Treasury prepares to crack down on audit firms, with or without ASIC
Ronald Mizen and Edmund Tadros
Treasury is considering handing the corporate regulator the power to punish major audit and consulting firms for the first time, as part of a crackdown on the sector proposed after PwC was caught circulating confidential government tax details to promote its services.
Officials are also considering a second course of action – taking all power to oversee auditors away from the Australian Securities and Investments Commission and handing it to another regulator, known as the Financial Reporting Council, made up of existing industry boards.
The PwC offices in Melbourne. The use of confidential government information by the firm has led to a broad overhaul of how the sector is governed. Luis Ascui
The two options are among several included in a consultation to be made public within weeks. Labor hopes that, once finalised, the reform will close a loophole that has made the firms themselves largely unaccountable, with ASIC having oversight over only individual auditors and specific matters.
Two people who were briefed on the options said Treasury’s preferred plan was not to shift responsibility for regulating auditors away from ASIC and to the Financial Reporting Council, a combined body that was first announced by Treasurer Jim Chalmers two years ago.
The Australian Financial Review reported in early 2023 that PwC’s former international tax head, Peter Collins, had been deregistered because he shared confidential government briefings with the firm’s clients and partners. The firm then designed schemes to help clients sidestep the new multinational tax laws Collins was helping Treasury to develop.
Under current rules, ASIC can take action only against individual auditors and does not have broad powers to take action against big firms like PwC and its major competitors, EY, KPMG and Deloitte. The proposed change would make the firm responsible for the action of their auditors.
Graeme Samuel, the former chairman of the Australian Competition and Consumer Commission, is an outspoken critic of the firms, and has urged the government to allow ASIC to regulate the partnerships.
Samuel said the government should not only hand power to the corporate regulator, but make the penalties for breaches so large that auditors and audit firms would seriously think twice before doing the wrong thing.
“This is the big stick, but it is a big stick only to be wielded in extreme circumstances. The smaller sticks are deregistration, and name and shame. With a big firm, name and shame can do more than a prosecution and a penalty,” he said. “There is a strong argument for ASIC to be funded appropriately to be able to conduct audit integrity examinations.”
In an earlier discussion paper released last May, Treasury raised concerns that auditors were incentivised to prioritise client satisfaction over audit quality, potentially undermining market confidence. It suggested the number of partners could also be capped, and firms may be forced to register as corporations, giving ASIC oversight over their conduct.
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.
“We strongly support and have recommended the government gives ASIC the power and resources needed to regulate audit at a firm-wide level, rather than individual auditors or engagements – audit quality management and independence standards, in particular,” Chartered Accountants Australia and New Zealand’s local reporting and assurance leader, Amir Ghandar, said.
“For us, the crux of the issue is funding and coverage – making sure the resourcing and powers are there for whatever regulator is in place to effectively fulfil the mandate of chief audit regulator. There are pros and cons whether the chief auditor is ASIC or a stand-alone audit regulator, and it is appropriate for government to consider all options.”
Demands for more resourcing
In July 2023, ASIC scrapped its annual report card on the quality of audits at the largest four firms and conducted just 15 reviews of high-risk audits in that financial year. It had conducted 45 such reviews one year earlier.
In 2022, ASIC produced negative findings on 60 per cent of the audits it reviewed, a nearly 10 per increase for the six largest firms, including PwC, EY, Deloitte, KPMG, BDO and Grant Thornton. Deloitte and KPMG were singled out for a drastic decline in audit quality, which the regulator said needed immediate action. Both firms needed to take “deliberate and concerted action” to improve, the regulator said at the time.
The publication of the information had long angered the audit firms, but the reduction was so extreme that the standards body complained.
The shake-up also resulted in ASIC chief accountant Doug Niven leaving the regulator. Niven is now chief executive of the Auditing and Assurance Standards Board, one of the bodies set to be merged into the Financial Reporting Council. Other agencies being merged into the new council include the Australian Accounting Standards Board and the Financial Reporting Council, with the new entity expected to start in 2026.
Any push for ASIC to provide greater scrutiny of the audit sector will come with demands for more resourcing from government. ASIC chairman Joe Longo has repeatedly warned he does not have enough money to do all the things expected of the regulator. Its funding will fall from $511 million last year to $509 million over the 12 months to the end of June 2028.
At the end of last year, the final report by the parliamentary inquiry into the structural challenges in the audit and consultancy industry made its own findings about the sector – giving the corporate regulator more powers to crack down on audit firms was one of the key recommendations.
An EY spokeswoman said the firm operated in “highly regulated sectors … and maintains robust quality and compliance systems”.
“EY fully supports the role of any regulator in this sector, where the regulator is appropriately resourced, has effective review processes and has deep expertise in financial reporting and modern audit practices,” she said.
A spokeswoman for KPMG said the firm supported “options that enhance the regulatory oversight of audit firms.” A spokesman for Deloitte said the firm was “supportive of the important work being undertaken by Treasury” and would review the recommendations once they are published. PwC declined to comment.
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Ronald Mizen is the Financial Review’s political correspondent, reporting from the press gallery at Parliament House, Canberra. Connect with Ronald on Twitter. Email Ronald at ronald.mizen@afr.com
Edmund Tadros leads our coverage of the professional services sector. He is based in our Sydney newsroom.Email Edmund at edmundtadros@afr.com.au
