ASIC must take stronger action against 'delinquent auditors', says former ACCC chair

Professor Graeme Samuel, at Monash University's Business School, has outlined practical measures to address audit misconduct at the big four firms, following recent allegations against KPMG’s audit department by a whistleblower.

The Parliamentary Joint Committee on Corporations and Financial Services, which has held several hearings into the allegations, is currently accepting submissions for its inquiry into the audit misconduct allegations involving KPMG.

In a recent submission, Professor Graeme Samuel noted that the Joint Committee on Corporations and Financial Services has now laid bare“the delinquency of at least two of the big four accounting firms”.

He also stressed the vital role that the audit discipline plays in providing information about a corporation’s financial affairs.

”Audits of corporations are a vital discipline that serves shareholders, suppliers, creditors, and employees in providing important information as to a corporation’s financial affairs,” said the former ACCC chairman.

”But the discipline relies on the integrity of the audit and auditors – overseen by ASIC, with powers to register auditors, to suspend or cancel registration as a consequence of audit processes and reports that fail an integrity test, and to examine audit reports and disclose details of deficient audits.”

Samuel said ASIC’s powers needed to be ”exercised with rigour” so auditors recognise that failing to maintain intellectual integrity and high-quality audit work will have inevitable serious consequences.

”ASIC has previously examined and opined on the quality of audit reports. That practice should be resumed with adequate resources provided to ASIC. But importantly, the results of ASIC’s examination must be made public with clear identification of the reports concerned and the audit firms involved,” he said.

”It must inevitably result in accountability for deficient audit practices – with audited corporations choosing to migrate away from consistently poor-performing auditors.

”Transparency is an unforgiving discipline and allows directors to impose accountability on delinquent auditors and shareholders to impose accountability on delinquent directors who continue to engage deficient auditors to conduct the audit of the vital financial accounts.”

Samuel also raised concerns about inherent conflicts of interest where the firm supplies both audit and non-audit services to the same corporate organisation.

Conflicts of interest such as these, he said, inevitably impact on the integrity of the vital audit function.

He warned that these cannot be satisfactorily overcome by implementing ”artificial walls” which he described as an ”inherently dubious mechanism for ensuring integrity”.

”Accordingly, the ASIC auditor registration process should require as a condition of registration of an Australian auditor that a registered auditor, their firm and their associated entities, Australian or international, should not derive income from non-audit services provided to an audited corporate organisation, including all associated entities both in Australia and internationally,” he said.

”If an auditor cannot satisfy ASIC as to its ability to satisfy this condition, registration should be denied or cancelled.”

Samuel said this would result in the redistribution of non-audit services amongst consultancy firms.

Another separate issue arises where audit firms provide audit services to a government department or agency, and then seek to provide consulting advice.

”The audit function will provide access to privileged and potentially confidential information, which the firm can then use to win consulting work – even if providing consulting work will require them to forego their previous auditing work,” he said.

”This dictates that there should be a time gap, perhaps up to 2 years, between the cessation of the audit role and the commencement of consulting roles.”