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3. COMPANY AUDITING IN AUSTRALIA
- This chapter provides an overview of the institutional arrangements for the registration and regulation of company auditors in Australia. The chapter also provides an outline of the types of auditing work that the Law and other legislation provides must be undertaken by RCAs.
REGISTRATION OF COMPANY AUDITORS
- The rationale for registering company auditors is to ensure that there is, within the accounting profession, a group of readily identifiable people who have the experience and specialist skills needed for undertaking company audits. This, in turn, assists in maintaining public confidence in the capital markets.
- The first Australian requirement for the registration of company auditors appeared in the Victorian Companies Act of 1896. During the early 1890s the standard of company auditing in Victoria was apparently of a poor standard, with allegations of auditors lacking appropriate qualifications, not being independent of the companies they were appointed to audit and failing to perform the duties of auditor in an appropriate manner. The then Victorian Attorney-General, Mr (later Sir) Isaac Isaacs, made the following observations about the standard of company auditing during the debate on the Bill that ultimately became the Companies Act 1896:
The system of auditing accounts of public companies at the present time, as honourable members know, is by no means satisfactory. Auditors are called in who are selected in the first instance, perhaps, not by reason of any particular competence they may possess, but because they are personal friends or, it may be, relatives of the directors or of the manager, whose accounts they have to overlook and certify to; and we have known instances in this colony where men of by no means unblemished character, but whose sole recommendation was their relationship to the directors or to the manager, have been called in to certify the correctness of the accounts...Honourable members will at once admit that auditors have been far too slovenly in their work in the past. I am not speaking of all auditors, of course, because we have notable exceptions to the general rule, but in many institutions the auditors have evidently thought that their chief duties
were fulfilled by a perfunctory examination of the books, and after all they merely certified that the accounts were correct according to the books... 1
- The Act contained a number of provisions dealing with the audit of companies, including one for the establishment of a three-member Companies Auditors Board which had the power to licence persons to act as auditors of companies where the Board was satisfied with their general conduct and character and had the appropriate qualifications. The qualifications that were needed by a person to obtain a licence included:
(a) holding a certificate of competency granted by the Municipal Auditors’ Board pursuant to the Local Government Act;
(b) membership of accounting bodies such as the Incorporated Institute of Accountants Victoria or the Australian Institute of Incorporated Accountants;
(c) having, within five years before the commencement of the Act, practised in Victoria for at least three years as an auditor or accountant; or
(d) having, upon examination, satisfied the Board that he had a thorough knowledge of accounts and auditing and the provisions of the Companies Act.
- Subsequently, the other States (as the Colonies had become) followed the Victorian lead and introduced requirements for the registration of company auditors. Research suggests that Tasmania followed in 1920, South Australia in 1934, Queensland in 1942, Western Australia in 1943 and New South Wales in 1945.
- The Working Party notes that the need for the Law to establish a mechanism for the regulation and supervision of company auditors in particular is largely a reflection of the fact that Australia does not have a legislative regime for the registration of all individuals who provide accountancy services to the public.^2 Although proposals for the enactment of such legislation have been put forward by the accounting profession from time to time, with the twin objectives of preventing unqualified persons from holding out to the public that they have accounting skills and to bring accountants into line with other professions such as legal practitioners, doctors and dentists, all of the proposals have ultimately lapsed.
- The absence of a legislation-based regime for the registration of public accountants has created problems for many State and Territory Acts that impose audit
(^1) Victorian Parliament (House of Assembly) Hansard, 11 June 1895, pp. 224-225. (^2) There were formerly Public Accountants Registration Boards in New South Wales and Queensland.
- RCAs are also subject to the ASC’s ongoing auditors’ surveillance program, which aims to ensure that they perform their duties in accordance with the Law, other statutory requirements, the general law and auditing standards.
- Where an RCA fails to lodge a triennial statement, ceases to reside in Australia or, in the opinion of the ASC, is incompetent, negligent or otherwise not a fit and proper person to remain registered as a company auditor, the ASC may refer the matter to the CALDB for disciplinary action, including possible deregistration. A decision of the CALDB may be the subject of an appeal to the Administrative Appeals Tribunal (AAT).
ROLE OF ACCOUNTING BODIES
- Australia’s accounting bodies have developed comprehensive requirements for entry to membership, the supervision of members and, where necessary, the disciplining of members which apply to all members of the bodies, including those who are RCAs. As many of these requirements exceed the legislative requirements and ASC procedures for the registration and supervision of company auditors, the Working Party believes that an overview of the requirements of the accounting bodies will be of assistance to readers when they are considering the Working Party proposals set out in the following chapters. This overview is in Appendix B.
- In addition, the ICAA and the ASCPA have had a significant influence in raising audit standards, particularly through their education and continuing education programs and the work of the Auditing Standards Board, which is jointly funded by those bodies.
NUMBER AND DISTRIBUTION OF RCAS
- As at 2 April 1997, 8,404 RCAs were registered under the Law. The distribution of these auditors by State and Territory is set out in Table 3.1.
- Table 3.1 also shows the distribution of Australian companies by State and Territory. It will be noted from the table that there is a close correlation between the number of companies in a jurisdiction and the number of RCAs in that jurisdiction.
