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Sound audit lifts accounting standards

The Financial Markets Authority (FMA), a New Zealand Government agency that oversees the functioning of financial advisers and financial institutions, has done well to accredit Certified Public Accounts (CPA) Australia to carry out audit licensing in this country.

The only other organisation with a similar authority has been the New Zealand Institute of Chartered Accountants (NZICA), which automatically became the first accredited body when FMA was established last year.

The entry of CPA Australia to the licensing regime will improve the standard of auditing, boost confidence in investment markets and ultimately allow businesses to focus on what really matters, namely, achieving sustainable growth.

Our report in Businesslink has Commerce Minister Craig Foss saying that the move would strengthen New Zealand’s financial markets.

As he mentioned, accreditation of CPA Australia marked another step towards reducing regulatory barriers within the Single Economic Market between New Zealand and Australia.

The nature of the work carried out by accountants and auditors requires a high level of ethics. Shareholders, potential shareholders, and other users of the financial statements rely on the yearly financial statements of a company as they can use the information to make an informed decision about investment.

They depend on the opinion of the accountants who prepared the statements, as well as the verifying auditors to present a true and fair view of the company.

Knowledge of ethics can help accountants and auditors to overcome ethical dilemmas, allowing for the right choice that would benefit people, most of all, ordinary investors with limited financial resources.

Most countries have differing focus on enforcing accounting laws.

In Germany, accounting legislation is governed by tax law; in Sweden, by accounting law; and in UK by the company law.

In addition, countries have their own organisations which regulate accounting.

We believe that formation of FMA was a strategic decision of the New Zealand Government, heralding a new era of cleanliness in accounting standards.

Ethics in accounting is not a new concept.

Luca Pacioli, the ‘Father of Accounting,’ wrote on accounting ethics in his first book published in 1494. Ethical standards have since been developed through government groups, professional organisations and independent companies.

These various groups have led accountants to follow several codes of ethics to perform their duties in a professional work environment.

Accountants must follow the code of ethics set out by the professional body of which they are a member. Accounting societies such as NZICA, CPA Australia in New Zealand and Australia, the Association of Government Accountants, Institute of Internal Auditors, and the National Association of Accountants (US) have codes of ethics and many accountants are members of one or more of these societies.

The importance of auditing and the need to regulate auditors and auditing firms became pronounced with the collapse of Enron in 2001 in the US and the failure of many financial institutions around the world, including New Zealand. Hundreds of billions of dollars were lost by ordinary investors, who relied on the reports of auditing firms.

The European Commission is due to unveil a formal set of proposals for the audit industry this November. A leaked document suggests that the industry is overdue for reform from top to bottom.

The proposal for mandatory rotation of audit firms has been floating around for the better part of a year. There is little evidence to suggest that it will improve audits, and some weak evidence (based on national experiences in countries like Italy) that it will not help, or make things slightly worse. The big audit firms say that their work improves as they get to know their clients over the years. Their critics say that these years stretch into decades, with auditors forgetting that they serve investors, not company management.

From the New Zealand context, we believe that the entry of CPA Australia will lift the accounting and auditing standards in this country.

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