In recent years, general public start to raise questions about the level of audit independence and the quality of audit information, especially after corporate collapses such as HIH, Enron and One.Tel where independent audit reports showed that the companies were making a profit, when in fact they were heavily in debt. This essay is to provide a brief overview of the current regulation of corporate governance in Australia in the role of auditors, and illustrate some gaps in the regulation with examples. In addition, a few recommendations are given accordingly for changes.
1. Legal Regulation of Corporate Governance in the Role of Auditors
1.1 CLERP 9 reforms
CLERP 9 reforms largely employed the law reform recommendations in the Ramsay report to address the audit independence controversy. CLERP 9 has significantly changed the way that audit work is carried out in Australia. The most significant changes were:
Improving the standards of auditor regulation through changes to the powers of the Financial Reporting Council and the reconstitution of the Auditing and Assurance Standards board;
Imposing statutory requirements for auditor independence and audit partner rotation; and
Providing proportionate liability in respect of claims made against auditors.
1.2 Performing the audit
There is a distinction between the lead auditor and the review auditor. The lead auditor is primarily responsible for conducting the audit, while the role of review auditor is to review the overall conduct of the audit. It is auditor’s statutory right to access the books of the entity. Company officers must provide information and explanations that the auditors required to assist with the audit and to help auditors form more accurate auditor’s opinion.
The individual auditor or the assurance team must form an opinion about whether the company’s financial reports represents a fair and true view of the financial position and complies with the accounting standards. Also, they need to state whether the necessary financial records have been maintained and whether the officer of the company offers the information and explanation that the auditor required.
1.2.1 Audit Independence
Independence contains two components: independence of mind and independence in appearance. Independence of mind means that the auditors act with integrity, objectivity and professional skepticism and provide their opinion based on the facts. While independence in appearance means that the auditors should avoid the potential conflict of interests. For instance, their clients cannot be their relatives, friends or former employees, etc.
The statute requires that all company auditors must satisfy the test of independence. The test of independence asks company auditors to avoid all the possibility of the conflict of interest with their clients. Whether there is a conflict interest between the members of the audit team and the officers of the audit client is very essential...