ASIC slams ‘compromised’ auditors

Corporate watchdog urges Treasury to overhaul the cosy relationship between auditors and big corporates.

Senator Deborah O'Neil launched the inquiry into the auditing sector. Picture: Sam Mooy.

The corporate watchdog has urged Treasury to overhaul the cosy relationship and “lack of professionali­sm” between audit­ors and the biggest companies in Australia, privately lobbying the government to set up an independ­ent body to regulate the appointment of auditors.

The call for a shake-up of the sector came after the Australian Securities & Investments Commission found 50 per cent of audit reviews­ had “significant deficien­cie­s”, halving that rate by this year was “unrealistic” and it needed an “international” ­solution.

Documents released under Freedom of Information laws show that ASIC warned senior Treasury officials in mid-2017 that it believed the reasons behind the lousy audit quality results were “cultural” and caused “primarily (by) the lack of auditor independ­ence because companies pay audit­ors”, which opened the groups up to conflicts of interest.

The minutes show that “ASIC’s view is existing statutory independ­ence requirement have not ­assisted because firms don’t value audit work and audit firm ­rotations don’t work because in large, diverse enterprises, incoming auditors­ have (a) huge company learning curve so it can take years before they have the sophistic­a­tion to know and willing­ness to challenge company ­account presentations effectively”.

The release of the documents comes as parliament gears up to scrutinise major accounting firms KPMG, Ernst & Young, PwC and Deloitte over conflicts of interest, poor audit quality that can help trigger corporate collapses, and the tight-knit relationship between government and the big four accounting giants.

An inquiry into the auditing sector by the parliamentary joint committee on corporations and fin­ancial services was launched by Labor senator Deborah O’Neill, as the sector is under scrutiny across the globe following a series of ­disasters in Britain and South ­Africa.

In a July 2017 meeting that included­ former watchdog chiefs Greg Medcraft and Peter Kell, and Treasury boffin John Lonsdale, now a senior member of the Australian Prudential Regulation Auth­ority, ASIC commissioners said the 2016 review of public ­audits found problems with the “lack of professional scepticism” of auditors inspecting company account­s.

ASIC members said audit work was being “seen as loss-leading within firms and not high-profile enough to attract top talent at all or for very long” and there was a “focus of partners on bringing in new business so (they were) not undertaking quality assurance roles” in the business of auditing.

Commonwealth Bank has had PwC as its auditor since 2008, after employing EY in the role for a ­decade before that.

BHP Billiton recently appointed EY after a 21-year relationship with KPMG, when it was forced to change its auditor because of British rules on auditor tenure.

“ASIC does not consider Aust­ralia can take a unilateral approach­ to this as it’s an inter­national issue and needs to be solved at that level,” the meeting minutes show.

“(ASIC) does not believe the issue can be solved without establishing an independ­ent body to appoint­ auditors and on-charge audit costs to clients so the nexus between auditors and client payment­ is broken.

ASIC‘s most recent audit review­ found inadequate work had been done in 20 per cent of the 250 key auditing areas.