28 Feb MPs look to smash cosy auditors club
Edmund Tadros – The AFR – Friday 28 November 2020
The cosy relationship between auditing firms and company directors is set to be disrupted with a parliamentary committee recommending that corporations go to market for their audit every decade, or explain to shareholders why they won’t open up the role to rival firms.
The committee examining audit quality in Australia has proposed that more than 500 listed companies that have had the same auditor for more than a decade be forced to put their audit out to public tender by 2022.
The interim recommendations, along with a host of other far-reaching suggested changes to the Corporations Act and accounting standards, by the Parliamentary Joint Committee on Corporations and Financial Service are aimed at improving the perceived and actual quality of auditing in Australia.
The committee recommendations include that companies be required for the first time to tell shareholders how long they have had the same auditor.
The average tenure of audit firms at the largest 20 companies is more than two decades. Woodside Petroleum has had EY (the former Ernst and Young) check its books for the past 66 years. ANZ Bank has retained KPMG as its auditor for 51 years, while Westpac has had PwC check its financials for 18 years.
The recommendations present both an opportunity and major threat to the big four consulting firms Deloitte, EY, KPMG and PwC, which dominate the blue-chip auditing market and collectively generated about $1.5 billion in revenue from their statutory audit work last year.
The committee is running an ongoing inquiry, recently extended until September, into auditing amid long-term concerns from the corporate regulator and other experts that the quality of work is inadequate.
The Australian Securities and Investments Commission’s most recent audit inspections found that the big four firms failed to obtain sufficient assurance in up to 33 per cent of the key audit areas scrutinised.
The audit role is critical to the function of the markets with investors relying on an auditor’s independent review of the financial statements of a company.
Committee chairman Liberal senator James Paterson said that across 110 submissions and 32 witnesses at four public hearings “no new empirical evidence of systemic audit failure was uncovered”.
“However, stakeholders presented anecdotal evidence and raised fears about audit quality. This indicates a lack of trust in the audit industry that must be remedied,” he said.
Labor senator Deborah O’Neill, the driving force behind the inquiry, countered that the committee had heard ample evidence from experts and whistleblowers “of cultural practices” at certain big four firms which compromise audit quality.
She said the interim recommendations will help “restore confidence in business and reverse the negative global perception of our audit quality”.
“It should also be a wake-up call to those in the professional services industry who willingly flaunt safe and respectable workplace practices – you are not above the law and you will be held accountable for pernicious work practices and work culture,” she added.
The recommendations for listed companies to disclose auditor tenure and publicly go to market every decade are designed to increase the transparency of the relationship between auditors and their listed clients and put pressure on companies to regularly open up the role.
The interim majority report into the “Regulation of Auditing in Australia”, tabled in parliament on Thursday afternoon, also wants to adopt aspects of the US Sarbanes-Oxley Act 2002. This would see auditors report on the accuracy of management’s assertion that their internal financial reporting systems are effective.
The Sarbanes-Oxley Act was enacted in the US after financial scandals in the early 2000s involving the collapse of companies such as Enron and WorldCom. It was designed to protect investors from fraudulent financial reporting.
The committee also recommend that the corporate regulator and the government’s audit quality advisory body develop a list of services auditors are banned from providing to audit clients and tighter definitions of non-audit services.
Such a move has been resisted by the big four consulting firms, which collectively sell more than $500 million a year in non-audit work to their audit clients.
The committee took the view that even though the “provision of non-audit services” may not hurt audit quality, it “may impact the perception of independence which, as a consequence, would impact the perception of audit quality”.
The committee also wants mandate the introduction of digital reporting to allow easier comparison of the financial results of listed companies.