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Two years of secrecy: Big four accounting firms still skirt oversight
Treasury has been told the big four accounting firms Deloitte, EY, KPMG and PwC operate in a regulatory grey area with gaps in how the partnerships are policed, and the current oversight of audit quality is inadequate.
A summary of dozens of responses to the department’s consultation into auditing and consulting governance also outlined support for giving the corporate regulator the power to sanction firms, as opposed to individuals, an idea that is vehemently opposed by the accounting sector.
The consultation, which closed in mid-2024, was triggered by the PwC tax leaks scandal and followed a parliamentary inquiry that made 40 recommendations to reform the sector. Details of the 36 submissions and 16 private forums are contained in a ministerial summary, released under Freedom of Information laws.
The response dodged major recommendations that the Treasury consultation was examining, such as a bipartisan proposal to slash partner numbers at the big four consulting firms to a maximum of 400 equity partners – bringing them into line with law firms. Other inquiry recommendations examined by Treasury included partnerships rules, governance of the sector and auditing standards.
‘Regulatory gap’
The Treasury summary of the submissions found there was a “regulatory gap in which professional standards, regulations [and] laws apply only at the individual registered auditor level ...while the management of audit partnerships make[s] decisions affecting audit quality, relating to independence and audit resourcing”.
There was also support for the view of Joe Longo, the chairman of the Australian Securities and Investments Commission, that because of legal grey areas ASIC only regulates a “sliver” of services provided by the big four. Different parts of the big four firms are also accountable to bodies such as the Australian Taxation Office and the Tax Practitioners Board.
The summary found agreement that it was difficult for regulators “to take action against an audit partnership for misconduct, either relating to an individual’s conduct or partnership conduct” and that the partnership structure of the big four firms meant they were “not regulated by ASIC despite the work conducted by these partnerships (such as audit) being worthy of regulatory attention”.
The summary also noted “ambiguity and uncertainty among stakeholders as to the various roles, responsibilities and remits of organisations within the shared regulatory framework”. Professional bodies such as Chartered Accountants ANZ “do not see themselves as a ‘front line’ defence, or a ‘quasi-regulator’, but as supplementary to the existing regulatory framework.”
Respondents were also of the view that ASIC was not doing a good enough job of monitoring audit quality.
“Current regulatory oversight regarding audit quality in Australia is not adequate,” the summary states. “ASIC’s current surveillance and enforcement activity is not seen as a strong deterrent against poor conduct – especially in relation to overseas counterparts, particularly the US.”
The Treasury consultation paper made clear the government’s overriding concern around any potential changes was protecting the quality of three services critical to the wider economy: auditing, taxation and insolvency.
Firms vs everyone else
The firms that submitted responses included the big four and smaller firms Pitcher Partners, PKF Australia, Moore Australia and Forvis Mazars. Other submitters included accounting professional bodies such as CA ANZ, CPA Australia and the Institute of Public Accountants, ASIC and university experts.
A table in the document outlining the broad views of the group shows the big four firms support increases to the current governance standards but feel existing compliance standards should stay the same. This includes allowing the firms to self-regulate when it comes to providing non-audit services to auditing clients.
The big four also broadly support greater public disclosure and complained that ASIC did not track the audit quality of smaller firms.
Mid-tier and smaller firms opposed any increase to governance and compliance standards. The mid-tier firms complained the existing regime was already costly and pricing them out of smaller audits.
There was disagreement in the submissions about the idea to force large firms to structurally separate their audit and non-audit arms. There was also debate over whether self-regulation of the sector was working with company directors “confident that existing regulatory requirements and governance practices safeguard auditor independence”.
The regulators and standard setters said there was a clear need for “firm level regulatory action” because “the current system’s penalties – that focus on individuals – fail to incentivise firm-wide compliance effectively”.
There was general agreement among the submissions that partnerships should fall under existing corporate whistleblower protections.
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Edmund Tadros leads our coverage of the professional services sector. He is based in our Sydney newsroom.
