Name and shame big 6 audit quality: former ASIC chief accountant
ASIC’s former chief accountant has said the watchdog’s decreased audit file reviews were “concerning”, citing the benefits of stricter transparency rules.
Former ASIC chief accountant, Doug Niven, has raised his concerns with ASIC’s approach to ensuring audit quality, particularly among Australia’s largest firms.
He noted that transparency regarding the level of negative findings from audit file reviews can serve as a “strong incentive” for firms to improve their audit quality.
Last year, ASIC did away with its annual report card on the audit quality of the big four accounting firms. In doing so, the firm ceased producing firm-level results except in certain exceptional situations.
“Sufficient levels of surveillance and transparency of findings provides evidence of the need for improvements in conduct in a regulated population,” he said.
“A problem does not cease to exist just because of the extent of the problem is less apparent.”
Niven made these comments in his personal capacity, separate from his role at the Auditing and Assurance Standards Board (AUASB) as answers to questions on notice by the Parliamentary Joint Committee on Corporations and Financial Services.
In 2022, following an internal review, ASIC integrated its audit surveillance and financial reporting activities into a combined “financial reporting chain.”
The new approach meant that ASIC would generally carry out an audit where issues are identified with financial reports, given the “strong correlation” between the two.
ASIC executive director for regulation and supervision, Greg Yanco, said the approach “acknowledges that everyone in the financial reporting chain, from report preparers to directors to auditors, have a role to play in improving the quality of financial reports and audits.”
Commissioner Kate O’Rourke wrote, in response to Niven’s submission, that the approach means ASIC could “concentrate [its] resources on audits whether there is more likely to be harm to consumers and investors through deficient financial information.”
Niven highlighted several potential drawbacks of this approach, including his belief that certain material misstatements are often not capable of being identified by reading a financial report.
“Where a regulator conducts a ‘desk review’ of a financial report, they are not reperforming the audit. It can be difficult or impossible to identify the risk of a material misstatement from reviewing the financial report,” Niven submitted.
“A regulator may also be able to identify material misstatements in a financial report from more detailed information on the audit file.”
He also clarified that audit surveillance and financial reporting had already been integrated for “many years,” and that audit file reviews were “predominantly a subset of the financial reports selected for review.”
Since the shift to a “risk-based” model, the number of audit files reviewed each year by the watchdog has fallen. According to Niven, in the 12 months to 30 June 2010, ASIC reviewed 58 audit files. In the 12 months to 30 June 2023, it reviewed only 15 audit files.
The number of key audit areas reviewed on each file also fell substantially, from 207 in the year to 30 June 2019 to 45 in the year to 30 June 2023. Substantially fewer financial reports were reviewed across a similar time frame.
Niven said the reduction in the level of audit file reviews was “concerning,” particularly so when considering the increasing public scrutiny towards the profession, the increase in audit deficiencies in the US, and ASIC’s expanding responsibility areas.
Indeed, the deficiency rate of audits conducted by the US limbs of Deloitte, EY, and PwC nearly doubled in the PCAOB’s most recent annual inspection report.
Overseas, “proactive” auditing is seen as an important contributor to confidence in independent audits and financial reports, said Niven.
He added that the deflated level of audit file reviews is stark by international comparisons. Canada has the “most comparable profile of listed entities to Australia,” yet its audit regulator reviewed 8.8 times as many files in the year to December 2022 as ASIC did in the year to 30 June 2023.
“Overseas audit regulators review audits where there is no known material misstatement in the financial reports with the objective of improving audit quality,” said Niven.
“This reduces the risk of material misstatements in future financial reports not being detected or addressed by auditors.”