Table 3.1: Number of Registered Company Auditors and the Number of Companies in each Jurisdiction
State or Territory No. of RCAs as at 2/4/
Percentag e of total
No. of companies as at 22/5/
Percentage of total
New South Wales 3,588 42.69 362,521 35.
Victoria 2,186 26.01 307,860 30. Queensland 1,053 12.53 151,046 14. Western Australia 715 8.51 94,605 9. South Australia 504 6.00 64,210 6. Tasmania 175 2.08 13,292 1.
Australian Capital Territory 87 1.04 19,885 1. Northern Territory 39 0.46 6,807 0. Location not identified or overseas 57 0.
Total 8,404 100.00 1,020,226 100.
Source: Statistical data about number of RCAs compiled by The Treasury from the Register of Auditors. Statistical data about number of companies extracted from the ASC’s ASCOT database.
- An examination of the Register of Auditors indicates that a significant proportion of Australia’s RCAs are based in State capital cities. Appendix C provides an overview of the distribution of RCAs within each State and Territory.
- An analysis of the Register of Auditors that was undertaken by the ICAA and ASCPA in 1995 found that, of the 8,739 RCAs as at 30 November 1994, 1,722 were members of both the ICAA and ASCPA, 4,167 were members of only the ICAA and 2,315 were members of only the ASCPA. Of the other 535 RCAs, 259 were identified as being former members of either the ICAA or the ASCPA.^3
(^3) The NIA has advised the Working Party that, as at 30 June 1996, 57 of its members were believed to be RCAs.
(c) it is required by 5 per cent or more of shareholders or the ASC to prepare audited financial statements.
- Notwithstanding the basic requirement that a large proprietary company must have its financial statements audited, section 313 of the Law permits the ASC to relieve a large proprietary company of the obligation to have its financial statements audited where such an audit would impose an unreasonable burden on the company. In considering whether it should grant such relief, the Commission is required to have regard to a number of issues including:
(a) the expected costs of complying with the audit requirements;
(b) the expected benefits of having the company or companies comply with the audit requirements; and
(c) any practical difficulties that the company or companies face in complying with the audit requirements (for example, in the first year to which the audit requirements apply to the company or where the company or companies are likely to move frequently between the large and small proprietary company categories).
- In assessing the expected benefits, the ASC is required to take account of the number of creditors and potential creditors, the ability of the creditors to independently obtain financial information about the company or companies, and the nature and extent of the liabilities of the company or companies.
- Information provided to the Working Party by the ASC suggests that approximately 25,000^7 public and proprietary companies are currently required to have their financial statements audited. However, the Working Party believes that many small proprietary companies may also choose to appoint an auditor.
company must be covered by consolidated accounts of a parent company), together with two other orders relating to small proprietary companies which are controlled by foreign companies: (a) 97/0565 which provides relief from the requirement for such a company to prepare and lodge accounts and to have them audited where the company is not part of a large group (ie the company, its siblings formed or operating in Australia, and their controlled entities are small when the section 45A test is applied to them on a combined basis); (b) 97/0567 which provides relief from the requirement to have audited accounts on a similar basis to the relief previously provided to large proprietary companies pursuant to Class Order 96/1850. (^7) The estimate of 25,000 companies has been derived as follows: 18,000 public companies and 7,000 proprietary companies. By way of comparison, it has been estimated that as at 30 June 1994, prior to the introduction of the large/small test for determining the reporting and audit obligations of proprietary companies, 60,000 companies had auditors. This figure was derived as follows: 17,000 public companies, 23,000 non-exempt proprietary companies and 20,000 exempt proprietary companies.
- As a result of the amendments made to the Law by the First Simplification Act, the provision that formerly allowed an exempt proprietary company to appoint as its auditor a person who is an officer of the company, or a partner, employer or employee of such an officer, now applies to all proprietary companies.^8
Accounts of Dealers and Brokers
- All bodies corporate and natural persons holding either a securities dealer’s licence or a futures broker’s licence must, within one month of obtaining the licence, appoint an RCA to audit the accounts that they are required to prepare in accordance with sections 860 (securities dealers) and 1218 (futures brokers) of the Law.
- As at 30 June 1996, 1,508 securities dealers licences and 87 futures brokers licences were on issue. 9
Other Audits
- As noted earlier, there are a number of other Commonwealth, State and Territory Acts that require RCAs to audit financial statements or other accounts. These Acts, and the audit requirements that they impose, include:
(a) auditing the accounts of life insurance companies in accordance with section 83 of the Life Insurance Act 1995 ;
(b) auditing the accounts of general insurance companies in accordance with section 47 of the Insurance Act 1973 ;
(c) auditing the accounts of regulated superannuation funds with more than four members in accordance with section 113 of the Superannuation Industry (Supervision) Act 1993 ;
(d) auditing the accounts of financial institutions in accordance with the requirements of State and Territory Financial Institutions Codes;
(e) auditing the accounts of incorporated associations in accordance with the requirements of State and Territory Associations Incorporation Acts; and
(^8) As a result of concerns raised with the Parliamentary Joint Committee on Corporations and Securities by the ICAA and the ASCPA, the Committee indicated in its report that it expects the problem ‘will be addressed by the audit...working party’ (‘Report on the First Corporate Law Simplification Bill 1994’, March 1995, paragraph 2.68). As explained in chapter 9 of this report, the Working Party does not support the amendment made by the First Simplification Act. (^9) Source: ASC 1995-96 Annual Report.
