Separation of audit and advisory critical for improving standards, inquiry told
Accounting firms should be prohibited from providing both advisory and audit services to the same entity, the government has been advised.
The provision of audit and non-audit services to the same client can raise independence concerns and should be restricted, the Tax Justice Network Australia and Centre for International Corporate Tax Accountability and Research has told a recent inquiry.
In a recent response to the PJC inquiry into the audit, assurance and consulting industry, the joint submission said that where a firm provides advisory services and auditing, it should be prohibited from being able to audit an entity that it has provided other advisory services to.
“That would include where advisory services have been provided by a related international partnership. For example, if PwC Luxembourg provided tax advice to a corporation, then PwC Australia should not be permitted to audit the corporation,” it stated.
“Even knowledge that another part of the same firm had provided advice to an entity will create a conflict of interest that, even subconsciously, will impact on the rigour and integrity of the audit.”
The current rules allow firms to provide certain types of non-auditing services including tax advice, under certain conditions to audited clients, it noted.
The Tax Justice Network stated that some research has found that consulting employees can have a positive effect on audit quality, particularly where those consulting employees have skills complementary to auditors, such as special industry, technical, and management skills.
However, other research has shown the more tax services a company receives from its auditor, the lower its effective tax rate over the long term, it said.
The submission has called for the Corporations Act 2001 to be amended to restrict the use of the same firm to provide audit and non-audit services to Australian corporations, a proposal previously put forward to the inquiry by Professor Graeme Samuel.
“Corporations should also be required to have regular rotations of audit firms. Using the same audit firm for an extended period could result in an overly friendly relationship where certain audit issues may be overlooked,” the submission said.
“These reforms would bring Australia into greater alignment with similar regulations in both the US and the UK.”
In his submission to the inquiry, Professor Graeme Samuel said a requirement for the major accounting firms to split their audit and advisory practices into two separate firms would be an “extraordinary overreach”.
However, prohibiting a firm from providing non-remunerated services to the same corporation (and its associates) that the firm is auditing would be a far simpler and achievable solution, he said.
Greater scrutiny of financial statements by ASIC
The submission also said that ASIC should be required to review the financial statements of companies and ensure basic compliance.
“Many financial statements are filed with clear errors and filers face no or very limited consequences for filing false or misleading statements in the rare situations that errors might be identified,” it said.
“As in other jurisdictions, including the UK and New Zealand, annual financial statements should be free and available for review by all stakeholders. Having more public scrutiny of financial statements should be a strong motivator to increase compliance.”
The submission noted that providing free financial statements may require alternative funding sources for ASIC.
“However, the increased transparency would far outweigh any additional government expenditure that might be required,” it said.
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