Auditor oversight in hands of super-regulator

Commerce Minister Simon Power today announced that auditor oversight as it relates to issuer audits is to be the responsibility of the new Financial Markets Authority (FMA).

He made the announcement at the Institute of Financial Professionals New Zealand annual awards in Auckland.

Last October, Mr Power said practitioners who carry out statutory audits would need to be regulated as a specialised profession by the New Zealand Institute of Chartered Accountants (NZICA). He also said a reconstituted Accounting Standards Review Board would oversee NZICA's performance by monitoring and reporting on the adequacy and effectiveness of its auditor regulatory systems.

"I have now decided that the oversight function will fit better with the FMA. 

"Audit quality is a core element of financial market confidence.

"It would be inconsistent with my consolidation aims to have a significant market-confidence function being carried out by an agency other than the FMA or the Reserve Bank."

The auditor-related changes are likely to come into force in mid-2012.

What is the scope of the auditor reforms?

The reforms will only affect audits of issuers of securities, along with banks, insurance companies and other entities that take deposits or hold assets for broad groups of investors.  The great majority of entities will continue to be able to have their audits carried out by practitioners who are not Licensed Auditors.

How many auditors and auditing firms will be affected?

The great majority of issuer audits are carried out by the Big 4.  It appears likely that the reforms will impact on 100-odd auditors within ten or so accounting firms.

Why is oversight needed?

The Registrar of Companies has noted that there were some finance company audit failures.  It is essential that the practitioners who carry out financial sector audits have the necessary skills and experience to carry out the work to a high standard.

In addition, New Zealand's self-regulation system is no longer acceptable internationally.  We need to make these changes to allow New Zealand auditors to be recognised by overseas regulators, such as the Australian Securities and Investments Commission.

Why does practice review need to be responsibility of the FMA?

We will not be able to obtain or retain international recognition of our auditors' qualifications unless practice review becomes the responsibility of an independent regulator.  Depending on how international practice evolves, it may be open to the FMA to contract NZICA to carry out or contribute to practice reviews.

It will be challenging to have a smooth transition in relation to existing regulatory functions.  How will the FMA be able to cope with having a new function as well?

The oversight functions are not likely to come into force until mid-2012.  This will provide the FMA with more than a year from its establishment to prepare for its auditor-related functions.

Is there a role for NZICA in promoting audit quality?

Yes.  NZICA will carry out much of the frontline regulation, subject to FMA oversight.  NZICA will also continue to have a major role in promoting audit quality in relation to non-financial sector audits.