PwC to ramp up its audit quality

The leading accounting firm is to create an independent audit quality advisory board.

PwC CEO Luke Sayers says the nation’s biggest professional services firm will create an external board to review the quality of its audit practice. Picture: John Feder

The nation’s biggest professional services firm plans to establish an external board to review the quality of its audit practice and will change the way the performance of audit partners is assessed as part of a package of measures designed to improve transparency.

PwC Australia audits 60 companies in the ASX 200, or 30 per cent of the index, giving it the largest audit share of the big four accounting firms.

The firm’s chief executive Luke Sayers, who will step down next year, said PwC was in the process of creating an independent audit quality advisory board to help the firm enhance its approach to audit quality.

Its members will come from a range of roles relevant to the audit profession, including those with regulatory, auditing and standard-setting experience and will review the salaries of audit partners, in addition to audit quality.

“It goes with transparency more broadly: the segregation or ring-fencing of some external people into a private partnership that will push and prod and advise on all things related to assurance.

“By having esteemed people around the table, working with our assurance business, we just feel that there is going to be greater levels of input and transparency. We don’t have an independent board — this is about opening ourselves up to the external world,’’ Mr Sayers told The Australian.

He said the three-person board would be comprised of “eminent people well known for their integrity, governance, knowledge of our world”.

“Because we need those people to be independent, there will obviously be a rigorous process (over) what sort of people can join,’’ he said.

PwC is also reviewing the performance of its audit partners against a new scorecard in the year ahead.

In addition to the results of internal and external inspection outcomes, it will also measure the quality of their work by incorporating feedback from their teams and audit committees and review how they use automation and other specialist expertise.

“This goes right to the heart of are partners only interested in revenues and profits,” Mr Sayers said. “We acknowledge that the quality scores of all the firms in the profession has not lifted collectively as much as we would all like in the past five years.

“This is one way of absolutely baking it into every partners’ assessment, and therefore further reinforcing the importance of quality in our audits over and above almost everything else.

“Every person is accountable for their audit book for a quality perspective.”

PwC went on the front foot earlier this year to be the first big four firm to release sensitive ­information about its internal audit work.

It claimed the corporate regulator considered it did not obtain reasonable assurance that a financial report was free from material misstatement in 12 per cent of the key audit areas that ASIC reviewed across PwC files for the 2018 financial year.

This compared to 24 per cent across the whole industry and 20 per cent at the six largest firms.

Former ASIC chairman Greg Medcraft has previously called the quality of auditing in Australia “appalling” and in February a parliamentary committee report expressed “ongoing concern” about the “deep-rooted problems in the audit market”.

The joint committee on corporations and financial services said it had been “concerned for some years about audit quality” and asked ASIC to develop a new way to measure it that produced ­results comparable over time.

The big four accounting firms are now facing a parliamentary inquiry into the quality of their audits of listed companies amid claims their legacy audit businesses are being used to subsidise their higher-margin consulting services.

A recent study by consultant Godfrey Remuneration Group, which reviewed the remuneration reports of listed companies between 2016 and 2018, found PwC provided both audit and remuneration services to 11 clients.

In its submission to the government inquiry, PwC called for an independently led review of non-audit services provided to listed companies to be completed by June next year.

“We acknowledge that society’s expectations on conflicts, perceptions of conflicts and vertical integration, of large one-firm businesses — whether they be banks or professional services firms — are changing,” Mr Sayers said.

“So when you are an auditor of an account, you are working for the board but mostly you are working for the shareholders of Australia. Those auditors, today from my perspective, 100 per cent of the time are not conflicted. But I understand how people may perceive them to be conflicted if there are a number of other services being done outside of the audit.”

He said PwC was “up for this conversation”.

“We are up for working with the parliamentarians. We are up for working out how we respond collectively to this. Let’s do a review, let’s work through what those changes may need to be, then the profession needs to move towards that new world,” Mr Sayers said.

“What we cannot have is a businesses’ downfall or the auditors are to blame … because of a conflict. We want to take that off the table.”