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Opinion and insights on current industry issues for audit and risk committees
Audit and Risk
Committee Matters
June 2014
Comprehensive reviews
A logical evolution
Responsibilities of the audit
and risk committee page 2
The tax and morality debate
The facts, our views and
the implications
An in-depth discussion page 5
Cost reduction and controls
Maintaining discipline and
creating a platform for growth
Actions to consider page 9
2 | Audit and Risk Committee Matters: June 2014
With regulation threatening to undermine the role of the audit committee, its time for
a conversation about the alternatives that might more effectively drive audit quality and
independence, objectivity and professional scepticism. PwC Australias Assurance Leader,
Peter van Dongen, makes the case for a proposal that would strengthen the role of the audit
committee by helping them provide more rigorous oversight of their auditor.
The European Unions recent decision to endorse
an audit reform package which includes a provision
for mandatory frm rotation has the potential to
undermine the role of the audit committee.
If audit committees are charged with delivering
governance over the audit, how does limiting their
choices and discretion improve their prospect of success?
Taking a broad view, the measures being endorsed
in Europe are part of a political response to pressure
to avert fnancial crises like that which occurred in
2008. However, a case has yet to be made which
successfully links the root causes of the fnancial
crisis to what these measures supposedly address,
that is, a supposed need for improvement in auditor
independence, objectivity and professional scepticism.
The global fnancial crisis was by and large the result
of global liquidity drying up. From an auditors
perspective, this led to a marked increase in the
diffculty of valuing fnancial assets and liabilities
in the existing accounting framework and also,
perhaps more dramatically, a systemic deterioration
of confdence of reported asset and liability values.
Theres no doubt there are some important lessons to
be learned from that history for auditors, preparers of
fnancial statements, regulators, legislators indeed
all participants in the fnancial reporting eco-system.
Its therefore troubling that the bulk of the effort since
the crisis, in particular in Europe, has been directed
towards audit reform. While we spend so much political
capital proposing solutions to problems with no causal
link to the crisis, we miss the opportunity to shine a light
on the real drivers, and therefore miss out on exploring
better ways to genuinely promote trust in the global
capital markets.
The question is; where do we go from here
In our view, measures like mandatory frm rotation
and tendering undermine the sovereignty of the audit
committee and do nothing to promote good corporate
However, we must accept the reality that governments
in some jurisdictions see audit reform as a lever that
needs to be pulled in order to prevent future crises.
And despite the fact that jurisdictions such as the US
and Australia have shown little appetite for similar
reforms, its important to consider more constructive
regulatory alternatives, should a case for change to audit
regulation be successfully made here in the future.
One solution thats been overlooked is that which
the Canadian regulator has proposed; periodic
comprehensive reviews.
A comprehensive review is a structured, in-depth,
strategic review of audit quality and auditor
performance carried out by the audit committee
at a fxed interval. In its most rigorous form it also
includes a provision to communicate its fndings to
shareholders, regulators, and the broader market.
Peter van Dongen
Managing Partner, Assurance
National Assurance Leader
+61 (2) 8266 3378
Comprehensive reviews;
a logical evolution of audit
committee responsibilities
3 | Audit and Risk Committee Matters: June 2014
A periodic comprehensive review is, by nature,
an outcomes-focussed proposition because it
concentrates on objectivity, independence and
scepticism the underlying drivers of audit quality.
Most importantly, under the comprehensive
review model the discretion of the audit
committee is maintained because it retains the
ultimate authority to decide if the outcome of
the review supports a decision to retain their
auditor. That makes a lot more sense to me than
stripping the sovereignty of the audit committee
in favour of instructions based on tenure.
In detail: what does a periodic
comprehensive review involve?
A periodic comprehensive review should examine
the effectiveness of the relationship between the
audit frm and the company. It should concentrate on
the audit teams independence and any barriers to
objectivity or effectiveness in conducting the audit.
At a high level the review should identify,
review and formally evaluate whether or not:
The auditor has safeguards in place to adequately
guard against independence threats;
Communications from the audit frm are timely,
clear, concise and relevant, and suggestions for
improvements or changes are constructive;
The exercise of professional scepticism includes
looking at contrary evidence, the reliability of
evidence and, considering potential fraud, the
need for additional procedures;
The auditor is willing to challenge management
The audit frm has responded to the fndings
of external and internal quality reviews and
made improvements;
The audit frm has adequate internal processes
for assessing and monitoring quality;
The quality of the engagement team is suffcient -
including the continuity of appropriate industry,
sector and technical expertise;
The audit frm has exercised suffcient
objectivity to mitigate any independence
and familiarity threats.
The review would assess and evaluate these factors in
the context of how the incumbent audit frm applied
them to the audit and how the auditor responded to
any additional engagement-specifc issues.
