Audit firms failing, ASIC threatens court action

The continuing overall level of adverse findings needs to be addressed, says ASIC.

Auditing firms are required to provide assurances that corporate financial statements give an accurate and fair view of a company’s financial position, liabilities, profits and losses. Picture: Getty Images

The corporate watchdog has warned taking giant accounting firms to court will be a “priority” after finding the quality of work in the industry has deteriorated, despite the sector pledging to improve after regulators applied sharp scrutiny.

The Australian Securities and Investments Commission audit inspection report for 2018-19, released on Thursday, found that auditors did not in the regulator’s view obtain reasonable assurance that the financial report was free from material misstatement in 26 per cent of the key audit areas it reviewed.

That was an increase from 24 per cent a year earlier and 25 per cent the year prior to that.

While the accounting giants - KPMG, PwC, Deloitte and Ernst & Young - all dispute areas of ASIC’s use of a “headline” assurance rate, the regulator found KPMG did not complete enough work on 33 per cent of the key areas in the latest ASIC inspection. That was an increase compared with the 21 per cent figure the company scored in the previous inspection.

Deloitte was found to have done insufficient work in 32 per cent of key audit areas for the second time in two years, while PwC, the biggest auditor in Australia, went from 12 per cent to 18 per cent.

EY’s result held steady at 22 per cent.

ASIC commissioner John Price. Picture: Aaron Francis

“While firm action plans to improve audit quality remain important, the continuing overall level of adverse findings from our audit files reviews needs to be addressed,” said ASIC commissioner John Price. “ASIC will adopt a more intensive supervisory and regulatory approach in this regard,” he said.

KPMG said ASIC’s inspection covered 10 of the more than 5000 audit opinions the company signed each year.

“While we do not necessarily agree with all of ASIC’s findings, we believe that the process provides valuable insights to improve the quality of our audits,” a KPMG spokeswoman said. “We will conduct an evaluation and act on all matters identified by ASIC.”

“Clearly, an overall fall for the profession and our own result is disappointing. KPMG has today published our private report in full, giving context to our result, as we continue our efforts to enhance transparency and trust in the auditing profession.”

ASIC said it would review each file adverse review finding and consider whether more matters should be referred to the Courts, the Companies Auditors Disciplinary Board or that some other action would be taken.

PwC, the biggest auditor in Australia, went from 12 per cent to 18 per cent. Picture: Zuma Press

“This may mean taking more enforcement actions against auditors for defective audits and auditor independence issues. Enforcement of auditor matters is a priority for ASIC.”

Parliament is investigating the auditing sector amid heightened concerns about conflicts of interest between audit firms and the companies they scrutinise. A series of high-profile corporate collapses around the globe has triggered an international overhaul of regulations policing the operations of major accounting firms.

Auditing firms are required to provide assurances that corporate financial statements give an accurate and fair view of a company’s financial position, liabilities, profits and losses.

However, the quality of audit work has been criticised by global regulators, amid concerns about conflicts of interest at the big four accountancies – PwC, KPMG, EY and Deloitte – as they focus more on consulting work.

ASIC has started publishing the individual percentage findings for when it considered a firm did not obtain reasonable assurance that a financial report was free from material misstatement, for each of the major audit firms, after they recently volunteered their results for the first time.