Name Summary Comments. Accounting Standards Review Board (ASRB)

Transcription

1 Name Summary Comments Accounting Standards Review Board (ASRB) Submission relates to Part 4 of the bill, which will transform the ASRB into the External Reporting Board (XRB), with a wider set of responsibilities. Supports the intent of this part of the bill; its comments are of a technical nature, designed to improve the functioning of the XRB and the efficiency of standard-setting arrangements, by adjusting a few clauses. Charities Commission Submission relates to Part 4 of the bill. Supports the proposed amendments to the Financial Reporting Act Considers, in particular, that: The XRB s obligation to act independently is appropriate. The requirement for the Board to consult those who may be affected by a proposed standard is a positive and necessary corollary to the standard-setting power. The power of the Board to set tiers of financial reporting for different classes of reporting entity is practical. A tiered approach to financial reporting standards should ensure that the impact on small entities is appropriate. Deloitte Supports the intent of the bill, but has some concerns. Criminal sanctions: Vigorously disagrees with the proposal to give auditing and assurance standards the force of law, and make non-compliance a criminal offence. Submits that section 87 should be deleted, for the following reasons: Submits that criminal offences should be reserved for actions that are perpetrated with criminal intent, and should not apply to inadvertent or even negligent breaches; these should be handled by the disciplinary processes that are already required under the Institute of Chartered Accountants of New Zealand Act NZICA processes are stringent and the results are public; this is sufficient to ensure compliance as an auditor s reputation is paramount to their obtaining future work. Auditors already face the threat of material civil penalties should they be negligent. Making the requirements legally enforceable will encourage a tick box approach by auditors, whereas to maintain audit quality an auditor should use judgement.

2 Does not believe that international auditing standards were written by the International Auditing and Assurance Standards Board with the intent that failure to meet any particular requirement would be a criminal offence. Proving a criminal offence would be a lengthy and expensive process. Auditing would be very different under such a regime. Potential criminal liability would be a significant disincentive to people entering or remaining in the auditing profession. If section 87 is not deleted, would prefer to see a more stringent standard applied, rather than imposing criminal sanctions. For example, a test of intent, that an auditor has wilfully, recklessly or fraudulently failed to comply with a standard. Licensing firms rather than individuals: Like other submitters, favours licensing of firms, which then recommend individual partners. Penalties for non-compliance: Opposed to provisions hat would hold each partner in a firm liable to individual fines. This would include non audit partners and would give rise to a fine determined based on the size of the partnership, not the severity of the offence. Licensing conditions: Agrees with the FMA having the ability to attach conditions to a licence, including specifying the kinds of issuers an auditor may audit, but considers that this should be rarely used, with most auditors being fully licensed. Overseas auditors will need to have specific conditions imposed. Overseas auditors: Similar points to other submitters about need for level playing field. Quality reviews: Like other submitters, would prefer an aggregated form of public reporting. Also, submits that audit firms and auditors should be given the opportunity to see and comment on the report prior to publication, and be able to publish a firm response. Investigations by the FMA: Submits that the FMA should have the ability to impose a lesser sanction than cancelling or suspending licenses, such as issuing a direction to take corrective action and report back, or to have a peer review by another licensed auditor or the appropriate accredited body. Funding of FMA: Submits that both the FMA and the XRB are required to serve the public interest and therefore the Government should fully fund their activities. They should not be funded by a tax on issuers, licensed auditors, the Auditor-General, and other members of associations of accountants. (Considers the levy a tax, not a cost recovery, because the funders have no ability to influence the costs incurred.) Scope of bill: Stresses importance of ensuring that the definition of issuer is consistent across the Financial Reporting Act, the Securities Act, and this bill. Would expect the definition to capture all entities that are currently issuers as well as those that are in the process of issuing securities to the public.

3 External Reporting Board: Supports the proposals for the establishment, objectives, and operation of the XRB. Agrees with the standard-setting function moving to the XRB due to pressure from other jurisdictions for auditing standard-setting to be seen to be independent from the profession, but considers it crucial that the profession itself still has proper input to the standards. There needs to be clear delineation of which ethical and other standards the XRB will be producing and which NZICA will be responsible for, so that multidisciplinary firms are clear which standards they need to be in compliance with. Auditor liability: Like other submitters, disappointed that the introduction of auditor regulation has been divorced from the question of limiting auditor s liability. From an auditor s perspective we have been offered a harsh proposal force of law auditing standards which virtually no other country has, and no limitation of liability, which a number of other countries allow. Ernst & Young Endorses submission by NZICA, and offers the following additional comments: Criminal sanctions: Opposed. Submits that: There will be adequate incentives and deterrents without this measure. There is very limited international support for legally enforceable auditing standards. Not aware of any evidence internationally that criminalising breaches leads to increased audit quality. Proposal could significantly detract from the attractiveness of the profession over time. Other professions are not criminally liable (e.g. architects with leaky homes, surgeons with medical misadventure ) There is legal profession support for the view that only true crimes should have criminal punishment. Licensing firms rather than individuals: Cites reasons why it favours firm rather than individual registration. Auditor liability: Reform should be holistic. Strongly believes that wider reform should be considered in conjunction with, or shortly after, this bill. Reform of the liability arrangements applying to auditors is vital to address disproportionate liability sharing and potential collapse of a major firm following a corporate

