Let ASIC police big four conflicts: Samuel
Treasury floated the possibility of splitting the big fours’ consulting arms from their core audit and assurance divisions, and questioned whether the statutory limits on partnership size were too generous.
However, Professor Samuel said there was a “fundamental conflict of interest” in providing auditing and consulting services to the same clients, but an enforced carve-up of the industry would be unnecessarily complicated and impractical given the global nature of the big four firms.
Instead, state governments should hand over to the federal government their powers to regulate partnerships of economic significance, similar to what was done with consumer laws in the mid-1990s, to allow the big four to be brought under the aegis of the Australian Securities and Investments Commission, he told The Australian Financial Review.
The corporate regulator could prevent the big firms undertaking non-audit work for audit clients, Professor Samuel said, avoiding a complex restructuring of the firms.
Former ACCC chairman Graeme Samuel. Alex Ellinghausen
Such work made up an average of 6 per cent of the big four’s revenue last financial year, according to Treasury data.
Professor Samuel, former chairman of the Australian Competition and Consumer Commission, said the ASIC oversight could be achieved by the “very simple solution” of the regulator imposing conditions on the registration of auditors to prevent their firms undertaking non-audit work for audit clients.
“All that will happen is that, among the big four, there will be a redistribution of consulting work, and firms won’t lose all their consulting income,” he said.
Under the sector’s complicated, self-imposed rules, firms are allowed to provide certain types of non-audit services, under certain conditions, to auditing clients. This can include the auditing firm providing tax advice.
This is despite concerns that providing non-audit work to auditing clients might compromise auditor independence, and related worries about declining audit quality.
Governance reforms ineffective
In the consultation paper, Treasury questioned whether governance reforms undertaken by the firms in response to scandals in the sector were likely to fundamentally change firms’ behaviours.
ASIC previously has said the much-vaunted governance commitments were unenforceable.
PwC, for example, will appoint independent directors to its governance board as part of its post-tax leaks scandal reforms, while KPMG introduced independent directors in 2017. Three independent directors sit on EY’s global governance board.
In all cases, independent directors are outnumbered by partners, who, as part owners, have a direct interest in the financial performance and profitability of the firm.
In its consultation paper, Treasury questioned whether governance reforms – such as the appointment of independent directors or commitments to corporate governance procedures – would lead to change.
“In these cases, there may be a high level of overlap between the owners, the executive and members of the board, all of whom could be partners with varying degrees of management or oversight responsibility,” Treasury said.
“To the extent that such a partnership has appointed independent directors to its board, directors’ influence may be limited if they are in the minority.”
Professor Samuel said moves to adopt unenforceable governance models looked good on paper, but would not fundamentally change the behaviour or culture of the big firms.
“You can put in place all sorts of structures you like, but the culture of the firm will overwhelm the structures one way or another,” he said.
“It’s better to have these things constrained, regulated and disciplined by an independent body – that being ASIC – that can exercise the power to provide oversight and regulation in the same way as if the firms were corporations.”
Treasury said the size of the large firms – which each have more than 500 partners – limited the power and liability of individual practitioners subject to professional regulations, and granted more influence to firm-level management driven by incentives of profit optimisation and the maintenance of client relations.
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Treasury questions the very nature of the big four consulting firms
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- Edmund Tadros
Opinion
Treasury questions the very nature of the big four consulting firms
Get ready for war as the big four fight back against suggestions they are too big, incapable of governing themselves and have compromised auditing roles that are critical to the economy.
Edmund TadrosProfessional services editorThe Treasury consultation paper on regulation of the big four consulting firms makes it clear the current way the firms operate and are policed is not working effectively.
But it also highlights that the government’s overriding concern is about three services critical to the wider economy: auditing, taxation and insolvency.
Those three services “are considered particularly important to the functioning of Australian markets and the economy”, the paper states.
The areas are already highly regulated, but the responsibility is often split between some combination of federal and state bodies and professional bodies. This is why 11 of the 16 issues raised in the paper are framed in terms of how they would affect auditor independence and audit quality.
The inquiry particularly focused on the audit quality and operations of the big four consulting firms – Deloitte, EY, KPMG and PwC. Stephen Clark
The essential issue for Treasury is that no one has an overview of the firms and how their structures and services might compromise those key three services.
ASIC chairman Joe Longo put it best when he noted that the corporate regulator only policed a “sliver” of services provided by the big four because they operated in a grey legal area where they were neither “true partnerships” nor covered by federal corporate laws.
The paper raises potential areas for reform that go to the heart of how the firms have become so successful: their multidisciplinary partnership structure.
It asks if the partnerships are too big, if they are capable of governing themselves, and if sharing of profits between auditors and other advisers within the firm compromises the auditors.
The paper, which dropped just before dinner time on Friday, is too fresh for the firms to have had a comprehensive look. But they have already, privately, questioned why partnership size limits would have to change.
Each of the firms maintains that their governance structures would never have allowed the PwC tax leaks, which triggered this whole process, to take place. (PwC has also made sweeping reforms made under current chief executive Kevin Burrowes.)
Prepare for a war over this, and other issues close to the partners’ hearts, that will play out in dense and complicated submissions warning about all the dangers of change and unintended consequences.
But the firms are also surprisingly positive about the paper, because it means Treasury has now entered the picture. They have all been badly bruised by the parliamentary inquiries that have targeted their operations and believe that the political pile-on has gotten out of hand.
The view within the firms is that this paper will provide some guidance to rein in any recommendations made by the Senate consulting inquiry (due to report at the end of the month) and the joint inquiry into the structure of the big four (due to report later in the year).
There is also broad agreement that, if nothing else, there should be some consolidation of the way the firms are policed, the way standards are set, and the way it is all enforced.
