From 1 July, the Financial Markets Authority (FMA) will perform its audit quality reviews in-house, using FMA staff and contractors.
Previously the work has been contracted to the New Zealand Institute of Chartered Accountants. The FMA will maintain the same auditor regulation focus as has applied in the past and will aim for the same three year review cycle.
Stronger audits for the auditors an FMA priority
As we have previously reported, the FMA made lifting auditor standards a priority after its 2014-2015 audit quality annual review found that the majority of audit firms were falling short in some aspects of their performance.
It is now building up its enforcement capability by advertising for auditors who have recently left the industry and are interested in becoming reviewers for the FMA.
The move is timely as the first “key audit matter” reports are now being published, ahead of the new formats becoming mandatory for NZX issuers with reporting periods ending after 15 December 2016.
Focus areas for audit quality reviews
- Auditor independence – particularly in relation to firms providing significant non-audit services to FMC reporting entities. Have they placed appropriate controls in place to protect their independence? Have all aspects of the non-audit services been reported to the board, in the financial statements and in the auditor’s report?
- Audit quality control systems and supervision – especially where the FMA audit review picks up matters not detected in the firm’s own quality review procedures.
- Professional scepticism – is there evidence of this in relation to: significant judgements on accounting and fair value estimates, reliability of data and representations provided by management or directors, impairment calculations, recoverability of assets and changes in accounting treatments.
- Audit evidence – particularly in relation to going concern, revenue recognition and the completeness and accuracy of related-party transactions.
- Does the auditor understand the FMC entity’s business model sufficiently that all key risk areas are included in the audit strategy?
- Has the auditor taken adequate steps to assess the risk of fraud? This aspect has become top of mind for some audit committees, following recent reported instances of long-term frauds perpetrated by some previously trusted listed issuer employees.
- Has the auditor assessed the competence and objectivity of any experts relied on in the audit?
- Audit fees – where these are very low or do not reflect the complexity of the business, the FMA will assess whether the work has been completed to an appropriate standard.
Other FMA priorities – “key audit matters”
The other key priority outlined in the FMA’s oversight plan will be to monitor the new assurance standard for “key audit matter” reports, required for all New Zealand listed issuers with a reporting period ending on or after 15 December 2016 (although it can be used earlier).
For other FMC reporting entities, considered to have a higher level of public accountability, the effective date will be for periods ending from 31 December 2018.
'Key audit matters', are those that, in the auditor’s professional judgement, were most significant in the audit of the financial statements for the current period. The auditor will be required to report why each matter was considered to be significant, and how the matter was addressed in the audit.
Some issuers, notably NZX Limited itself (which has already published its first “key audit matter” report a year ahead of the mandatory deadline), are starting to turn their minds to the new requirements. A number are considering ‘dry run’ reports (kept private to directors) for this year’s financial statements.
FMA is also working with EU officials to get full recognition of New Zealand auditors within the EU (they currently have a transitional recognition until a final equivalence decision is made.)
Chapman Tripp comment
The audit profession has moved within the last ten years from light-handed self-regulation to one of the most heavily regulated New Zealand professions - particularly for individual auditors that must be licensed by FMA, and audit firms that must be registered, to audit FMC reporting entities.
The key audit matter regime raises a number of complex legal issues that we will comment on in a future Brief Counsel. But it will be fascinating to watch investors, issuers, auditors, and the FMA respond to the new requirements.