Audit regulation must target conduct, not audit quality, audit expert says

In response to Treasury’s July options paper, Regulation of accounting, auditing and consulting firms in Australia, one accounting body’s submissions say that the nation’s audit regulatory framework has a firm-level regulatory gap, stressing that auditor conduct, not audit quality, needs to be addressed.

The options paper noted that the Corporations Act 2001 does not impose auditing standards on the general conduct of the registered company auditor (RCA) or audit firm.

“The current framework is largely built around individual RCAs, yet audit services are delivered through firms that establish governance structures, quality management systems, independence processes, methodologies, resourcing models and cultural settings,” CPA Australia’s submission to the options paper said.

Tiffany Tan, CPA Australia audit and assurance lead, said that Australia does not have an audit quality issue.

“By international standards, audit quality in Australia remains comparatively strong. The recent concerns in Australia have primarily been about conduct and governance, rather than systemic audit quality failures,” Tan said.

“It's really the conduct that we [are trying] to address via this reform.”

She stressed that ASIC lacks sufficient resources for surveillance and enforcement – areas that need improvement.

“A registration regime is only effective if the regulator has the resources to inspect firms, respond to risks, engage with the market and enforce the rules,” Tan said.

Restructuring costs

Tan said that the paper did not address the impacts or the costs that will flow on to corporate clients. According to Option 2A in the paper, external audits may only be conducted by an authorised audit company (AAC).

“The concern is that, under Option 3C, if the Big Four do not convert their audit practices from partnerships into companies, they may no longer be able to conduct external audits in Australia,” Tan said.

She noted that changing the structure is both costly and complex, bringing with it high costs and administrative burden.

“A forced change in legal entity status would trigger ASIC's auditor resignation and reappointment process for every affected client. Supplier, technology and insurance arrangements would need to be renegotiated or restructured. Staff, systems and client records would need to be separated, with audit appointments potentially re-tendered,” CPA Australia’s submission said.

Tan said there is an alternative in which the structure does not need to be changed.

“Bring the partnership in without touching, without forcing them into restructuring the whole organisation, without changing the legal structure from a partnership to a company.”

“It doesn't achieve anything by changing the structure”.

Welcome options

CPA Australia welcomes the paper’s Options 3A, New Governance Requirements for Large Audit Firms, and 6A, Transparency Reporting – Tenure and Fees.

“Option 3A remains relevant as a voluntary comply-or-explain governance code [which] complements, rather than duplicates, licence conditions,” CPA Australia’s submission read.

Tan said that the requirement of transparency reporting in Option 6A, Transparency Reporting – Tenure and Fees, acts as a “market-driven force”.

“CPA Australia strongly supports mandatory disclosure of auditor tenure as a low-cost, high-transparency measure,” the submission said.

“All of these transparency measures [are] like a market-driven force; you don't need regulation to do that, because if you are being transparent, the market would decide which audit I want to use, and for what reason. With 6A, it puts more accountability back to the entity itself too,” Tan said.

“[Transparency is] the whole ecosystem’s [role], not just the auditor’s role, but also the entities’ role and the audit committee.”

“Regular tendering and better transparency can strengthen contestability while retaining audit continuity and valuable institutional knowledge,” Tan said.

An entity-neutral framework

CPA Australia recommended an entity-neutral registration framework, modelled on the approach used under the Tax Agent Services Act 2009, that would apply consistently to partnerships, companies, and other audit practice structures.

The body said that conditions would focus on systems for quality management, independence, ethics, governance, and transparency.

Tan stressed that the number of files expected per year should increase. Currently, ASIC inspected 25 files in 2025-26 in a population of 2,300 listed companies and 11,771 large proprietary companies.

“CPA Australia encourages ASIC to continue building on this trajectory. International comparisons illustrate how thin Australia's inspection coverage remains,” the submission said.

“The Government has an opportunity to deliver meaningful reform without creating unnecessary upheaval. The roadmap is clear: regulate firms directly, strengthen surveillance and enforcement, improve transparency, and preserve the diverse and sustainable market needed by Australian businesses and capital markets,” Tan said.

“Stronger oversight, fair processes and credible sanctions are the essential elements of a modern audit regulatory framework."