It’s time to clean up our financial statement audit framework in the spring

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Various boards, management committees and public sector entities are currently immersed in the year-end ritual of poking, pushing, questioning by types of accounting known as financial statement auditing.

These audits are led by audit professionals who will generally be registered company auditors and are required to ensure that they comply with accounting standards, auditing standards, ethical standards and the Companies Act. , as well as any other relevant laws that a particular entity must follow.

Banks can be businesses, for example, but there is a significant set of prudential regulations that they must comply with. Public sector departments have a host of disclosure rules they are required to follow that – at least according to the Australian National Audit Office – some departments continue to fail to comply properly.

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Auditors and their role of poking their noses into digital crevices to see if companies have done the right thing tend to gain the upper hand.

Consider the fact that those who are auditors – the full ones with registration with the corporate regulator – have much of their regulation hardwired into corporate law.

It is not universally known that ethical standards for those engaged in auditing are legally binding.

An interesting method of legislating them makes ethical standards – sometimes seen as a bit fuzzy by people – legally binding.

The Corporations Act 2001 recognizes compliance with auditing standards which themselves require compliance with ethical standards.

In short: a violation of ethics in the auditing world is a violation not only of the rules of professional bodies, but also a violation of the law of the black letter.

The question then arises as to how significant the violation may be and whether some form of action is warranted by the business regulator, but if you are an auditor, a violation of ethical standards is, by its very nature. nature, a violation of law.

The thumbscrews have been tightened on auditors, and proof of this is the recent successful prosecution of an audit firm and auditor for alleged non-compliance with the very auditing standards that dictate to them what they must do.

What about the people who make up the rest of the three-legged stool of governance: directors, senior executives and auditors?

It is interesting to note that members of the accounting profession who occupy positions within the company, such as directors, are not affected in the same way by the ethical standards enshrined in the law, whereas the same document is designed to deal with members of accounting bodies in general, members in a corporate-type environment and members in private practice.

Auditors are held to a higher ethical standard in this regard because their ethical guidance is enshrined in law.

The real standard-setter that sets audit and assurance guidelines is a statutory board that is overseen by the Financial Reporting Council and reports to parliament whenever it appears before estimates.

This becomes quite interesting when one considers a body which has an extra-legal orientation which is in no way regulated in the same way as the code of ethics of the accounting profession but which plays a major role in the way in which companies – especially listed companies – report.

Take the recommendations and principles of the Corporate Governance Council, which sits under the auspices of the Australian Stock Exchange. There is no law requiring it, but it is accepted as a reference for listed companies.

The Corporate Governance Board also sits outside a regime that requires the Board to be accountable to the government of the day as well as to Parliament.

Consider this for a moment: a set of requirements that apply to corporate officers and directors – the people who govern an entity and are responsible for its accounts – do not have a part of the regulations that they follow in law. of the black letter while listeners viewing their material are regulated.

It’s probably time for federal treasury policymakers to sit down and ponder this a bit, as there is a great opportunity to streamline the regulatory framework that some people have called a spaghetti crossroads.

This opportunity comes with the evolution of a new Sustainability Standards Council which will be based with the IFRS Foundation, which is the body responsible for global accounting standards, in London.

There would be nothing wrong with establishing a sustainability governance and reporting council that would take over the work of the Corporate Governance Council, but expand the governance disclosure guidelines to provide relevant information and details. non-profit entities.

You can then get the body to also address sustainability standards that G7 countries and global securities regulators consider essential.

Such a standard-setter on governance and sustainability standards could sit under the Financial Reporting Council, like the Accounting and Auditing Standards Boards.

He would be accountable to Parliament and would be called upon to appear from time to time before parliamentary committees.

It would also supplement some of the regulatory inequity between auditors and the people they audit, as some of the guidelines that directors comply with in the form of corporate governance information would be set by a statutory standard setter and promulgated. under such a scheme.

There is nothing wrong with using the creation of a new world authority to engage in our own spring cleaning in Australia. It just requires creative thinking and people willing to shake the cage.

Clean and store the bird cage
(vectorass / Adobe)

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