Audit sector quality, professionalism 'remains strong': AICD

In a recent submission, the Australian Institute of Company Directors (AICD) has told the government that audit quality in Australia remains strong and that boards continue to have "confidence in the rigour of the audit process and professionalism of the sector" despite the recent audit misconduct scandal at KPMG.

AICD said there was insufficient evidence to suggest that audit quality in Australia was experiencing a systematic decline.

The institute said while it would support targeted and proportionate reforms to enhance audit quality and independence, it cautioned the government against implementing board structural reforms and a “one size fits all” or blunt application to both firms and reporting entities.

The submission warned that broader structural reforms could lead to unintended consequences, including reduced audit quality and market capacity, as well as reduced access to capability and expertise within Australia’s largest multidisciplinary firms.

"We are particularly concerned that certain reform options would also impose significant and disproportionate costs on audit firms and, indirectly, reporting entities of all sizes and sectors, and ultimately their shareholders," it said.

"In the AICD’s view, this outcome would be inappropriate given reporting entities are not the source of the conduct issues the reforms are intending to address. These downstream costs would come at a time when Australian businesses are already burdened by high regulatory costs and where productivity remains a core national priority."

The lack of clarity on which firms the proposed reforms would apply to makes it difficult to assess the proportionality of the proposals, the institute said.

"We strongly recommend that these reforms are limited to the largest and most systemically important firms that have the capacity and resources to meet significant new regulatory requirements."

"Limiting new requirements to these very large firms would also be consistent with our understanding of the policy concerns the reforms are seeking to address and broader community focus on the conduct at multidisciplinary firms in particular."

The institute said the government could adopt the definition of significant global entity to identify which firms the new obligations would apply to.

The definition, which applies to entities with at least $1 billion in global turnover, would set an appropriate threshold and would only capture Australia's largest partnerships and multidisciplinary firms.

"Imposing significant new obligations on firms that do not have equivalent resources or the same risks as the largest multidisciplinary firms will likely reinforce market concentration amongst the largest providers," it said.

The impact of these reforms on reporting entities, the institute said, should also be considered through a proportionality lens.

"A number of reform proposals would have significant downstream consequences for reporting entities, including through increased service costs, reduced access to specialist expertise and changes to the structure of the audit market. As we understand from the Options Paper many of the proposals would apply to all ‘reporting entities’ a population that is considerable, including all public companies and large proprietary companies."

"The capacity of these entities to implement the proposed requirements will vary considerably. For example, an ASX 50 company will have a far greater capacity to implement these requirements than a privately owned business or NFP entity that is just above the large proprietary company threshold."

The submission warned that the proposals run the real risk of not only imposing new, significant compliance costs on these entities but also disproportionately impacting the quality of audit and non-audit services provided to them.

"For example, we do not consider there is a strong policy case in prohibiting a privately owned business from also obtaining non-audit assurance services from its audit firm."

The proposed regulatory obligations should be calibrated to the nature, size and risk profile of the reporting entities, it said.

"That is, where there is a clear case for additional safeguards to support confidence in financial reporting and audit quality, rather than applying uniform requirements across a highly diverse population of reporting entities."

"We note that several overseas jurisdictions, including the UK, apply heightened audit, governance and reporting requirements to public interest entities that are of particular significance to investors, financial markets or the broader economy. A similar approach in Australia would assist in providing a more proportionate and risk-based framework, while limiting unnecessary compliance costs for smaller listed entities, private companies and not-for-profits that do not."