Australia: Big four consulting arms need regulation: ethics board
Aug 13, 2024
The consulting arms of the big four firms should be regulated like their auditing and tax divisions, according to the accounting industry’s ethics body.
The Accounting Professional & Ethical Standards Board also warned that the corporate regulator’s decision to wind back its audit inspection program could hurt audit quality over time.
The big four firms – Deloitte, EY, KPMG and PwC – operate in a grey legal area where they are neither “true partnerships” nor covered by federal corporate laws. The result is that the Australian Securities and Investments Commission only polices a “sliver” of services provided by the big four.
The ethics board wants ASIC or another regulator to “capture services” provided by the firms that are not currently “subject to appropriate regulatory oversight”.
One “concern is that ASIC’s mandate is limited and does not cover all services provided by firms to clients”, the board said in a response to a question about ASIC’s regulation of auditing from the committee running the joint inquiry into the structure of the big four.
The big four firms are broadly open to having more consolidated regulation – the outfits are regulated in a haphazard manner at the state and federal level – but are likely to resist any formal oversight of their consulting arms.
‘Review more audit files’
ASIC last year overhauled its audit quality surveillance program, changing to what it described as a “data-led, risk-based approach” that relies on issues in financial reports to identify audits for ASIC oversight.
The regulator also scrapped its annual report card, which detailed the number of negative findings against the major firms. The new system involves the regulator directly informing company directors about issues it identifies.
Audit quality is critical to the function of markets, with investors relying on an auditor’s independent review of the financial statements of a company when making decisions.
The ethics board stated it was “concerned about the adequacy of the financial reporting and audit surveillance program at ASIC’ and that the regulator “should review more audit files on an annual basis”.
ASIC conducted 15 audit reviews in FY23, down from 45 in FY22 and almost 60 in the financial year before the pandemic. In comparison, Britain’s Financial Reporting Council conducted 119 reviews and Canada’s regulator conducted 132 reviews.
“ASIC is the key safeguard for the integrity and quality of audit services provided in Australia,” the ethics board said in its evaluation of ASIC’s regulation of auditing.
“Reducing the number of reviewed audit files may negatively impact audit quality in Australia in the long term. The [joint inquiry] committee could consider the necessity for a broad and robust surveillance program to ensure the proper functioning of financial markets and the economy.”
[Financial Review Magazine]
