Unpacking proposed reforms of accounting and auditing firms

The Government has proposed substantive reforms that in totality would reshape the governance and regulation of large audit and accounting firms in Australia. The Government’s proposed reforms come in the context of significant attention on KPMG and have the aim of driving improvements in audit quality, auditor independence and higher ethical standards. 

Context

The audit sector has come under increasing scrutiny in recent years, highlighted by Parliamentary inquiries, including the 2024 Report into Ethics and Professional Accountability: Structural Challenges in the Audit, Assurance and Consultancy Industry (2024 PJC Inquiry), which made 40 wide ranging recommendations to enhance the regulation of audit firms, including Corporations Act style governance and accountability requirements, operational separation of audit and non-audit services and greater regulatory powers for Australian Securities and Investments Commission (ASIC). Separately, Treasury in 2024 also conducted a consultation into the regulation of accounting, auditing and consulting firms in Australia, to which the AICD made a submission.

The proposed reforms are occurring in an environment of heightened scrutiny on large accounting and audit firms stemming from concerns about KPMG conduct. Following a Parliamentary hearing on ethics and professional accountability in late June, KPMG Australia announced leadership changes, a governance overhaul and an action plan to address integrity issues and strengthen accountability.

On 1 July 2026, Treasury commenced a new six-week consultation on proposed reforms to the regulation of accounting, auditing and consulting firms in Australia. The Treasury options paper (Options Paper) puts forward that recent events have highlighted gaps in the “regulation of the audit sector in relation to independence and ethics, audit firm culture and values, firm-wide monitoring systems and internal controls, and prioritisation of audit quality.”

In a press conference announcing the consultation, the Assistant Treasurer, The Hon Dr Daniel Mulino MP said that the Government does not have a particular timeline on legislating any of the proposals. Minister Mulino also noted the raft of broader reforms, including the recent passage of legislation to establish External Reporting Australia and the current consultation on whistleblowing protections.

We examine the key options proposed by Treasury below. Public consultation closes on 12 August 2026. 

Summary of key proposed options

Treasury’s proposed options are across six themes, with the full detail available in the Options Paper. The key options, which have been the subject of preliminary feedback from AICD members, are summarised below.

The proposals are broadly aimed at the largest multidisciplinary firms who provide accounting, auditing and advisory services. This recognises that audits are mandatory for the largest companies in Australia. Given the intention to also increase audit market dynamism and require licencing of all audit firms, some proposals also have implications for small and mid-tier firms.

Audit firm governance

Operational and structural separation

Operational separation aims to ‘ring fence’ the audit practice from other services, without requiring the firms to spilt into two separate entities. In the UK, this initiative was introduced in 2020 (with a three-year transition period), where the UK’s four largest audit firms split their UK audit and non-audit practices.

Under the operational separation option, to manage the conflicts of interest between providing audit and non-audit services, the audit service line would be required to have a separate CEO and chair (with the non-audit service line retaining its own CEO and chair) and governance board.

Under the mandatory structural separation option, reporting entities could only procure audit services from firms that do not offer non-audit services. Treasury recognises that exceptions may be needed, especially where the provision of non-audit services is required in the context of an audit.

Treasury highlights that pursuing these options would likely involve significant transitional costs that would be passed on to clients and consumers.

New governance requirements on large audit firms

New governance requirements would be imposed on large audit firms. This includes establishing a board for decision-making, strategic direction, and oversight and a minimum number of independent board members, and in addition, it is proposed that new, specific tailored duties akin to directors’ duties under Corporations Act will be introduced on directors and senior management.  

ASIC would have enforcement powers if key personnel failed to comply with their duties. Treasury notes that imposing corporate style obligations may conflict with the legal structure of a partnership.

Reduce partnership limit for accounting firms

The partnership limit would be reduced for accounting firms from 1,000 (i.e. 400 has been floated as an appropriate level, consistent with partnership caps on legal firms), with a requirement that a percentage of partners are registered and subject to code of conduct requirements. Treasury notes that having a minimum percentage of partners personally exposed to deregistration and civil and criminal penalties may further incentivise practitioners and firms to meet ethical standards.

Audit market

Disclosure of audit tenure

Under this option, there would be additional reporting obligations regarding auditor tenure. Companies would be required to disclose audit firm and lead auditor tenure, current lead auditor commencement, and the most recent auditor tender date, in their annual reports.

Mandatory audit tendering and audit rotation

Treasury proposes that listed audit clients would need to conduct mandatory periodic tendering for audit services every 10 years and mandatory audit firm rotation firm every 20 years. It is highlighted that this option would be consistent with the UK and the EU which both require mandatory audit firm rotation and tendering.

Prohibition from engaging auditor for non-audit services

This proposal aims to address the risks to auditor independence by preventing the cross-selling of non-audit services to the client. However, Treasury recognises there may be circumstances where non-audit services are required as part of the audit process itself.

ASIC regulation and enforcemen

Treasury has proposed that all audit firms, including partnerships, would be required to be licensed by ASIC, as the primary regulator for auditing.

The conditions of the license would include requirements relating to quality management, ethical standards, and governance. Breaches would allow ASIC to impose additional licence conditions, issue infringement notices, commence proceedings to pursue civil penalties, or suspend or revoke a licence.

Separately, there are proposals to introduce civil penalties on registered company auditors, authorised audit companies, and audit partnerships for contraventions of auditor requirements. A new tier of penalty for a ‘significant global entity’ (i.e. $1 billion turnover) also aims to provide a credible deterrent to the largest firms.

Finally, Treasury has proposed mandating a minimum level of audit surveillance activity by ASIC. This could cover audit files being selected on a randomised and risk basis and reports to be published publicly, consistent with the current approach adopted by ASIC.

Next steps

Public consultation on Treasury’s proposed options closes on 12 August 2026. The AICD will be providing a detailed submission and would like to hear from members on these key proposals. Feedback can be provided via policy@aicd.com.au.