In summary
We believe periodic comprehensive reviews are the
most effective way of enhancing audit committee
oversight of the performance of their auditor and
quality of their audit. We believe they are more
helpful and appropriate than other measures which
undermine the ability of the audit committee to
effectively discharge its unique role in the capital
market. Moreover, we will always welcome
any proposal that builds on existing corporate
governance frameworks in order to promote
auditor independence, objectivity and scepticism
the triumvirate that underpins audit quality.
4 | Audit and Risk Committee Matters: June 2014
[Periodic comprehensive reviews]
make a lot more sense than stripping
the sovereignty of the audit
committee in favour of instructions
based on tenure.
5 | Audit and Risk Committee Matters: June 2014
Recently, boards and senior management of many major multinationals have been grappling
with a moral choice whether their companies should be paying as little tax as legally possible,
or whether they have an obligation to society to pay a fair and substantial contribution of tax in
excess of that minimum.
Does the board have an obligation to
ensure your company pays as little tax
as legally possible?
For many years, a commonly held view was that the
role of boards and senior management was to ensure
that companies paid the minimum amount of tax legally
possible, thereby maximising after-tax returns to their
shareholders. To do this, companies established structures
in particular ways, took advantage of tax concessions
and incentives offered by various countries to attract
investment, and carefully considered what steps could
be taken to optimise after-tax returns within the letter of
the law. More recently, as governments have sought to
recover their fscal positions after the GFC, these practices
have been called into question by tax-aware consumers,
the media and the non-for-proft sector. Governments
have been quick to respond and global, coordinated
action is being taken through the OECD, the G7, the G20
and ongoing collaboration between tax legislators and
regulators in developed and developing countries.
What has changed?
In the UK, Europe and the US there has been
considerable attention on the role multinationals
played through the GFC. Several governments helped
multinationals through the GFC and now face signifcant
defcits and are cutting services to their constituents
through austerity measures. As a result, there have
been several high profle consumer protests, extensive
media coverage and pressure on governments to act
on the perception that many multinationals do not pay
their fair share of tax and need to take a more moral
approach to their tax affairs. In one case, this consumer
and political pressure led to a voluntary payment of tax
to restore some of the brand damage that occurred.
The OECD published an action plan to address concerns
over what it calls base erosion and proft shifting (BEPS).
The BEPS report and action plan targets a number of
perceived areas of concern such as the use of hybrid
instruments and entities, transfer pricing, excessive debt
funding, how the international tax system applies to a
digital global economy and harmful tax incentives which
undermine the global tax system. The BEPS action plan
sets out an aggressive timeline for member states to take
action to address each area of concern. More detailed
OECD discussion papers regarding some of these topics
(such as hybrids and the digital economy) have already
been released.
David Earl
Partner, Tax
+61 (3) 8603 6856
The tax and morality debate
Tax and your decisions about tax risk and strategy
can no longer be viewed in isolation from your
business or as a simple matter of complying with
the letter of law but paying as little tax as possible.
6 | Audit and Risk Committee Matters: June 2014
In Australia, there have been a number of changes
that are related to the tax and morality debate and
the BEPS report. These changes have included
further strengthening of our transfer pricing
laws, amendments to our general anti-avoidance
provision (Part IVA) and further budget allocations
to the ATO to investigate the global tax practices
of multinationals. Non-government organisations
have also written to CEOs of major listed groups
about their tax affairs and the use of tax havens.
Another signifcant game changer in Australia is the
publication of major companies tax information each
year by the ATO. For the 2013-14 and later income
years, the ATO will publish a report in respect of
companies with total reported income of $100 million
or more. It is envisaged that the report will include the
information in Figure 1.1.
There could be entirely appropriate reasons why a
companys Australian taxable income is signifcantly
less than its accounting income (e.g. utilising carried
forward losses, signifcant foreign income that is taxable
offshore but not in Australia), but this context will not
be clear from the published information. Accordingly,
companies should consider taking steps now to educate
stakeholders (not just shareholders their customers,
the media, regulators, and society generally) about
their tax affairs before this information is published
by the ATO. This might be as simple as including some
additional context in their annual report. For others, it
might extend to publishing their tax strategy and policy.
These measures are intended to have the objective of
discouraging large corporate entities from engaging
in aggressive tax avoidance practices, provide more
information to inform public debate about tax policy,
enable better public disclosure of aggregated tax
revenue collected, and improve information sharing
between Government agencies.
Tax and your decisions about tax risk and strategy
can no longer be viewed in isolation from your
business or as a simple matter of complying with
the letter of law but paying as little tax as possible.
For audit committees of multinational groups, this
challenge needs to be met with transparent and
detailed tax reporting to defend tax positions and
enable informed discussions by stakeholders.
