Big four accounting firms in ASIC’s sights

PwC called out over auditing work quality after ASIC triggered a $500m writedown at client Myer.

PwC is one of Australia’s big four accountancy firms.

The corporate watchdog called out accountancy firm PwC over the quality of its auditing work after the regulator triggered a writedown of more than $500m in the ­financial ­accounts of its client Myer, resulting in the retailer posting a $476m first-half loss last year.

The Australian Securities & Investments Commission warned rival auditing firm Deloitte over “material changes” made to the fin­ancial statements of two clients, oil and gas company MMA Offshore and investment group Pacific Current — wiping out $250m and $50m in asset values respectively.

The watchdog queried the reliability of the figures cited in the financial reports.

The regulatory slap-downs are recorded in a series of confidential audit inspection reports for PwC, Deloitte and KPMG — obtained by The Australian under Freedom of Information laws — in which ASIC found sky-high rates of inadequate auditing across dozens of financial statements over the 18 months to June last year.

In each of the private reports, ASIC sets out where it believes the auditing firms failed to obtain reasonable assurances of the ­information in companies’ financial reports. It also lists instances where clients of each firm had to make “material changes” to their financial statements after the regulator privately questioned the reality of the figures.

The revisions to the value of the companies’ financial assets is part of a campaign ASIC has ramped up over the past year to restore investor faith in the reliability of financial accounts.

The move comes amid concern that deteriorating audit quality could contribute to damaging corporate collapses.

The regulator targeted an ­assortment of companies and their auditors over questionable accounting manoeuvres to justify unrealistic cashflow forecasts or goodwill values, particularly in under-pressure industries such as mining, retail and media.

The release of the heavily ­redacted audit inspection reports — a move three of the big four ­auditors, PwC, Deloitte and Ernst & Young, sought to block — comes as parliament gears up for a slew of public hearings into the ­accounting firms over conflicts of interest, poor audit quality and the tight-knit relationship between government and the big four accounting giants.

ASIC, which has voiced concerns about the increasing focus of auditors on collecting fees for contracting and consulting work for the same clients they are auditing, will on Friday be grilled by a parliamentary joint committee over its regulation of the accounting sector.

Previous analysis by The Australian shows that contracting fees — worth a total of $265m — amount to one-fifth of the fees the big four accounting firms are charging the 20 biggest Australian companies. Those same companies have failed to change their auditors for decades. In one case, oil giant Woodside has retained Ernst & Young for 65 years.

One of the most high-profile cases listed in ASIC’s inspection reports is the $515m writedown by Myer, which early last year stunned the market by marking down the value of its goodwill and brand name after the regulator had questioned the value of ­intangibles on the department store’s balance sheet.

ASIC also questioned the ­company’s cashflow forecasts. The write-down forced Myer, which has lost more than 80 per cent of its market capitalisation since relisting on the stock exchange in 2009, to suspend its dividend payments to avoid breaching its debt covenants.

In its most recent quality inspection report, ASIC warned KPMG over the financial reports of four of its audit clients — Orica, Genworth Mortgage, Cabcharge and Seven West Media, which were also the subject of write-downs of between $30m and $115m in their financial reports.

PwC this year sparked a brawl over ASIC’s findings after it revealed it had been accused by the regulator of inadequate work in 12 per cent of reviews of its key audit areas — a far healthier figure than KPMG’s 21 per cent or Ernst & Young’s 22 per cent.

In publishing the group’s headline audit results, PwC head of assurance Matt Graham said transparency would drive accountability across the market and “ultimately build trust”.

“It is difficult to entirely capture the day-to-day reality of a complex and challenging audit,” Mr Graham said. “For example, there are many cases where a company makes adjustments to its financial statements, or clarifies or enhances disclosures, before they’re published, as a result of the audit process.

“The market only sees a clean set of financial statements and an unqualified opinion, but there is often a lot of work behind the scenes by the auditor with the ­client to achieve this outcome.”

Ernst & Young is the only one of the big four audit firms continuing to fight the release of its most recent inspection reports.

KPMG chose not to block The Australian’s Freedom of Information request. PwC and Deloitte ultimately decided not to pursue a formal appeal of the release of their heavily redacted audit reports.

ASIC senior freedom of information officer Haydar Tuncer said: “PwC, EY and Deloitte have described in their submissions the detrimental effect disclosure would have on their business ­affairs. These firms have argued that disclosure could reasonably be expected to adversely affect their commercial, business or fin­ancial interests and their ability to operate their respective busi­nesses and successfully tender for ­future audit contracts.”

The audit reviews involve ASIC combing over a sample of public company audit files and ruling whether the auditor has done enough work to ensure key information can be relied upon by investors. ASIC also interviews senior auditors about their independence policies and practices.

In each of its inspection reports, ASIC cites a range of instances where the auditor “did not obtain sufficient evidence to support” the information in the fin­ancial accounts along with a “good practice” guide at ensuring higher audit quality. In the 2018 inspection reports, Deloitte fared the worst of the big four firms, with 32 per cent of its key audit areas found to have been carried out insufficiently to ensure financial accounts were free from error. Deloitte accused ASIC of using accounting standards tests that were “not fit for purpose”.