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Markets demand collaboration on audit quality

Investors and businesses in today's capital markets operate on the basis of a profound trust. That the wheels of "gatekeepers", chiefly the market regulator, turn as one with core contributors on market integrity - such as auditors - is a critical element of the landscape underpinning almost every decision in markets around the world. Regulator audit oversight and inspection programs put this alliance into sharp focus.

More than a third of CPA Australia's 150,000 members operate outside Australia, with a large and growing contingent throughout Asia. This puts us in the privileged position of having a deep liaison with regulators and inspection programs around the world, particularly in Australia, Asia and New Zealand.

In addition to learning much from these relationships, we have had the occasion of being able to give back. Our work with the Ministry of Finance in Vietnam as part of a World Bank program to modernise that country's accounting infrastructure is but one example.

If there is a central lesson from all of this it would have to be that the value of these market and auditor oversight programs in driving improvements is intrinsically linked to collaboration involving all stakeholders.

In Australia, the chief regulator's public audit inspection program serves as a microcosm of the dynamics between regulators and the audit profession globally, and the observations and lessons stemming from it have universal relevance.

In 2012, the Australian Securities and Investments Commission (ASIC) public audit inspection report found deficiencies primarily related to audit evidence, auditors' professional scepticism and the use of experts. The hue and cry that followed led the Australian Parliament to focus on auditing in its oversight of ASIC and informed an inquiry into the wider implications of several significant corporate collapses that occurred in Australia during the global financial crisis.

CPA Australia used these fora to raise its concerns that the value found in essential collaboration around the audit inspection program seemed to have become overshadowed by a distracting fixation on the findings as a quasi "report card" for the profession. Possibly worse, these distractions made it very difficult to reflect on lessons of the recent financial crisis and work collaboratively toward the shifts needed to anticipate and respond to future problems. In short, the cure had the potential to inflame the ill.

Although raising such criticisms was an extraordinary step, the robust and frank exchanges that ensued have been invaluable in clearing the air, resetting and refocusing the discussion and allowing for far more productive outcomes. ASIC, the profession and other key stakeholders have demonstrated a deeper and more meaningful engagement on many issues, including the most recent audit inspection report. ASIC's emphasis on consultation and seeking to collaborate around the report is palpable.

For evidence of this, look no further than my wide-ranging and unprecedented conversation with ASIC chairman Greg Medcraft on national network television. By agreeing to the interview, the Chairman was signalling a new level of open engagement with the community, taking the opportunity to clarify the regulator's stance on key policy issues such as the EU's mandatory audit firm rotation experiment.

Australia's audit profession has committed to a range of programs, including action plans aimed at addressing the focuses raised by ASIC and generally improving audit quality. One of those focuses, as highlighted by many other regulators around the world, is auditors' application of professional scepticism. CPA Australia has initiated a wide conversation and research program aimed at better understanding and fostering professional scepticism amongst individuals and teams.

Perhaps most importantly, well focused engagement means we can concentrate on the big picture. Toward this end, ASIC made a valuable contribution at CPA Australia's recent Evolution of Audit Forum - a conference of professional and regulatory leaders from around the world aimed at identifying and collaborating on tomorrow's issues.

Our purposes, intimately allied when it comes to investor confidence and protection, face a burgeoning set of challenges and risks in the capital markets. The ability to work together in a frank and unbridled way is vital in earning the ongoing trust of investors and the broader community, trust being the commodity so central to the viability of our markets.

Malley's previous blog post
Good governance needn't mean reinventing the wheel

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