Name ABN Total income Taxable income Income tax
A1 Ltd 10 234 567 890 $500,000,000 $400,000,000 $120,000,000
B1 Ltd 97 876 543 210 $300,000,000 $101,000,000 $10,000,000
C1 Ltd 10 293 847 756 $120,000,000
Figure 1.1: Information envisaged to be included in the ATOs publication of major companies
tax information
7 | Audit and Risk Committee Matters: June 2014
What should you do to respond?
A number of observations can be made about the tax and
morality debate in Australia. Unlike many other countries
where the debate is raging, Australia has a number of
inherent safeguards in our tax system, including:
our general anti-avoidance rule, Part IVA, is amongst
if not the most effective anti-avoidance rule in
the world
our transfer pricing rules are some of the strongest in
the world
the ATO is sophisticated, well connected and leading
the world in a number of areas connected to the tax
and morality debate
many of the concerns are a direct result of an out of
date global international tax system, which must be
updated in order to better respond to a globalised
digital economy.
However, the reality is that Australian companies must
respond to the environment and it would be a bold move
to ignore the recent changes and not plan a response.
Find out more
Follow the latest OECD developments on its BEPS Action Plan
and to hear from PwC global tax specialists on various actions.
We have also recently launched the eighth Paying Taxes
publication in conjunction with the WorldBank and IFC. As in
previous years, the report is expected to be a catalyst for some
interesting debate with tax authorities, governments and
businesses around tax systems and how they can be reformed.
8 | Audit and Risk Committee Matters: June 2014
Questions for the audit and risk committee to consider
There are a number of key questions around tax risk management that audit and risk
committees of multinationals should, as a minimum, start thinking about:
What is our philosophy to tax? Do we seek to take all advantages available within
the letter of the law? Do we temper our actions from the perspective of their broader
societal impact?
Is this philosophy understood by our staff, our regulators, our customers, our
shareholders and other stakeholders? Have we set and enforced clear policies?
Do our tax practices generate broader reputational concerns? Are we prepared to deal
with those concerns whether legitimate or not? Who is responsible for doing this?
Given the ATO will be publicly releasing the tax payments made by large companies and
most mining companies, is there a case to disclose more than we are currently obliged to
disclose in terms of our tax payments and profle in order to educate stakeholders?
As a Board, do we know:
How much tax we pay?
Where we pay tax?
Our effective tax rate?
How many tax havens we operate in?
How many enquiries we have received about our tax affairs?
Whether we have been named in any public justice or tax fairness reports?
Do we understand which jurisdictions really matter to us in terms of proft repatriation?
If tax laws changed with little notice in one of those jurisdictions, are we prepared to
respond quickly?
9 | Audit and Risk Committee Matters: June 2014
Cost reduction and controls:
maintaining discipline and
creating a platform for growth
Most Australian companies have launched cost-cutting programs in the past three years
and many others plan to. The question for boards is how to cut costs without undermining
controls, and how to ensure the right controls are in place to support growth.
Kristin Stubbins
Partner, Assurance
Assurance Markets and Strategy Leader
+61 (2) 8266 2208
Case study Finance function slips after
cost-out program
A large Australian corporate reviewed a divisions fnance
function in 2009 and made a number of improvements,
including implementing a new fnance system, identifying
processes that could be refned and reducing headcount.
With a change program in place, the senior management
team turned its attention to other issues soon after the
However, by 2012, the business discovered errors in
the divisions fnancial accounts. This led to a detailed
investigation, which revealed:
Appropriate controls had not been embedded when
the change program was implemented, leading to
errors in monthly reporting.
Staff had been poorly trained in using the new
fnancial system. Further, business-as-usual IT
support had been reduced as part of the cost cuts.
Consequently, a number of manual workaround
processes had been implemented instead of staff
using the system.
Employee numbers had actually increased over the
three years. As line managers became aware of the
control issues, they had added people to perform
detection and analysis. This created more manual
workarounds, rather than addressing the root cause
of the issue : embedding the right controls to optimise
process and system functionality.
What is happening in your company?
In the latest PwC Global CEO Survey, 77 per cent of
Australian respondents had implemented a cost-
reduction initiative in the past year and 57 per cent
planned to do so in the year head.
This is consistent with our observation that almost
all major Australian companies have completed cost-
cutting exercises over the past three years. These
exercises have been accompanied by offshoring, the
implementation of shared service centres, outsourcing,
reductions in employee numbers and the introduction
of new technology systems.
However, while many organisations have had project
plans and risk management structures in place
during their cost-reduction exercises, they have rarely
followed up by reviewing the adequacy of their controls
environment after such streamlining measures.
This has left many companies exposed to weak or
unsustainable risk management controls in certain
functions, including the critical areas of fnance and
human capital.
10 | Audit and Risk Committee Matters: June 2014
Key questions for the audit and risk committee
If your company is about to embark on a cost-reduction
exercise, its important to ask:
Will the companys controls be re-designed along with
processes or systems?
