Big four accounting firms hit back at watchdog staff ‘bias’

Australia’s big four accounting firms have blamed the sector’s poor audit quality findings partly on biased ASIC investigators.

PwC Australia chief executive Luke Sayers. Picture: John Feder

Australia’s biggest accounting firms have blamed the sector’s poor audit quality findings partly on unskilled and biased Australian Securities & Investments Commission investigators in confidential letters to the government after the regulator slammed the industry for sliding standards.

A series of private submissions made by PwC, Deloitte, KPMG and Ernst & Young to Bill Edge, the chair of the government’s Financial Reporting Council, reveal the big four professional service firms pushed back against warnings issued by the regulator’s former chair Greg Medcraft about sloppy audit work.

The big four firms, which are the subject of a parliamentary inquiry after a series of high-profile corporate collapses around the globe put the focus on auditors that signed off on company accounts, aired a series of concerns with Treasury about the ­professionalism of ASIC in­vestigators and the way the regulator conducted its audit inspections.

The letters — obtained by The Australian under Freedom of Information laws — were fired off by the heads of the major accounting firms after Mr Medcraft warned in October 2017 that audit quality was “appalling” and could “cause another Enron (collapse)” as the firms prioritised lucrative consulting work ahead of assurance contracts.

Following a meeting with some of the firms in December 2017, the FRC asked the audit firms to outline their concerns with Mr Medcraft’s criticisms and suggest ways to improve ASIC’s inspection program before Mr Edge updated former financial services minister Kelly O’Dwyer on the issue.

In a letter to Mr Edge, PwC chief Luke Sayers said Mr Medcraft’s warning was “inflammatory and not consistent with the legislated objectives of ASIC to enhance confidence in capital markets”. “That said, PwC recognises the need to continue to ­increase efforts to improve audit quality across the industry,” Mr Sayers said.

While acknowledging ASIC’s inspection program had an important role in improving audit quality, the big four pinned some of the blame for poor quality results on the watchdog’s own staff.

Former Deloitte CEO Cindy Hook told the government “a number of (ASIC’s) reviewers lack practical audit experience”, “a number did not reach senior levels in the profession”, “some do not have appropriate industry experience”, and “some have limited knowledge of controls based auditing”.

This made it hard for Deloitte to stick to its commitment to “agree or accept” ASIC’s findings.

Ms Hook said the time taken to conclude reviews could “cause significant strain on our partners and staff” and noted instances where ASIC employees “clearly had a conflict of interest and came to the review with bias” because they had worked on both the surveillance work tied to the matter and the subsequent investigation into the related audit.

EY chief executive Tony Johnson said overseas regulators employed “significantly higher skilled staff than ASIC for audit quality inspections” who were “typically ex senior managers and partners of the large firms”.

“This deeper and wider experience with the audit context may better place those regulators to discharge the quality oversight role in relation to audits,” Mr Johnson said.

These sorts of concerns were not later raised by the big four firms in public submissions to the current parliamentary joint committee on corporation and financial services inquiry into the audit sector.

At the time, ASIC proposed to use more former audit partners in its surveillance work. Currently, members of ASIC’s financial reporting and audit team have on average 15 years’ experience in the audit sector and the regulator uses retired partners from the big firms to conduct “some” audit reviews.

Mr Medcraft’s 2017 comments were triggered after ASIC found auditors failed to obtain reasonable assurance that financial ­accounts were free from misstatement in 25 per cent of reviewed cases for the 2016 financial year.

The watchdog’s probes have since uncovered a further decline in audit quality. The audit inspection report for 2018-19, released last month, revealed auditors had failed to obtain reasonable assurance about the figures in the accounts in 26 per cent of the key audit areas it reviewed, leading ASIC to warn that taking accounting firms to court over failures in the law would be a “priority”.

Mr Sayers said PwC would be leading the industry in an attempt to improve investor confidence in the audit sector and told the FRC that ASIC should release its inspection reports publicly, as the headline audit quality figures led to “confusion” in the market.

But he also raised concerns about the “quality of ASIC staff”.

“ASIC should establish an ­accountability framework for its inspection process that sets standards for the market such as what its turnaround time will be on reports, quality of ASIC staff and quality of ASIC reporting,” Mr Sayers said.

KPMG chief Gary Wingrove said he was “surprised” by Mr Medcraft’s comments, which he said “do not accord with the good working relationship” the firm had established with ASIC.

Mr Wingrove suggested the possibility of an “appropriate mechanism or forum to call out ‘good’ examples of audit quality” arising from ASIC’s inspection process to help “address the current imbalance in messaging around firm audit quality performance”.

PwC, KPMG, EY and Deloitte have been subjected to increasingly fierce regulation globally after a series of high-profile corporate collapses, such as the British government contractor Carillion, which went insolvent owing billions, and the recent collapse of 178-year-old British travel firm Thomas Cook, which put 9000 staff out of work.

Auditing firms are legally required to provide assurance 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 as they focus more on consulting work.

The share of revenue at the big four firms from audits of financial statements has shrunk from an average 24 per cent to 18 per cent over the past five years.