KPMG supports increased transparency around auditor tenure

KPMG has welcomed most recommendations made by the ASX Corporate Governance Council in its consultation draft for the fifth edition of its Corporate Governance Principles and Recommendations.

Changes requiring listed entities to instil a culture of acting ethically and increased disclosure around auditors' tenure have been welcomed by the big four firm.

The draft principles and recommendations, released earlier this year, contain proposed changes to the disclosure of board skills and diversity, increased disclosure or verification processes for periodic reports, as well as auditor tenure review processes.

The recommendations also call for disclosure of a listed entity’s material risks, as assessed by the entity, rather than specific material environmental and social risks.

In a recent submission, KPMG said that overall the changes set out in the consultation draft will drive “contemporary best practice governance aligned to the dynamic nature of the environment in which Australian listed entities operate.

“The proposed changes will lead to greater transparency and thus, a higher level of trust in corporations. In addition, the changes are aligned with the goal of reducing compliance costs, increasing productivity, and promoting transparency and diversity in corporate governance,” the firm said.

The most significant change among the recommendations is the proposed amendments to Principle 3, it said.

The recommendations propose changing the wording of Principle 3 to “a listed entity should instil and continually reinforce a culture of acting lawfully, ethically and responsibly within the organisation and in its dealings with external stakeholders, to create long-term sustainable value”.

KPMG said it did not entirely support this recommendation as it wants to see more clarity in the wording of the principle and the underlying commentary.

“It is noted that whilst the ASX has particularly asked for feedback regarding the consideration of external stakeholders in this Principle, no feedback was requested in relation to the addition of the wording ‘to create long-term sustainable value’,” it said.

“In relation to this addition, KPMG would like to comment that it is unclear whether the statement pertains to the creation of long-term sustainable value for the external stakeholders or for the entity itself.

KPMG said whilst directors should pursue the objective of long-term sustainable value for the entity, this may not be possible in all instances for all external stakeholders and cautioned that this change may have an unintentional impact.

“Further to this, the ASX may find it beneficial to reference established standards on responsible business conduct such as the United Nations Guiding Principles on Business and Human Rights and the OECD Guidelines to support consistency of understanding and application,” it said.

The big four firm said it does support disclosing auditor tenure in annual financial reports and recommends clarifying the definition of auditor tenure and providing transparency on how the tenure duration is determined.

“KPMG has been a long-standing proponent of such disclosures and publicly supported a move to such disclosure following the Parliamentary Joint Committee (PJC) led Inquiry into the Regulation of Auditing in Australia in 2019/2020,” the firm said.

“We consider disclosure to be a key part of our commitment to enhance transparency and promote public trust in the auditing profession.”

The firm said that KPMG’s Example Public Financial Statements 2023–2024 include an example of a voluntary illustrative disclosure.

“Although this disclosure is not required, KPMG considers that it is best practice to disclose auditor tenure, of both the auditor and the lead partner, in the annual financial report,” it said.

“A definition of auditor tenure and how it should be measured was not considered by the PJC recommendations. Guidance from other jurisdictions define auditor tenure as the number of consecutive years of service provided by the current audit firm and lead audit partner.”

Determining the period of auditor tenure which, in many cases is not addressed by any definitive guidance, can be complex and will require professional judgement, the firm stated.

“For example, determining the commencement date of the current auditors’ tenure has been challenging where the audit firm, or the entity, have been involved in previous mergers, acquisitions and/or changes in ownership structure,” it said.

“For this reason, transparency is key to assist users of the annual financial report to understand how the entity arrived at the current auditor tenure duration.”