4 failure. Notes that the auditor is often viewed as the last man standing, and as the party with deep pockets. Levies: Believes a levy on auditors could reduce audit quality and thus be counter-productive to the bill s aims. Submits that the investing public and issuers should fund the regime, rather than auditors. Scope of auditor registration: Would prefer registration to apply to all statutory audits, but if this is not considered appropriate for resourcing or financial reasons then accepts that the proposed focus on issuers is appropriate. Overseas auditors: Concerned that as the bill is currently drafted, the playing field is not level in a number of significant respects, which should be addressed. Also recommends change to definition of overseas auditor. Quality reviews: Submits that individual quality reviews should not be published; instead, proposes a regular summary report. Grant Thornton New Zealand Limited Endorses submission by NZICA. Supports bill in principle, but some aspects are of serious concern. Bill appears rushed. Alignment with Australia: Pleased by evident efforts to align with Australia, but bill is too much a cut-andpaste me too approach, rather than the more challenging functional equivalence. (As outlined below, supports replication of Australia s proportionate liability regime; does not support giving auditing standards the force of law, nor the decision to register individuals rather than firms.) Auditor liability: Submits that limitation of auditor liability should be dealt with in this bill. Does not accept officials arguments that the issue be parked. Criminal sanctions: Opposed. This level of sanction is simply not necessary. It is a radical move, and would put people off going into auditing as a career. Coverage of bill: A vast number of entities will not be covered by the bill (charities, not-for-profit entities, professional training establishments, and entities audited by the OAG), resulting in market segmentation and two standards of audit quality. Asks the committee to consider: Should there be two quality review regimes in place one run by the FMA for issuers, and one for all other entities by NZICA? Does the fact that after this legislation is passed, a significant number of audits will still be subject to NZICA s self-regulation create a concern? If not, why not? Notes that in Australia, regulation of auditors is across-the-board, and not restricted to issuers.

5 Reciprocity with Australia: Considers it unfair that the bill would allow Australian auditors to sign off audit opinions on New Zealand companies, but the reverse does not apply. Submits that assurances should be sought from the Australian Government that NZ auditors would be allowed to conduct audits in Australia; if these are not forthcoming, New Zealand should take a more defensive position in the bill. Licensing auditors: Concerned that the bill does not appear to guarantee that all audit firms will at least meet New Zealand standards. Cites possibility of a New Zealand auditor joining an overseas professional body because of a perception that it imposed lower standards. Transparency: Submits that meetings of the XRB should be held in public. KPMG Endorses submission by NZICA. Wishes to reinforce NZICA s comments on the following matters: Criminal sanctions: Vigorously rejects the assertion that criminalising breaches of auditing standards will enhance audit quality. Overseas auditors: Concerned by absence of level playing field, in that overseas jurisdictions do not provide reciprocal arrangements. Submits that modifications are needed to avoid widening the imbalance. Licensing firms rather than individuals: Submits that licensing should be focussed on the firm, with the firm itself accrediting individual partners. Auditor liability: The bill does not address concerns regarding the unlimited civil liability of auditors in New Zealand. Sees a risk that New Zealand could be left out of step internationally, given recent developments overseas (particularly in Australia) which have seen a liability limitation regime of some form for auditors. Submits that the bill could provide for such a regime by allowing either the ability to trade through a limited liability entity, a statutory cap on liability, or at a minimum, proportionate liability. Legislation Advisory Committee Submission comments on two aspects of bill: Criminal sanctions: Questions whether it is appropriate and necessary to extend the criminal law to auditors when they may in fact be already subject to professional disciplinary proceedings and civil liability for negligence for the same behaviour. To make auditors subject to both the criminal law and professional discipline may be somewhat excessive. Such is not the case in most other professions. Accessibility of standards issued by the XRB: Concerned that standards issued by the External Reporting Board are not required to be published. Submits that there should be a requirement to

