Inbox: Do new audit regulations go far enough?

While changes which came into force last month under the Auditor Regulation Act 2011 are to be applauded, New Zealand is still lagging behind the sort of rigorous corporate scrutiny being contemplated in the Northern Hemisphere, says accounting firm Grant Thornton New Zealand.
The new act, which took effect on July 1, means that the auditor of any company that issues shares or debt to the public will now have to be licensed and member of registered firm and undertake on average minimum of 150 hours of auditing annually.
Audit firms will have to demonstrate and prove to the satisfaction of the Financial Markets Authority that they have sound governance structure to address issues such as auditor rotation, risk management and quality control, says Mark Hucklesby, Grant Thornton’s national technical director. He says this may well prove difficult for some of the smaller audit firms in the market.
Hucklesby says the Government has also upped the ante, and brought New Zealand into line with other countries, with the creation last year of the External Reporting Board – an entity that independently governs the development and issuance of auditing standards.
“While these changes in New Zealand are well overdue, the rest of the world has moved on yet again,” Hucklesby says. The European Commission has published proposals for further far reaching changes to the audit process including:
• Audit firms being required to rotate after maximum engagement period of six years with cooling off period of four years before the audit firm can be engaged again by the same client.
• Audit firms being prohibited from providing some non-audit services to their audit clients if these fees exceed 10 percent of audit fees.
• Public-interest entities being obliged to have an open and transparent tender procedure when selecting new auditor.
• Prohibiting contractual clauses limiting the selection of audit firm choice (eg, only very large firms).
Hucklesby says recent Grant Thornton International business survey of 1000 European Union businesses shows that majority (54 percent) supported mandatory rotation of audit firms, although every 10 to 12 years was felt to be sufficient.
He says the accounting profession here, in consultation with the business sector, should be considering whether some of these latest Northern Hemisphere proposals are appropriate for New Zealand.
“The audit landscape is changing. While many still view an audit as commodity service that simply adds compliance costs to businesses, the reality is that auditors play pivotal role in assessing the quality of financial statements.”M