NZ auditors still struggling to meet standards in latest FMA review

Monday 30th November 2015

The country's auditors are still struggling to meet minimum accounting standards, with less than a fifth reviewed by the Financial Markets Authority characterised as 'good' and the rest needing to improve.

Of the 38 audit files in the 12 months ended June 30, 18 percent were seen as 'good' and needing limited improvements, better than the 5 percent of 56 files a year earlier, though largely in line with the 15 percent of the first report in 2013. Some 37 percent of audits required improvements, compared to 59 percent a year earlier, and a further 45 percent needed significant improvement, more than the 36 percent in 2014.

The FMA report said the files selected tended to be more complex and risky than the norm, and would show up different results from a neutral sample, and that the introduction of the regime "has had a positive impact on audit quality."

The government introduced stricter oversight of the audit sector after the failure of the finance company sector last decade spurred a report slating the auditing of those lenders as lacking "the rigour and analytical depth one would expect for entities managing substantial public investments. "That led to the renewed appetite for work that had been underway since 2001 to end self-regulation when the collapse of Enron led to the dissolution of accounting firm Arthur Andersen and sparked concerns about the oversight of auditing processes.

The FMA report cited the regulator's concerns around non-audit services provided by audit firms and how they managed threats to their independence. It also said monitoring of audit quality could be improved, greater professional scepticism could be applied, and that they could better assess external valuations.

The report found a lack of documentation around identifying fraud risks, and that the FMA "continue to observe audit deficiencies in which auditors do not perform sufficient auditing procedures for revenue and management override risk."

The regulator's second cycle of the review will be on ensuring auditors have effectively put in place remediation plans. The 2015/16 year will focus on risks posed to investors by reporting entities that don't comply.

The FMA is also preparing for the start of a new accounting standard requiring auditor's reports to provide key audit matters, explaining why they were judged the most significant, and how they were addressed in the audit.

The market watchdog will also bring in-house audit quality reviews once its contract with the New Zealand Institute of Chartered Accounts, now part of the Chartered Accountants of New Zealand and Australia, ends in June next year.

"This decision will ensure we are aligned with international audit regulators and is not a reflection on NZICA's performance of quality reviews," the FMA said.

BusinessDesk.co.nz

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