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Australia: PwC tax leaks undermined shareholder trust in audits

Oct 9, 2023

Retailer shareholders were “extremely disappointed” by the PwC tax leaks scandal because it raised doubts about the big four firms’ ability to carry out high-quality audits of listed companies, the Australian Shareholders’ Association has told an inquiry into the sector.

A joint parliamentary inquiry into the way the big four accounting firms are structured also heard on Friday that the scandal was “symptomatic of a structural problem” within the accounting sector caused by the tension between the firms acting to maximise profits while also being expected to act in the public interest.

Shareholders needed to be able to trust financial reports that have been signed off by an auditor, the association’s chief executive, Rachel Waterhouse, told the inquiry on Friday.

“We know from our retail shareholders that they’re extremely disappointed by the PwC failure,” Ms Waterhouse said.

She said that shareholders were also interested in knowing the ratio of non-audit work is being done for a firm’s audit clients over concerns that doing too much non-audit work may colour the audit findings.

The association’s policy and advocacy manager, Fiona Balzer, said bad behaviour within the non-audit parts of the big four created a “taint” around their audits.

“It’s the impact of the auditing on the financial markets’ confidence, and the individual investors, when things go awry in audit where accounts are misrepresented and money is lost,” Ms Balzer said.

“But the taint for the audit firm from the association with the consultancies and the advisories does diminish that trust ... So that taint I think is a real impact. And we also see internationally that periodically similar types of behaviours occur.”

Ms Balzer then referred to the collapse of UK government contractor Carillion, which was being audited by KPMG UK, as another example of a failure that dented confidence in corporate auditing.

“If these entities are failing or tolerating failures of an ethical nature elsewhere, how can we be assured that those [financial] numbers are correct?” Balzer said.

“And that’s where retail shareholders have a more difficult journey than a professional investor where you can interrogate the numbers and have time and expertise to dedicate to do comparisons.

“Whereas with the retail investor, there is a great element of trust, a trust that the numbers are correct, and that other people or themselves can pick up any errors as they emerge. Events like [the PwC tax leaks scandal], call that into question.”

The association also called on the government to implement the outstanding recommendations from the earlier parliamentary inquiry into audit quality. The 10 recommendations made by the committee in 2020 were designed to improve the standard of auditing and company reporting in Australia.

Split auditing from consulting
Separately, three Macquarie University academics argued that the only way to prevent a repeat of the scandal, along with resolving long-standing problems relating to poor audit quality, is to radically restructure the big four.

The trio want the big four to split into audit-only and consulting firms; to prevent auditing firms from providing any non-audit services to audit clients; and to create an independent statutory body to regulate the sector.

Associate Professor James Hazelton, Dr Erin Twyford and Emeritus Professor James Guthrie also want auditing firms to be banned from providing any non-audit services to auditing clients; to have auditors and their clients make public details about how audits are carried out; to force the big four firms to publish audited financial accounts; and to strip the sector of the ability to set its own ethical standards.

“We contend that there is a fundamental tension between acting in the public interest and acting from the profit motive,” Associate Professor Hazelton told the joint parliamentary committee on Friday.

“And in terms of resolving this tension, our primary recommendation is that there is a split between the provision of auditing services and the provision of consulting services. So under this model, a firm could offer auditing services or they could offer consulting services, but they could not offer both.”

PwC has already promised to publish audited financial statements from 2025, but its three big rivals have not committed to doing the same.

‘Long-standing issues in audit quality’
Dr Twyford said the use of offshore workers and cultural problems with the firms were partially to blame for the sector’s “long-standing issues in audit quality”.

In FY22, the corporate regulator found 60 per cent of audits reviewed had negative findings. In addition, Deloitte and KPMG were singled out for a drastic decline in audit quality and both firms needed to take “deliberate and concerted action” to improve.

Professor Guthrie also said the professional body Chartered Accountants ANZ did not run an effective disciplinary process for its members, which include all the partners of the big four consulting firms.

CA ANZ has sanctioned just 17 members from big four accounting firms during the past seven years.

Representatives of the professional body, which also gave evidence on Friday, pointed to reforms it was making in its disciplinary process which should improve the transparency and sanctions available to punish bad behaviour.

The submission of CA ANZ, which is funded in part by the big four consulting firms through membership fees, supports the current structure of the big four firms and the “proposition that multi-disciplinary firms are essential to high-quality audits of complex public interest entities.”

The Governance Institute of Australia said it would continue to advocate for the strengthening of whistle-blower protections.

“Australia still lacks a comprehensive whistle-blower protection mechanism and is therefore far behind the rest of the world,” it said.

The committee is aiming to report back by mid-2024.

[The Australian Financial Review]

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