Has the committee obtained comfort that controls
will be optimised, particularly given the change in risk
profle that the company may be undergoing?
Will the effectiveness of controls be reviewed after the
If the business has already completed a cost-out exercise,
its vital to ask these questions in retrospect.
The role of the audit and risk committee in
ensuring appropriate controls are in place
Management teams are often incentivised to optimise
savings, but not always rewarded for optimising controls.
This means boards have a critical role to play in maintaning
controls during and after major cost-out programs.
The audit and risk committee should also consider
whether major process changes should be accompanied
by cultural change programs, and explore opportunities
to lift the companys productivity and effectiveness in
tandem with cutting costs.
Finally, the audit and risk committee should question
whether new systems and controls especially those that
enable sophisticated data analysis will support
the companys future growth agenda.
Actions to consider:
Ask for controls to be included in
business cases
When the audit and risk committee is asked
to consider a business case for a signifcant
cost-reduction program, it should ask for
appropriate consideration of the sustainability
and optimisation of business process and
fnancial controls. The changing risk profle
of the business should also be considered as
part of this process.
Ensure controls are embedded in
project plans
The audit and risk committee should confrm
with management that the re-design and
optimisation of controls is embedded in the
project plan.
Pay special attention to systems
re-designs and implementations
The audit and risk committee should ask the
management team to present its plans for
process systems-related re-design, training
and controls.
Conduct post-implementation reviews
A post-implementation project review should
test the effectiveness of controls in the new
environment, and the audit and risk committee
should ask to see the outcomes.
Consider whether the new environment
will support growth
The audit and risk committee should consider
how new systems and controls will act to
support the companys growth agenda,
especially where that agenda relies on
sophisticated data analysis.
For more information on how you can
manage cost out initiatives with the
confdence of an appropriate remaining
controls framework, please call:
Kristin Stubbins (02 8266 2208) or
Christopher Daniell (02 8266 1682).
11 | Audit and Risk Committee Matters: June 2014
Relevant reading
VALUE ACCOUNTS Holdings Limited
annual nancial
report 2013
Value Accounts Holdings
17 September 2013
[Draft for discussion purposes]
To view any of the above publications, please visit:
Streamlined annual fnancial reporting and plain english OFR
Communicating the things that matter
Annual reports have become complex and diffcult to read. Companies struggle to tell the
story of their business model, strategy and performance to the market, and important
information gets lost in the noise and volume of requirements. In a competitive
market for capital, communication matters. Research has shown that companies who
communicate their strategy and performance credibly and effectively fnd it easier to
access capital.
Streamlined fnancial report, OFR and annual report
We have created a streamlined annual fnancial report to demonstrate some practical
ways that companies could make their reports less complex and accessible.
This publication illustrates some simple changes that all companies can take to make their
fnancial reports less complex and more accessible.
This, coupled with our methodology and benchmarks for communicating the business
model and strategy of a company, (OFR), and the elimination of duplication throughout
the annual report, should increase the clarity and usefulness of company reporting.
To fnd out more, please contact your PwC engagement partner or visit
Audit and Risk Committee
Topics featured in the previous edition of
Audit and Risk Committee Matters include
the audit quality debate, the evolving nature
of reporting and supplier arrangements in
light of risk considerations.
Internal Audit in 3D
This publication explores the
use of analytics in a world of
digital, data and devices.
Opinion and insights on current industry issues for audit and risk committees
Issue 1, 2013
Audit quality
The debate, our views and the
implications for audit committees
Response to ASICs fndings page 2
How valuable do stakeholders
fnd your reporting?
The evolution towards
integrated reporting
An in-depth analysis page 6
Is your supplier risk
management keeping
pace with your
strategic imperatives?
Supplier arrangements and
risk considerations
The role of audit and
risk committees page 9
Audit and Risk
Committee Matters
Internal Audit in 3D
Using analytics in a world
of Digital, Data and Devices
2014 State of the Internal
Audit profession study
Our 2014 study takes an in depth look at
how internal auditors are responding to
the changing needs and expectations of
their businesses.
World Watch
Global news and opinions
on governance, reporting
and assurance issues
affecting business today.
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network. Each member frm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general
information purposes only, and should not be used as a substitute for consultation with professional advisors.
Liability limited by a scheme approved under Professional Standards Legislation.
PwC Australia helps organisations and individuals create the value theyre looking for. Were a member of the PwC network of frms in 158
countries with close to 169,000 people. Were committed to delivering quality in assurance, tax and advisory services. Tell us what matters
to you and fnd out more by visiting us at www.pwc.com.au.
www. pwc.com.au/arcm
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Contact details
If you have any questions about the articles featured
in this publication, please contact myself or the
relevant author.
Peter van Dongen
Managing Partner, Assurance
+61 (2) 8266 3378