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Letter of agreement: independent audit regulation and oversight in New Zealand [1997] NZSecCom 5 (23 August 2007)

Last Updated: 12 November 2014

Independent Audit Regulation and Oversight in New Zealand

23 August 2007

Hon Lianne Dalziel
Minister of Commerce
Parliament Buildings
WELLINGTON

Dear Minister

Independent Audit Regulation and Oversight in New Zealand

The Securities Commission and representatives of the New Zealand operations of Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers recently met to discuss matters of common interest. These four accounting firms are commonly referred to as the Big 4. One of the matters discussed was independent audit oversight in New Zealand. We believe this issue is of such importance that we should write this joint letter to you as Minister to recommend that high priority be accorded to addressing this matter.

It is the view of the Securities Commission and the Big 4 that there needs to be independent audit oversight in New Zealand in line with international best practice. New Zealand currently lacks an independent audit oversight structure and has fallen behind other jurisdictions in this regard.

We are aware that the Ministry of Economic Development's planned discussion paper on audit regulation and oversight in New Zealand has been put on hold, with no immediate prospect of recommencement. We are writing to express our concern on this matter. We believe that the discussion paper on audit regulation needs to be given a much higher priority than it is currently receiving.

In New Zealand the Big 4 firms play a significant role as they audit a very large majority of the significant New Zealand companies. They audit 83% of all companies listed on the NZSX (97 of 117 listed issuers) and 62% of all companies listed on the NZAX (15 of 24). These companies represent 98% of the capital market of the NZSX and 76% of the NZAX. The Big 4 audit 94% of those referred to as the Top 230 New Zealand companies. These companies represent 97% of the capital market of this group.

The Big 4 acknowledge the need for independent oversight and are in support of its introduction in the broader interests of increasing confidence in audit quality.

Currently audit oversight in New Zealand is carried out by the New Zealand Institute of Chartered Accountants (NZICA) which is the professional body that most auditors in New Zealand belong to. Where the oversight role is undertaken solely by such a professional body it lacks the crucial elements of perceived independence and objectivity. Such an arrangement does not have the capability and credibility to engage with other regulators and participate in international audit regulator forums such as the International Forum of Independent Audit Regulators (IFIAR).

New Zealand is a very small part of the global capital markets and it cannot afford to ignore these issues and continue to act in a way that differs from jurisdictions that are major players in the capital markets.

The CEOs of the International Audit Networks (representing the six largest global accounting firms) in a recently published vision document (November 2006) state that they recognise that the establishment of independent audit oversight regimes have reinforced the independence of auditors, and in their view, improved the governance and regulation of the auditing profession. They state that independent audit oversight regimes have led to audit firms putting greater emphasis on audit quality.

The CEOs of the International Audit Networks have called for regulators to minimise national differences in the oversight of auditors and enforcement of relevant audit standards. They would like to see audit regulation more globally coordinated and believe that IFIAR may be an appropriate body to pursue this objective. There is little scope for regulatory convergence in audit regulation and oversight between New Zealand and other major capital markets if we do not have an independent audit regulation and oversight regime.

Internationally concern is being expressed with the current situation whereby the majority of capital market audits are being completed by the Big 4 and the disruption that would ensue should any one of these four fail.

In a similar manner to audit regulation and oversight, New Zealand differs from most other jurisdictions incorporating major capital markets, in that there are no legislative provisions dealing with auditor liability.

Any audit regulation reform should simultaneously address auditor liability. This issue is also currently occupying the minds of both IOSCO and IFIAR.

With the move to the trans-Tasman mutual recognition of securities it would be very sensible to have similar audit regulation frameworks operating within New Zealand and Australia.

We the Commission and the leaders of the Big 4 firms believe the time is right to consider and resolve these issues in the New Zealand market.

We are happy to meet and discuss this matter with you.

Yours sincerely