Once in a lifetime headline has now changed …
Tryst between consultants, super funds and regulators must end
The Senate inquiry is skipping over real conflict of interest – corporatist collusion in dodgy unlisted asset valuations and lax regulatory oversight.
Tim Wilson and Jason FalinskiStructural separation of the big four accounting firms will help address a broader problem of corporatist collusion, where regulators are turning a blind eye to the dodgy valuations of superannuation funds cleared by their auditors.
While the Senate’s inquiry into the big four consulting firms attracts attention for answers to populist questions on partner pay, it is skipping over the real conflicts of interest that exist.
Audit is only one part of the picture: the conflicts also exist where big government, big capital and the big four auditors intersect. Ryan Stuart
Thankfully, former competition tsar, Allan Fels, exposed the conflict of prudential regulated audit businesses when their consulting arm relies on billions of dollars from government contracts.
Fels’ observation is only one part of the problem.
The conflicts also exist where big government, big capital and the big four auditors intersect.
A few years after APRA’s capability review found its performance wanting, it was only a prelude to its incompetence and the conflicts that are now being exposed to hold the government’s patrons accountable.
APRA previously admitted that it was disinterested in holding to account the industry superannuation executives who were caught skipping the law by allowing them to misuse Australian’s retirement savings to pay fines for their misconduct.
But the real conflict has been exposed in APRA’s unwillingness to scrutinise the valuations of unlisted assets in super funds that have been audited by the big four.
The tryst of intimacy between industry super funds and Labor politicians, the minister and the prudential regulator, government and consultants, consultants and auditors, and the auditors and the industry super funds means super fund members’ interests come last.
APRA consistently ignored demands by the parliament in recent years to question these funds. And to cover their tracks, they’re embarrassing themselves by seeking to extol the virtue of being a reactive regulator.
It was also revealed that ASIC reduced the size of its supervision team of the big four auditors, scrapped its report card on their performance, and removed their chief accountant.
It’s hardly a surprise that the Financial Regulator Assessment Authority also called out APRA, highlighting claims of superior performance by funds that are built on the facade of “inflated balances, and new members may overpay as they enter the fund”.
But APRA’s failure to investigate super funds directly correlates with the conflicts of interest that exist with their auditors.
Enabling conflict
In the previous parliament, the House Economics Committee grilled funds about unlisted asset valuations and who was auditing them.
As an example, Australian Super outlined that its internal and external auditors were all marking each other’s homework over the previous five years.
In 2016, Australian Super’s internal auditor was the same person from PwC who became their external auditor for the next three years; and the same in reverse for KPMG, who acted as their external auditor, only to be bought inside in the subsequent years.
And regulators still haven’t scrutinised why industry super funds can value investments in companies such as Canva at tens of billions of dollars higher than US investors.
Following revelations of PwC’s conduct around tax advice, it doesn’t seem inconceivable that the big four auditors could be motivated to uphold the valuations of their paying clients first, and worry about the best financial interests of fund members second.
It was only after the obvious commercial reality that when so many workers now operate from home that funds couldn’t sustain their inflated valuations for commercial property.
HostPlus recently closed its dedicated property fund.
And industry super’s collective property trust that is filled with commercial property, ISPT, has floated a merger with their megafund, IFM Investors.
While such a merger hasn’t been completed, if it progresses it may enable the transfer of unlisted assets before they’re repriced and hide it further from fund members’ view.
It may also build a behemoth enabling individual funds to offload their unlisted assets into a broader pool to hide any losses.
This has only been enabled because of the conflicts that exist where the regulator turns a blind eye to the auditor, who turns a blind eye to the government’s sponsors.
There is no chance any audit firm is going to hold them to account when billions of dollars in consulting business is on the line. And it doesn’t end there.
Australian Super outlined that its internal and external auditors were all marking each other’s homework over the previous five years.
While it may not fit the textbook definition of insider trading, if PwC’s conduct were engaged in an equity trade, it would equate to using privileged information to advance its commercial interests.
Yet too often the parliament and regulators have been prepared to tolerate such inconvenient conduct in the super sector when it might trample on government toes.
Following the volatile market movements at the start of COVID-19, ASIC and APRA were presented with evidence of trustees and fund managers moving their own money from unlisted assets before they’d been revalued into shares at discounted prices.
When asked, ASIC and APRA both accepted there was a risk of insider trading because internal staff would know whether unlisted assets had been revalued, or not, while it was transparent that the market was repricing shares.
Once presented with evidence in parliament that this practice occurred, the regulators had no choice but to commence an investigation. Yet strangely, the investigation was shelved days after the last parliament was prorogued for the federal election and there was a change of government.
Perhaps the reason it was shelved was because it exposed APRA’s failure to scrutinise these unlisted assets and their audits in the first place, or more concerning, it might expose broader problems that lead to financial instability.
Dividing power is essential for accountability in governance. A structural divorce of the big four won’t solve all the problems, but it will put some competitive tension between the conflict of interest Kama Sutra of the big auditors turning a blind eye to the misconduct of the big capital sponsors of big government.
