Greens call for structural separation of audit in final report
The Greens want to see any firm providing audit services in Australia restricted from providing non-audit services.
A total separation of audit and non-audit services would be the surest solution to addressing inherent conflict of interest issues in the auditing space, according to the Greens.
The Greens made a recommendation in the final report for the consulting firm inquiry that any firm providing audit services in Australia be prevented from providing non-audit services, including when engaging in business with the Australian government.
This was one of 19 recommendations made specifically by the Greens in the report, separate from those made by the whole Finance and Public Administration References Committee.
The Greens noted in the report that while the big accounting firms were originally established to provide audit and accounting services, their provision of services has greatly expanded into consulting, tax, financial and legal services.
“Many of these are far more lucrative than audit. Currently, on average, 80 per cent of the big four firms' revenue in Australia comes from consulting clients, as opposed to audit clients,” the Greens said in the report.
The party stressed that, unlike other services, audit quality is critical to the integrity of the financial system.
“Audit is a legal requirement of public companies and poor audit quality can undermine economic stability,” the Greens said.
“Stakeholders told the Committee that there is an inherent conflict of interest arising from allowing a firm to provide both audit and non-audit services. Many witnesses to the inquiry gave such evidence.”
The Greens said evidence provided to the inquiry had raised concerns about conflicts of interest undermining audit quality in Australia.
“Currently, just over a third of audits fail to meet the standard required, namely, to obtain 'reasonable assurance that the financial report as a whole is free of material misstatement,” it said.
“The big four accounting firms talked about their 'sterile corridor' approach to managing conflicts of interest associated with providing audit and non-audit services. Rolling scandals from the big four make it clear that they do not adequately self-regulate or mitigate such structural conflicts of interest.”
Former ACCC chair Professor Allan Fels told the committee during the inquiry that “measures to resolve conflicts in this sector usually work badly in practice, are steadily eroded over time and are poorly enforced by regulators”.
The Greens said that the committee had gathered a large body of evidence supporting the idea of structurally separating audit from non-auditing functions in the industry.
It said the UK Parliament's 2019 report, The Future of Audit, concluded that “a structural break-up would prove more effective in tackling conflicts of interest and providing the professional scepticism needed to deliver high-quality audits”.
“Professor Fels told the Committee that 'total separation is the clean, clear, sensible solution, and as the current UK situation suggests, the global audit industry is already headed there,” said the Greens.
“The Greens agree with Professor Fels. Structural separation is the surest solution to address the inherent conflict of interests that arise when a small group of extremely powerful firms hold a near monopoly over auditing.”
The Greens stressed that maintaining audit quality is essential to the proper functioning of the economy and financial services.
