Australia Considers Audit Governance Reforms

The Australian government is considering structural reforms to the accounting profession, including the possible separation of firms’ audit and consulting arms, following scandals at PwC and KPMG, as reported by the Australian Broadcasting Corporation.

Assistant Treasurer Daniel Mulino released a Treasury options paper for consultation this week, exploring potential changes to how accounting, auditing, and consulting firms are regulated. “In recent years, we have seen behaviour from some large accounting, auditing and consulting firms in Australia that is not fair and honest,” Mulino said. “This has undermined trust in the firms themselves and raised broader questions about the resilience of the frameworks meant to uphold market integrity.”

The paper’s central concern is the potential for conflicts when firms earning most of their revenue from consulting also perform company audits. “Non-audit services may dominate the overarching culture of the firm,” the paper states, “and this culture may be at odds with an auditor’s role in challenging management and client perspectives.” Consulting revenue has consistently outgrown audit revenue at the largest firms, rising from 73 percent to 82 percent of total revenue between 2013 and 2018. Among the options canvassed are structural separation of audit and non-audit functions, licensing of audit firms by the Australian Securities and Investments Commission (ASIC) with ongoing ethical and quality obligations, and mandatory tendering of audit engagements every 10 years.

The paper also questions whether partnership self-governance is working. In a traditional partnership, partners collectively shoulder the firm’s financial and legal risks, with the expectation that they hold one another accountable. “Recent events suggest that this may not be happening as desired,” the paper notes. Options include new governance requirements for large firms, civil penalties for breaches of auditor obligations, which are currently low by international standards, and expanded ASIC powers over registration and deficient audit work.

Consultation on the paper closes on August 12.