The Auditor Regulation and External Reporting Bill (separated to form the Auditor Regulation Act and the Financial Reporting Amendment Act) was passed earlier this month to strengthen the regulation of practitioners who carry out audits of issuers and to consolidate all accounting, auditing, and financial reporting standards-setting into a reconstituted Accounting Standards Review Board, to be called the External Reporting Board.
Auditor Regulation Act
The Auditor Regulation Act establishes a new licensing and registration regime for auditors and audit firms who carry out issuer audits. Individual auditors who carry out issuer audits must be licensed by the Institute of Chartered Accountants (NZICA), or any other professional body accredited by the Financial Markets Authority (FMA). Audit firms that act in relation to issuer audits must be authorised by the FMA (or other accredited body) and registered by the Registrar of Companies as a registered audit firm. Consequential amendments have been made to the Securities Act and the Companies Act, and other enactments, to reflect these changes (see Schedule 1 of the Act for further details). For example, a "qualified auditor" for the purposes of the Securities Act will now be either a licensed auditor or a registered audit firm.
Under the new co-regulatory regime, the FMA is responsible for:
- setting the minimum standards for becoming a licensed auditor;
- carrying out quality reviews of audit firms and licensed auditors; and
- monitoring and reporting on the adequacy and effectiveness of NZICA's regulatory systems and processes.
The FMA has also taken over responsibility for regulating overseas-qualified auditors from the Registrar of Companies.
Issuer audits have been targeted by the new legislation because this is the class of audits where investors are considered to be most at risk of losing substantial amounts of money in the event of audit failure. They include audits of banks, deposit-taking companies, insurance companies, mutual funds and issuers of debt and equity securities offered to the public (as well as audits carried out under the Securities Act 1978 or securities regulations, such as an audit of financial statements contained or referred to in a prospectus for an offering of securities).
The Act was passed without the inclusion of the controversial clause which would have criminalised an auditor's failure to comply with auditing and assurance standards without reasonable excuse. (For discussion on this aspect of the Auditor Regulation and External Reporting Bill see our earlier article Increased regulatory risk profile for financial markets participants and auditors.)
The new regime will come into force once the NZICA and the FMA have established new regulatory systems, which is expected to be on or before 1 July 2012.
Financial Reporting Amendment Act 2011
The Financial Reporting Amendment Act 2011 consolidates all accounting, auditing, and financial reporting standards-setting into a reconstituted Accounting Standards Review Board, to be called the External Reporting Board (XRB). Until now most standards-setting work has been carried out by NZICA.
The XRB will be up and running on 1 July 2011.