Australian Prudential Regulation Authority

Assignment Task

Jessie Yeo had been a non-executive director of a small, local, authorised deposittaking institution (ADO, the Nirvana Credit Cooperative, for just a year during 2000 when she was invited on to its audit committee for the year 2001. When the Australian Prudential Regulation Authority (APRA) introduced new Prudential Standards for ADIs in 2000, audit committees became a requirement. The Credit Cooperative had duly formed an audit committee in 2000 but its members were not really experienced in the duties required of audit committees.

Jessie was a specialist in derivatives and the other Board members of Nirvana urged Jessie, who had been a member of the Cooperative since childhood, to lend her specialist finance skills to the Cooperative. All Board and Board subcommittee positions were honorary and Jessie was pleased to contribute her knowledge in the setting of interest rates, the introduction of securitisation and a loyalty credit card scheme to the Cooperative over the past year, through membership of the Board of Directors.

She found that people generally, including the other Board members, presumed she had sound accounting skills because of her finance background. Hence, there was real support and almost pressure for Jessie to become an audit committee member as well as a Board member. No one else on the Board possessed specialist accounting skills. It was not easy to get people to serve as directors in an honorary capacity when the risks were so high, even though all Board and Board subcommittee members were covered by an insurance indemnity policy. Jessie knew the basics of accounting; enough to read financial statements. However, she had never undertaken an auditing subject at university, opting instead for a finance specialisation. The other audit committee members were, respectively, an engineer, a secondary school teacher, a retired headmaster, a human resources specialist and someone in marketing.

At her first audit committee meeting, it became clear that other members of the committee wanted a change of auditor. The fees for the audit had been increasing steadily over the years. The pressure to put the audit out for tender had won out at that first meeting and not really knowing much about audit fees, Jessie had been happy to go along with the majority. There were strong arguments put that the incumbent auditor should not be requested to tender since much was known already about this firm's fee structure. Jessie asked if there were any problems with this auditor other than the fees, and it seemed there was nothing substantive 2 in the way of criticism about the service provided that could be directed at the firm.

Six small local firms and one national firm were invited to tender. The tenders came in and one was substantially below any of the others and well below the existing fees being paid. The other committee members were keen to dispense with the services of the incumbent auditor immediately. Jessie had a feeling that it was not possible to dismiss an auditor easily and she raised this question. Those who had been on the Board for many years could remember the appointment of the existing firm and were sure there had been little in the way of formal requirements when that firm had been first appointed, but that had been before the new Prudential Standards necessitated the credit union become a company.

Uneasy feelings about this auditor changeover kept coming to Jessie. Other Board members were particularly keen to appoint this cheapest tenderer because the firm concerned had offered to carry out internal audit tasks as well as the external audit at a discount rate. The possibility of having the same firm complete both audit tasks at such an unbelievably low price seemed too good to be true. The existing auditor had declined the opportunity to provide internal audit services as well as the external audit when asked; commenting that it created potential conflicts of interest and so it was firm policy not to do both.

Some audit committee members were also inclined to consider the existing audit firm to be overly conservative in its policy about providing both audit and nonaudit services, as well as about certain accounting policies. There had been a dispute with the audit firm over the 'provision for doubtful debts' in relation to loan accounts. The auditor had insisted that the Provision be raised. The Credit Cooperative had an excellent record on bad debts recovery, even after loans had been written off as bad, and the Board had resisted the auditor's request, but in the end capitulated because the alternative was an audit qualification.

Audit committee members were very keen that the proposed auditor should not be given the opportunity to meet the existing auditor so there would be no chance of discussion between the two about the accounting policy on estimating the Provision. Jessie, a member of the accounting professional body, suspected there was some ethical requirement that the proposed and existing auditor should communicate.

Jessie did not know a lot about auditing but she did know that auditor independence was important. The more she heard about the existing auditor the more comforted she felt that this was an audit firm that was independent and of good reputation, and the more uneasy she felt about the proposed auditor. She suspected that once the new firm was appointed, it would soon raise fees and so any savings would be short-lived before the process began again. Anyway, she was not sure the audit fee was the issue the Board should be focusing on. She requested that a decision regarding the change be delayed until she had had the chance to 3 investigate and could report back to the audit committee and the Board.

Required

Jessie is your superior at the merchant bank where she works and she has asked that you research the following issues so she can report back to the audit committee. Write a brief report for Jessie that covers the following issues:

1 How could the reputation of the existing and proposed auditors be evaluated?

2 The costs (if any) to stakeholders of the Credit Cooperative if an auditor of lower reputation than the present incumbent is selected.

3 The advantages and disadvantages of having both the internal and external audit performed by the same auditing firm.

4 Any other costs to the credit union involved in changing auditor aside from the audit fee issue.

5 The possibility that audit committee members were aggrieved over the tough stance taken on the Provision issue by the existing auditor and the fee issue is being used to justify a change in auditor. The real problem perhaps is the presence of an existing auditor willing to challenge management and the Board, and therefore a desire to find a more compliant auditor. If this scenario is a possibility, is a change of auditor in the best interests of the stakeholders of the Nirvana Credit Cooperative?

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