the Big Four firms and a select number of Mid-Tier firms. The focus was broadened from previous inspections to also assess whether the firms had documented and implemented a quality control system that provided a reasonable assurance that audits would be conducted in accordance with legal requirements.

In its report on the 2005-06 inspections, ASIC identified that: • the firms had generally responded positively to the new Australian legislative requirements but policies and systems were at varying levels of quality and maturity; • there were variations in the levels of compliance with the firms’ policies and systems; • results varied considerably between the Big Four firms and the Mid-Tier firms as the challenges faced by these respective groups of firms and the resources available to them are significantly different; and • there was a need to further improve the quality of audit work being done on the financial statements by both the Big Four and the Mid-Tier firms. Background Under the Corporations Act 2001, ASIC has responsibility for the surveillance, investigation and enforcement of the financial reporting requirements of the Act, including the enforcement of audit independence and audit quality requirements.

These requirements were significantly enhanced with the enactment of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosures) Act 2004 (CLERP 9) on 1 July 2004. For further information contact: Jennifer O’Donnell Executive Director, Compliance Telephone: 02 9911 2123 Mobile: 0411 549 257 Angela Friend ASIC Media Unit Telephone: 03 9280 3338 Mobile: 0412 058 800

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