Stricter audit role needed: HIH report

THE report of the HIH Royal Commission has added to the debate over audit independence and accounting standards by recommending changes that go well beyond current reform proposals.

On the hotly debated topic of auditor independence, Justice Neville Owen said an auditor was not independent if they “might” be impaired, or might perceived to be impaired, in the exercise of objective and impartial judgment.

“In determining whether an auditor or an audit firm is independent, all relevant circumstances should be considered, including all pre-existing relationships between the auditor, the audit firm and the audit client, including its management and directors,” Justice Owen said.

He recommended that companies identify all non-audit services provided by the audit firm and the fees applicable to each item of work.

Companies should also explain why those non-audit services do not compromise audit independence.

Justice Owen said attempts by auditors to facilitate their clients’ use of non-audit services would compromise their independence.

Justice Owen recommended that former auditors must wait at least four years before they can become a director of their former client.

He proposed extending this rule to former partners who were not directly involved in the audit, but with the current proposed period of two years.

Justice Owen endorsed the Federal Government’s proposal for compulsory rotation of audit partners after five years.

He recommended this rule be extended to key senior audit personnel.

On the subject of accounting standards, Justice Owen said: “Poorly worded standards that are subject to wide or inconsistent interpretation are incompatible with a system that gives them the force of law”.

He strongly encouraged the use of legal drafting experience when writing accounting standards.

Justice Owen also proposed that people with broad business or professional backgrounds should be involved in the setting of new accounting standards.

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