Big four consulting arms need regulation: ethics board
Edmund Tadros Professional services editor
The consulting arms of the big four firms should be regulated like their
auditing and tax divisions, according to the accounting industry’s ethics body.
The Accounting Professional & Ethical Standards Board also warned that
the corporate regulator’s decision to wind back its audit inspection program
could hurt audit quality over time.
The big four firms are likely to resist any formal oversight of their
consulting arms. Ryan
Stuart
The big four firms – Deloitte, EY, KPMG and PwC – operate in a grey legal
area where they are neither “true partnerships” nor covered by federal
corporate laws. The result is that the Australian Securities
and Investments Commission only polices a “sliver” of services provided by
the big four.
The ethics board wants ASIC or another regulator to “capture services”
provided by the firms that are not currently “subject to appropriate regulatory
oversight”.
One “concern is that ASIC’s mandate is limited and does not cover all
services provided by firms to clients”, the board said in a response to a
question about ASIC’s regulation of auditing from the committee running the
joint inquiry into the structure of the big four.
The big four firms are broadly open to having more consolidated regulation –
the outfits are regulated in a haphazard manner at the state and federal level
– but are likely to resist any formal oversight of their consulting arms.
‘Review more audit
files’
ASIC last year overhauled its audit quality surveillance program, changing
to what it described as a “data-led, risk-based approach” that relies on issues
in financial reports to identify audits for ASIC oversight.
The regulator also
scrapped its annual report card, which detailed the number of negative
findings against the major firms. The new system involves the regulator
directly informing company directors about issues it identifies.
Audit quality is critical to the function of markets, with investors relying
on an auditor’s independent review of the financial statements of a company
when making decisions.
The ethics board stated it was “concerned about the adequacy of the
financial reporting and audit surveillance program at ASIC’ and that the
regulator “should review more audit files on an annual basis”.
ASIC
conducted 15 audit reviews in FY23, down from 45 in FY22 and almost 60 in
the financial year before the pandemic. In comparison, Britain’s Financial
Reporting Council conducted 119 reviews and Canada’s regulator conducted 132
reviews.
“ASIC is the key safeguard for the integrity and quality of audit services
provided in Australia,” the ethics board said in its evaluation of ASIC’s
regulation of auditing.
“Reducing the number of reviewed audit files may negatively impact audit
quality in Australia in the long term. The [joint inquiry] committee could
consider the necessity for a broad and robust surveillance program to ensure
the proper functioning of financial markets and the economy.”