6 make them available via the internet and for inspection or purchase as is the case with notices published by the FMA. New Zealand Institute of Chartered Accountants (NZICA) Supports the bill s objectives. Submission outlines specific concerns which, if addressed, would help ensure the objectives are fully realised. Submission also offers extensive contextual information, e.g. on what an audit does/does not do (the audit expectation gap, p.5 of submission), on the NZ context (pp.6-8), and on international practice (p.9 and appendix). Auditor Regulation: Criminal sanctions: Vigorously rejects the assertion that criminalising breaches of auditing standards will enhance audit quality. Proposal is unworkable, unjustified, and will lead to distortions in auditor behaviour and the audit labour market. Submits that section 87 be deleted. (Paragraphs of submission.) Overseas auditors: The bill entrenches a number of distortions that potentially discriminate between local and overseas auditors. (Paragraphs of submission.) Licensing firms rather than individuals: Submits that the bill should be amended to provide for firms to be licensed, with nominated individuals being identified by the firms for evaluation by and registration with accredited bodies (Paragraphs of submission.) Exemption for the Controller and Auditor-General: Submits that the bill and the Public Audit Act be amended to ensure that audits performed under that Act are subject to similar req1uirements as under the bill. (Paragraphs of submission.) Levies: Submits that wider consultation should be undertaken regarding the funding and cost burden of the new regime. (Paragraphs of submission.) Reporting of quality review: Submits that FMA should publicly report an annual review without identifying particular firms, as ASIC does in Australia. (Paragraphs of submission.) Initial public offerings (IPOs): Submits that the scope of the bill be clarified to require the audit of financial information used in IPOs. (Paragraphs of submission.) Disciplinary powers: Submits that the FMA s sanctions should include the power to refer a matter of concern to the relevant accredited body. (Paragraphs of submission.) Auditor liability: Like Grant Thornton, submits that some form of limited liability for the auditors of issuers should be included in the bill. Alternatively, the Companies Act 1993 should be amended

7 to allow the appointment of an auditor in the form of a body corporate. External Reporting Board: Funding: Submits that XRB should be funded from general taxation, given the public interest involved and the practical difficulty of identifying and charging users. Powers: Submits that XRB should be given several additional powers to help achieve the objectives (p.3 of submission). PriceWaterhouse Coopers Endorses submission by NZICA. Like NZICA, comments on the audit expectation gap, noting that regulation of the audit profession addresses only one segment of the financial reporting supply chain when looking to strengthen reliability in capital markets, and that the bill as drafted implies that company failure is an audit failure as a result of the expectation that the audit provides complete rather than limited assurance. Submits that the linkage between regulation and liability reform is an important step in the quality improvement process. Auditor liability: Submits that other contributing parties, including directors, trustees, and valuers, should share the responsibility when failure occurs. Favours proportional liability (like NZICA and Grant Thornton). Submits that this would improve the position for investors, whereas the current proposals would result in more onerous costs without clear benefit to investors. Criminal sanctions: Does not support the contention, implicit in the bill, that criminalising breaches of auditing standards will enhance audit quality. Sees no credible justification for making professional negligence by auditors a crime. Initial public offerings: Notes that bill does not require the audit of financial information included in the offer documentation for an IPO by a licensed auditor. Submits that this omission should be closed. Licensing firms rather than individuals: Supports the registration of firms rather than individuals. Overseas auditors: Supports NZICA s submission that there must be a level playing field for all persons conducting audits of issuers in New Zealand. Quality review: Has some concerns about the practice and engagement quality review. These relate to consistency, the quality of the reviewers and those who will manage the review process. Suggests requiring licensed auditors to make available suitable experienced individuals to be seconded to the NZlCA review team. Funding of FMA: Submits that some element of the FMA s cost should fall on the Government. Otherwise, sees potential for significant double-up of costs falling on licensed auditors.

8 Staples Rodway Limited Endorses submission by NZICA. Supports the bill s objectives and the majority of its provisions. However, some provisions require further examination: Auditor liability: Submits that the issue of auditor liability cannot be meaningfully separated from consideration of an appropriate regulatory regime. Recommends that the bill be amended to allow for some form of limited liability for all audit engagements. Licensing firms rather than individuals: Supports the registration of firms rather than individuals. Overseas auditors: Does not agree with proposal. Submits that overseas auditors should be required to comply with the same requirements as New Zealand licensed auditors; in particular, that they should be: Required to provide audit services under New Zealand law. This would include being subjected to the same potential civil and regulatory penalties for audit failure as New Zealand licensed auditors. Required to provide audit services under the same limitation of liability constraints as New Zealand auditors. Subject to review by the FMA. Further submits that overseas auditors should only be permitted to become licensed auditors in New Zealand when their jurisdiction offers the same rights to New Zealand auditors. License expiration: Submits that licenses be issued without an expiry date. Consider that time-limited licences would increase costs without any commensurate increase in audit quality. Quality reviews: Opposed to publication of results of quality reviews, unless results are aggregated in a way that did not allow the identification of individual entities or auditors (p.3 of submission). Criminal sanctions: Opposed to giving auditing standards the force of law, which would open up auditors to criminal charges in the event of audit failure. Auditor-General: Agrees that the Auditor-General s independence must be preserved, but opposed to the proposed exemption from the requirement for auditors of issuers to be licensed: New Zealand s public sector constitutes a significant proportion of economic activity. Market integrity would be threatened if these companies were not subject to the same audit quality requirements and associated costs as other entities in the New Zealand market, including their competitors. One of the strengths of the New Zealand accounting profession is the ability of accountants to practice in both the public and private sectors. Having different requirements for public and private sector audits could undermine this transportability of skills.

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