ASIC’s ex-chief accountant slams its big four audit reprieve
The Australian Securities and Investments Commission’s chief accountant for more than 25 years has slammed his former employer’s oversight of the big four audit firms and backed a new watchdog to regulate financial reports, sustainability reporting and audit quality.
Doug Niven, who was appointed chairman of the Auditing and Assurance Standards Board late last year, said ASIC’s decision to scrap its annual audit quality report card on the six biggest auditors – which includes Deloitte, PwC, KPMG and EY – and slash the oversight team could be seen as caving in to firms angry about negative publicity.
Rightly or wrongly, reduced audit file reviews could be perceived by some to be a response to inappropriate criticism by some auditors of findings and the transparency on those findings,” Mr Niven said in a submission to a Senate inquiry made in his personal capacity as a former ASIC employee.
“Transparency on the level of negative findings from audit file reviews provides a strong incentive for audit firms to improve audit quality.”
Mr Niven also took a swipe at ASIC’s leadership, suggesting there was a risk they did not understand some of their regulatory responsibilities, such as audit, “which could result in suboptimal regulatory focus and outcomes”.
Last year, the corporate regulator overhauled its audit quality surveillance program, pivoting to what it described as a “data-led, risk-based approach” that relied on issues in financial reports to identify audits for ASIC oversight.
ASIC also scrapped its annual report card, which detailed the number of negative findings against auditors. Under the new system, the regulator just tells company directors about issues it identifies.
‘Concerning’ fall in audit reviews
ASIC conducted 15 audit reviews in 2022-23, down from 45 in the two years prior and almost 60 in the financial year before the pandemic. In comparison, Canada’s regulator conducted 132 reviews, the UK’s Financial Reporting Council conducted 119 reviews, and even New Zealand’s authority undertook 19 reviews, four more than the larger market across the Tasman.
Mr Niven labelled the reduction “concerning”, particularly after the US Public Company Accounting Oversight Board – the equivalent of the body he wants to see created in Australia – issued a stinging critique of US audit firms following a 40 per cent increase in identified audit deficiencies.
“A problem does not cease to exist just because evidence of the extent of the problem is less apparent,” he said.
Part of the reason for ASIC’s pivot is the long-term struggle to resource all its responsibilities within its existing budget allocation. Mr Niven suggested this supported the creation of a new watchdog.
“A separate regulator would ensure that funding for financial reporting and audit surveillances was used for the purpose for which it was provided. It is difficult to ensure funds are not reallocated over time within an organisation like ASIC which has a broad remit and its own priorities,” he said.
“A dedicated regulator may be seen to be more attractive to accountants, auditors and sustainability experts. It would have a separate profile and reputation.”
It would also offer roles regarded as part of a career and offer greater certainty over tenure, he said, and not to be part of a much larger organisation dominated by other types of practitioners. Attracting people into the areas of auditing and oversight has been a long-term struggle for the industry.
Mr Niven, who oversaw the audit oversight program during his tenure, indicated that ASIC’s new audit oversight model was flawed because it risked undermining confidence in the audit system, which could impede the effective allocation of capital.
“There can be a perception that a regulator is not effective in improving audit quality where the level of findings from audit file reviews does not reduce over time,” he said.
“Identifying and reporting negative findings through an appropriate level of audit file reviews is necessary to demonstrate that audit firms need to make genuine changes to improve audit quality.
“Consistent with my concern with the reduced level of ASIC’s proactive audit file reviews, it is of concern that ASIC has reduced numbers of suitably qualified and experienced financial reporting and audit staff.”
Ronald Mizen reports on politics, economics, business and the law, with a focus on corporate regulators, lobbyists and investigations from Parliament House, Canberra. Connect with Ronald on Twitter. Email Ronald at ronald.mizen@afr.com
