27 Feb Chair’s statement: Regulation of auditing interim report – PJC on Corporations and Financial Services
Senator James Paterson
Liberal Senator for Victoria
Chair, Parliamentary Joint Committee on Corporations and Financial Services
Tabling of interim report: Regulation of auditing inquiry
Chair’s chamber statement
Thursday 27 February 2020
I rise to speak to the tabling of the Regulation of Auditing Interim report as Chair of the Parliamentary Joint Committee on Corporations and Financial Services.
This is an interim report because although the Senate has voted to extend the committee’s reporting deadline until September, committee members agreed that the policy recommendations we wished to make were already clear from the evidence we have collected in our hearings so far.
We did not want to delay the action required by regulators, government and the industry by withholding our recommendations for six months.
The committee’s work has been comprehensive. We received more than 110 submissions, heard from 32 witnesses at four public hearings, and obtained more than 100 answers to questions on notice. The committee received evidence from a wide variety of witnesses, including regulators, accounting standards bodies, the Big Four and mid-tier accounting firms, and academics. Hearing from a diversity of voices has assisted the committee in understanding how the auditing industry is performing from a holistic perspective.
Today we make ten recommendations to restore trust and confidence in audit services.
Auditing is systemically important to a healthy financial system. It gives investors’ confidence they can rely on financial statements made by companies. Audit therefore needs not just to be high quality, but be seen to be high quality.
At the outset of the inquiry I asked witnesses to address the following questions:
“Firstly, what is the evidence that the practice of auditing in this country is flawed?
Secondly, are those flaws isolated, or are they systemic?
Thirdly, if those problems are systemic, what is driving them?
Fourthly, what policy solutions are available to government to address them, and what are the costs and benefits of those solutions? If they have been implemented elsewhere in the world, how did they work? If they are entirely new, what justifies this novel approach?”
I also noted that:
“It may be the case that the evidence base of a current problem of auditing in Australia is limited, but there is very good reason to believe it will be a bigger problem in the future. If that is the case, I will be interested to hear from witnesses why they believe so.”
The committee did not identify any new empirical evidence of systemic audit failure in Australia.
The most commonly relied upon evidence to claim we have systemic audit failure in Australia was the ASIC inspection reports. These have certainly attracted significant media attention and commentary in recent years, and they are reason for some concern.
But as ASIC was at pains to point out on multiple occasions during the inquiry, this data should not be relied upon to make judgements about the entire industry because they are not designed to be either a representative or random sample.
Instead, ASIC deliberately targets audit files based on risk. This is entirely appropriate for a regulator.
As ASIC says, this means we must be very careful extrapolating on this data. As other witnesses raised, and ASIC acknowledged, the figures also incorporate all issues with audit from the least serious to the most significant.
One of the recommendations of this inquiry is to ASIC on how they report this data, which will be asked to implement a revised framework for grading the findings based on the severity of the issues identified.
In the absence of new evidence of systemic audit failure, the committee was presented with some anecdotal evidence of audit failure, and fears were raised by a number of witnesses about the risks of audit failure of a systemic nature in the future.
This indicates a lack of trust in the audit industry. Due to the systemic importance of auditing to a market economy, a lack of trust in and of itself is a problem which must be remedied.
The committee’s interim recommendations seek to address this trust deficit by providing greater transparency, clarity and confidence of the auditing industry in Australia.
They include mandating disclosure of ASIC’s individual firm inspection reports, clear definitions of audit and non-audit services, expanded auditor independence declarations, restrictions on audit partner remuneration, audit firm public tendering, compulsory digital reporting and other related matters.
The committee has carefully weighed international experience to make recommendations which seek to balance competing factors of auditor competence and independence to deliver an audit market which is efficient, effective and trusted.
For example, based on experience overseas, technological innovation through digital reporting has the potential to lower the costs, increase the accuracy and improve the transparency of financial reporting.
I am personally most excited by this recommendation because the benefits it promises will not just be limited to the audit industry, but for all users of financial statements.
During the hearings and across the submissions, no compelling evidence was found to support the more radical proposals which have been abandoned or discounted internationally, such as mandatory structural separation of audit firms.
On the contrary, the committee heard significant evidence that measures like these would have profoundly negative implications for competition and audit quality.
The committee will hold two more hearings and hand down its final report in September.