The essence of a good law is that it enhances and serves their intended purposes. This means that it does not cost too much to comply with the laws and regulations such that it defeats the logic behind it all. A good law should also be simple and easy to understand so as to avoid complexities and lack of clarity.
The current Australian laws and regulations on the independence of auditors and corporate governance need a review. And this is the reason why the government proposed some changes in 2006. the new proposed changes are expected to correct the mistakes contained in the Corporate Law Economics Reform Program (Audit Reform and Corporate Disclosure) Act 2004 famously called CLERP 9 (Pearce, C. 2006).
These changes include the amendments effected in the Corporation Act 2001 touching on the auditor’s independence. Under these changes an audit firm owing more than $5000 to the audit chief is banned from auditing that client unless that Audit Company is day to day business is lending money. Cheques and saving accounts are not treated as part of the loans that are banned. Under the corporations Act 2001, ASIC had no authority to extend the duration beyond 21 days which the auditor and client could resolve a conflict. The new proposals will give ASIC powers to extend the period beyond 21 days (Sec 237 (2A) S 237 (2B) and S 237 (2C)) (Pearce, C. 2006).
The ASIC also relaxed the rules on auditors independence declaration and exempt auditors from declaring independence if a breach of the provisions and the auditor can sufficiently rely on the defense of the quality of the control system.
Apart from the already existing proposed changes I would also recommend the introduction of the banned Non Audit Services and the introduction of the prior approval policy by the client audit committee on the provision of some NAS.
The provision of NAS and audit services by the same audit company to the same audit client is seen to be the major threat to the independence of the auditors.
Under my proposed changes, I would recommend the prohibition of NAS like book keeping services on the client’s accounts and financial statements advice on the design and implementation of the financial system of the client, human resource and management services, mergers and acquisition advice actuarial and pension services, valuation and brokerage or dealership services. The prohibition will basically be almost similar to SOX Act 2002. The aim of these changes is to limit the number of NAS and avoid those NAS that are seen to be severely affecting the auditor’s independence.
It would then introduce the prior-approval policy whereby the client’s audit committee can and will need to give prior approval to the provision of other NAS not expressing banned under the new proposals.
The other change I would propose is that of auditor’s rotation. The current regulation states that the auditors of a company will have to be changed if they have audited in at least 5 out of 7 financial years. I would introduce a regulation requiring mandatory rotation of auditors if an auditor has audited a particular client in the last 4 out of 5 financial years. The essence of this is to limit the development of close interpersonal relationship between the auditors and the client which may negatively affect the independence and objectivity of the auditor. The other purpose of these change is to limit the company from selling its NAS to the auditor because of their close relations.
These are only some of the changes that I would recommend to reinforce the current regulatory environment in Australia.
References
Pearce, C. (2006). Corporate and Financial Services Regulation Review. Proposals Paper. (Online). 2008. Web.