11 August 2006

Ms Jan Munro
Senior Technical Manager
International Ethics Standards Board for Accountants
International Federation of Accountants
545 Fifth Avenue 14th Floor
NEW YORK NY 10017

Dear Ms Munro

Proposal to Rotate Key Audit Partners in the Ethics Code

The Group of 100 (G100) is an organisation representing the interests of the Chief Financial Officers of Australia’s major business enterprises. The G100 strongly supports legislation, regulation and guidance which improve the quality of financial reporting and corporate governance, including in the international arena of harmonisation and convergence. In doing so the G100 is actively involved in creating a cost-effective and efficient regulatory environment in which business is able to flourish while meeting community expectations.

The purpose of this letter is to explain the G100’s concerns about the practical implications of proposals being considered by International Ethics Standards Board for Accountants (IESBA), in particular, the proposed paragraph 290.154 of Agenda Paper 3-B for the June 2006 meeting as detailed on the IFAC web site. This paragraph relates to the rotation of audit partners including the engagement partner, partners responsible for the audit review and quality control and ‘other key audit partners.’ The definition of key audit partner in the IESBA draft includes ‘……….other partners involved at group level who are responsible for key decisions or judgments on significant matters with respect to the audit engagement’.

In view of current experience in Australia the G100 is concerned about the IESBA proposal to extend the rotation of audit partners of listed companies to include ‘other key audit partners,’ as defined. In Australia, practical issues are already being experienced in complying with the recently introduced Corporations Law amendments requiring the rotation of listed entity audit partners who play a significant role (usually interpreted as the engagement partner and the review partner) after five years.

We appreciate that the five-year time period is a particular Australian requirement and we will be making representations to the Australian Government on this matter. As the process of listed company auditor rotation under Australian law has already commenced, listed companies are finding that the pool of audit partners, with the requisite skills and experience, is sometimes shallow.

This was recently brought to our attention by some of our members and the contention confirmed by members of the auditing profession from the Big 4 who, in the main, are the auditors of the top 100 companies in Australia. While the pool of available skills may be adequate in the larger centres it is not necessarily the case in the smaller Australian cities such as Perth, Adelaide and Brisbane where specialised expertise in certain industries such as oil and gas and banking is often required.

In these cities given the Australian legislation already in place, the rotation of the engagement partner and the review partner together with the IEASB proposal to rotate ‘other key partners’ presents the propensity for a pseudo ‘firm rotation regime’ to operate.

Our concerns are compounded by the prospect that the rotation requirements may be extended to other ‘specialist’ members of the audit team. It is usual in large and complex company audits for the composition of the audit team to include a number of specialist partners whose role is to provide input on technical issues, such as taxation law, information risk management, asset valuation, actuarial valuations and technical application of accounting standards and reporting requirements. It is normal and appropriate for the lead engagement partner and engagement quality control review partner to rely of the advice of these specialists.

We are concerned that these individuals may in certain circumstances fall within the proposed broad definition of ‘key audit partner’ in the IESBA draft. For example:

• the audit of financial institutions necessarily requires extensive input from specialist partners in information risk management. Their involvement with planning and conducting the audit procedures is pervasive to the entire audit; and
   
• most large public company audits involve regular consultation with the firm’s specialist technical partner on interpretation of accounting standards.

In many instances these partners have little, if any, direct contact with the senior management staff. Adequate safeguards can be put into place to mitigate any familiarity threat, whilst retaining the benefits of their knowledge of the company’s systems and processes.

In our view it would be impracticable and potentially detrimental to the efficiency and efficacy of the audit process to mandate the rotation of these partners.

As the Corporations Law in Australia stands the five-year rotation applies in practice only to the engagement and the review partners. Should the proposed provisions of the IESBA code for key partners be introduced into the Australian Professional Bodies’ Code of Ethics it is uncertain whether the seven-year rule, rather than the Australian five-year requirement of the Corporations Act, would apply.

In addition, the Auditing Standards in Australia have now been given the force of law and the accounting bodies’ Codes of Ethics have legal effect to the extent that they are referred to in the Auditing Standards.

The G100 does not oppose the general proposal to rotate engagement and review audit partners but considers that the extension to automatic require rotation of other key partners in the IESBA Code is impractical. The proposed requirement may well be suitable for application in major commercial and developed jurisdictions. There are many countries around the world that do not have well developed capital markets. On the basis of our experience companies in these countries will find even more difficulties in complying with the proposed rotation of key partners. While the Australian regulator has the power to use discretion in such matters the experience is that such discretion is not exercised in these circumstances.

Accordingly, the G100 is concerned that there will not be any means for exemption from the requirements where an entity under extenuating circumstances is unable to comply.

In the first instance the G100 recommends that rotation of ‘other key audit partners’ not be a mandatory requirement. Instead, there should be a rebuttable presumption that after seven years the ‘other key audit partner’s’ independence is compromised unless it can be demonstrated that adequate safeguards have been in place to reduce the familiarity threat to an acceptable level.

Yours sincerely

Tom Honan
National President