Presentation to the Chinese Institute of Certified Public Accountants

Beijing September 2012

Supporting International Development by China’s Corporate Sector

The Role and Responsibilities of the Accounting Profession in Enhancing the

Credibility of China’s and the Asian Region’s Capital Markets

Presented by Lee White FCAChief Executive Officer

Institute of Chartered Accountants Australia

> I am honoured to be invited to

speak to you today

> The Chinese Institute of Certified

Public Accountants is to be

congratulated on the leadership it

has demonstrated in the evolution of

public accounting in China, since its

founding in 1988

> Chinese companies will be major

investors in Asia in the next 20 +

years because of their domestic

growth and financial strength

> In addition investment in Chinese

companies by domestic and foreign

investors will increase as more of

China’s major companies seek to

access local and international

capital markets to fund their growth

China’s growth

A consequence of growth

> Consequently the welfare of China’s

citizens and those of its regional

neighbours will be increasingly dependent

on the economic prosperity of China’s

corporate sector

> Good corporate governance will play a

major role in enhancing this prosperity

> A major component of good corporate

governance is reliable and timely

reporting both in terms of financial and

non financial data enhanced by high

quality external auditing and effective

audit committees

> This is the mandate and responsibility of

the accounting profession and the area

on which I would like to talk to you more

today as both CICPA and my

organisation ICAA have a mutual interest

and obligation to good corporate

reporting

Growth and corporate governance

What constitutes a quality audit

> Our approach has been to assist the 3 key

stakeholders to improve quality

• The supplier’s role – assisting auditors to

develop a quality audit (Continuous cycle of

audit quality brochure)• The consumer’s role – assisting consumers to

evaluate quality as a means of promoting quality

as a competitive edge between audit firms (The

benefit of audit brochure)• The governance role – making audit committees

more effective in delivering a quality external

reporting (Walk the line brochure)

Key phases:

>Client acceptance and retention

>Strategy and policies

>People and tools

>Inspection

>Remediation

>Return to client acceptance and retention phase

Framework for managing audit quality sustainability

Client acceptance and retention

> Risk appetite

> Values

> “Tone from the top”

> Data

Framework for managing audit quality sustainability

Strategy and policies

> Independence

> Delivery of quality

> Remediation systems

> Acceptance of standards

> Relevance

Framework for managing audit quality sustainability

People and tools

> Recruitment

> Development

> Engagement

> Culture

> Methodology / technology

Framework for managing audit quality sustainability

Inspection

> Commitment

> Collaboration

> Robustness

> Ongoing

> Effective / efficient

Framework for managing audit quality sustainability

Remediation

> Commitment

> Results / consequences

> Action

> Systems

> Accountability

Framework for managing audit quality sustainability

Five drivers of audit quality

>The culture within the audit firm

>The skills and personal qualities of audit partners,

principles and staff

>The effectiveness of the audit process

>Factors outside the control of auditors

>The reality and usefulness of audit reporting

The benefit of audit – a guide to audit quality

>Discussions and insights with leading audit committee

members

>Outcome of joint project by:

UK Financial Reporting CouncilThe Institute of Chartered Accountants in AustraliaThe Institute of Chartered Accountants of Scotland

>The aim of the project was to explore the workings of

audit committees

>The project was conducted through interviewing the

audit committee chairmen and others involved in working

with audit committees

Walk the line

Questions used as basis of meetings and telephone interviews:

>How would you define your role?

>How should your role discharge its obligations to the

board (however they are defined)?

>In whose interests is the audit committee acting?

>What is the proper relationship between the audit

committee and the rest of the board?

>What are the skill requirements of an audit

committee?

Questions used as basis of meetings and telephone interviews:

> How should audit committees identify risk? For

example, what regular reports should be available to

audit committees (external and internal auditors,

compliance reports and reports from chief financial

officer/chief executive officer)?

> To what extent should the audit committee have

responsibility for reviewing all material activities and

transactions and management’s assessment of the

financial risk in those transactions – and reporting

thereon to the board?

> What part should audit committees play in the

appointment of the chief financial officer, internal

auditors and external auditors?

Questions used as basis of meetings and telephone interviews:

>Should audit committee chairmen have a governance

responsibility to meet with investors?

>Should the audit committee be limited to a

consideration of financial reporting matters or should it

also consider other audit/financially related risks?

>What are the main challenges facing audit

committees?

Participants interviewed included

Leading audit committee members of listed companies from:

> Singapore> Indonesia> Australia> United Kingdom> United States> Germany> Netherlands

> Functions of audit committee

> Building on relationships

> Building an effective audit committee

> Challenges facing the audit committee

> Reflections and questions

Summary of findings

Functions of audit committee

Oversight of integrity of:

>financial reporting processes and reporting

>internal control and risk management

Building on relationships

>audit committee and the board

>audit committee and management

>audit committee and the auditor

>internal audit

>audit committee and shareholders

Building an effective audit committee

>composition of the audit committee

>managing the audit committee meeting

Challenges facing the audit committee

>unrealistic expectations

>communications to bridge the expectations gap

>legal responsibilities and liabilities

>keeping the flow with new members

>quality of information

>knowledge of auditing standards

Reflections and questions

Universal questions answered by audit committee chairmen:

>How do you keep the board fully informed?

>What sort of reports should be given to the board before

they are asked to approve financial statements?

>Should those reports come from the audit committee

chairman or management?

>How do you ensure you get the best out of the external

auditor?

>How often should the audit committee meet with the

external auditor?

Universal questions answered by audit committee chairmen (continued):

>How do you best deal with commentary from the

external auditor that may be critical of management?

>How do you ensure you get the best from the internal

auditor?

>How do you ensure you get the best out of the audit

committee members?

>How do you ensure diversity of membership across the

audit committee?

>How do you ensure frank and open discussions in audit

committee meetings?

> At a regional level we are working to

engage more closely with

independent audit regulators in

Australia, Singapore, Malaysia,

Indonesia, Thailand and Vietnam so

that the profession and the

regulators work together to enhance

quality

Regional engagement

Regional engagement

> Given my earlier comments about the role

of Chinese companies in the capital

markets and economies of these countries

China has a vital interest in the work of

these regulators

Regional engagement

> We would be pleased to explore further

with CICPA the opportunity for CICPA to

join with us in this engagement

Thank you