Treasury consultation on the regulation of accounting, auditing and consulting firms in Australia

In May this year, Treasury consulted on regulating audit, accounting and consulting firms in Australia and the AICD made a submission after two roundtables were held with Audit Committee chairs and Members. Here we summarise the findings of the consultation and AICD submission.

What was Treasury consulting on?

The consultation paper sought stakeholder views on a broad range of issues and 24 specific questions canvassing:

• Partnership governance mechanisms;
• Professional standards, regulations and laws, including those applicable to conflicts of interest and the integrity and quality of services provided by the audit and accounting industries;
• Transparency, public information and reporting by audit and professional services firms;
• Enforcement and regulatory oversight in respect of the audit, accounting and consulting profession;
• Protection of whistleblowers; and
• Competition within the Australian audit market, including the implications of ‘Big 4’ market dominance.

The Treasury Consultation was the latest in a number of consultations, inquiries and investigations into the audit, accounting and consulting industries, which included:

• In 2019, the Parliamentary Joint Committee on Corporations and Financial Services opened an inquiry into the regulation of auditing in Australia. The AICD made a submission. The Inquiry issued its final report in December 2020, with several recommendations directed at ensuring auditor independence.
• In November 2023, the Financial Reporting Council (FRC) released its report into audit quality and the surveillance and regulation of auditor quality and ethical standards. The FRC made 15 recommendations for improvement, including in relation to the supervision and enforcement of auditor quality and ethical standards.
• Various consultations and law reform proposals on strengthening tax practitioner conduct regulation and enforcement, bolstering information sharing for suspected professional misconduct and breaches of confidence, and reforms to whistleblower and tax secrecy laws (see Treasury’s summary of Government response to the PwC Scandal).
• On 15 May 2024, ASIC announced a new review of auditors’ compliance with ethical and independence requirements. ASIC has also named ‘enforcement action targeting gatekeepers facilitating misconduct’ as a 2024 enforcement priority and has explicitly called out the role of auditors.
• Inquiry into the management and assurance of integrity by consulting services provided by the Australian Government which issued its final report on 12 June 2024. The report made 12 recommendations aimed at enhancing public service procurement and contract management, increasing transparency, establishing industry regulation and integrity, and ensuring Parliamentary oversight.
• Inquiry into ethics, professional accountability and structural challenges in the audit, assurance and consultancy industry, which was due to report by mid-2024 (report still outstanding, with a further hearing scheduled for 2 August 2024).

AICD view

The AICD’s submission focused on Audit Committee and director governance issues. Our key points included:

• Directors are acutely aware of, and focused on, discharging their non-delegable financial reporting duties. Directors take active steps to form their own view on the completeness and accuracy of the financial statements.
• The Audit Committee is an effective mechanism to bring director and board focus to the oversight of the financial reporting process. This includes oversight of mechanisms to maintain high audit quality and safeguard auditor independence.
• In the AICD’s view, the current regulatory framework for external audit is sound. Additional requirements that are not proven to lift audit quality should not be imposed through regulation in circumstances where boards are increasingly overloaded as a result of the proliferation of financial and non-financial regulatory and reporting requirements. A strong evidence base must be presented before regulatory interventions are contemplated.
• Undertaking annual and periodic comprehensive audit reviews allows for the assessment of audit quality. In September 2022, in partnership with the Auditing and Assurance Standards Board (AUASB), the AICD issued the Periodic Comprehensive Review of the External Audit Guide (AICD Audit Review Guide) to provide practical assistance to directors and Audit Committees undertaking a comprehensive periodic review of their auditor.
• If directors are unsatisfied with their audit review, this may result in auditor replacement. Directors broadly support the current requirements for audit partner rotation and do not consider that mandatory audit firm rotation (as is mandated in the UK) will necessarily lift audit quality.
• Directors are confident that existing regulatory requirements and governance practices safeguard auditor independence. Key governance practices engaged in by boards/Audit Committees include providing sufficient time for Audit Committee and board engagement with auditors in the absence of management, imposing caps on non-audit fees or engagements, having a detailed list of prohibited non-audit services, and/or requiring pre-approval of non-audit engagements by Audit Committees and/or the board.
• In the absence of addressing capacity constraints within the Australian audit market, mandatory audit firm rotation or requirements to allocate a portion of audit services to non-Big 4 audit firms, as is the case in the UK, are unlikely to alleviate competition issues but could unintentionally decrease audit quality and increase audit cost.
• While the AICD is encouraged by ASIC’s recent focus on auditor compliance with quality and ethical standards, a formal response to the Financial Reporting Council (FRC)’s November 2023 Audit Quality Report (including recommendations for improving ASIC’s financial reporting and audit surveillance program), would be welcome.

The AICD will continue to engage with the Government and Parliament on financial reporting and audit quality and governance issues.