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Australia: ASIC hopes threat of criminal sanction enough to force good audits

Nov 28, 2023 

The corporate regulator says that it is hoping that the threat of criminal sanctions for poor audits will be enough to make professional services firms improve standards as it scrambles to revamp its oversight regime following acrimony over the conduct of senior partners at PwC.

The Australian Securities and Investments Commission this year slashed the number of audits it reviews in its annual quality inspection regime from 45 to 30, even as the accounting sector comes under unprecedented scrutiny for leaking confidential information and for other matters.

It also stopped publishing its annual report card naming and shaming audit firms over poor audits this year, in a move accounting experts said reduced transparency about audit quality and showed the regulator was a “toothless tiger” when it came to policing the big four accounting firms.

But Greg Yanco, ASIC’s executive director of markets, said that this did not mean the regulator was softening its oversight of audits, but rather reflected a broader overhaul of its regime after 18 years of taking the same approach.

“I know that it [naming the firms] created a nice statistic... but they [firms] really are more concerned about the fact that we’re taking criminal actions against auditors,” he told the Financial Review CFO Live Summit. “This will be a much more powerful way of bringing attention to audit quality.”

He said that the former regime had been criticised for focusing too much on narrow aspects of audit files rather than more systemic problems.

Under the new approach, which ASIC is still working out, broader factors such as firms’ conflict of interest management, their own quality reviews and their independence policies, will all be considered.

“We will be looking at those things in depth and if we find something egregious, we won’t hesitate to take enforcement action,” Mr Yanco said.

The same team would run surveillance as had run ASIC’s close and continuous monitoring of the major banks following the financial services royal commission, he added.

He also hinted that ASIC would have more detail regarding whether it thought professional services firms should be forced to split their consulting and audit arms to avoid conflicts of interest soon.

PwC already sold off its government services arm following the conflicts of interest between it and its tax division, and EY tried and failed with plans to separate the two divisions globally earlier this year.

But companies are already acting to ensure their audits were free of conflicts even as ASIC worked out its regime, the conference heard.

South32 chief financial officer Sandy Sibenaler said that she had refused to hire her company’s auditor, KPMG, for any services other than audit work for two years.

It comes amid ongoing concerns that accounting firms taking substantial non-audit fees from audit clients could have their independence, or the perception of their independence, compromised.

Ms Sibenaler said there was “no upside” to hiring KPMG for consulting or tax work, as well as auditing, when she considered their contracts and what was best for investors.

“We really thought about the criticality of independently audited accounts to support capital markets, access to debt, access to equity,” she said.

“Through that lens, we looked at the risks and rewards of enabling [KPMG] to do other work for us, and we determined that there was no reward to letting them do that.”

She said the fact South32 had not needed to tap KPMG for non-audit services in two years showed the strength of the broader market to provide these services.

[Financial Review]

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