CA ANZ calls for ‘firm-level’ ASIC jurisdiction on audit firms

In its submission to Treasury’s options paper on the regulation of accounting, auditing, and consulting firms in Australia, Chartered Accountants Australia and New Zealand (CA ANZ) recommended that the government adopt a targeted reform package that gives ASIC clear jurisdiction over the firms where audit quality is paramount and matters most.

It asked the government to require public interest entities to seek audit services only from audit firms licensed by ASIC. This would give ASIC “firm-level” jurisdiction over quality management, ethics, independence, and governance, not only individual auditors.

CA ANZ said this is the “central reform” in the regulation of accounting, auditing, and consulting firms in Australia, and would ensure accountability within the audit sector.

It added, however, that ASIC will need adequate resourcing as there is a cost involved in setting up an audit firm licensing regime.

Elaborating on its recommendations, the accounting body said individual auditor obligations should complement firm licensing, and ongoing professional conduct obligations for registered company auditors (RCA) can close residual gaps if they align with existing ethical and auditing requirements.

Furthermore, it said requirements for partners in multidisciplinary firms should be proportionate, linked to audit quality, independence, governance, and firm culture, and designed to avoid unnecessary disruption. It said fit and proper requirements should be targeted and communicated clearly.

Arming ASIC with these powers would enable it to enforce firm-level system of quality management (SoQM) requirements, improve accountability and regulatory scrutiny for firm-wide decisions, and enable better targeted regulatory action, the submission said.

However, CA ANZ flagged the possibility of unintended consequences from these reforms, including the potential for disproportionate impacts on smaller and medium-sized audit firms, but said this could be avoided by appropriate scoping.

It also said any changes to the auditing standard ASQM 1 could reduce international consistency, bump up compliance costs, cause regulatory fragmentation, and place a disproportionate burden on smaller firms.

The CA ANZ submission is in response to a Treasury options paper released in July that addressed issues such as accountability and potential conflicts of interest posed by the structure at the big four accounting firms.

The paper was released by the government in response to the scandal engulfing KPMG over allegations of misconduct in its audit practices and the mistreatment of the whistleblower who made the allegations.

It identified key issues in the profession such as accountability, internal governance, audit surveillance, disciplinary processes and sanctions, and audit market dynamism.

The paper sets out multiple options to strengthen accountability and lift standards in large accounting, auditing, and consulting firms in Australia. These include dealing with conflicts of interest in multidisciplinary firms with audit and non-audit functions, partnership reforms, and requiring audit firms to meet quality management and ethical standards to be eligible for engagement by audit entities.

Governance code for larger audit firms

Another recommendation by CA ANZ is for the government to introduce an enforceable Australian audit firm governance code for larger audit firms that are “most significant to investors and superannuation members”. This should emphasise audit quality, independence, ethical culture, transparency, and accountability for key decision makers, the submission said.

Citing the benefits, it said the code would standardise governance and transparency expectations. It would also establish clear accountability for key personnel responsible for audit quality, ethics, and oversight when combined with the ASIC powers stated above.

It warned, however, that without this ASIC enforcement, the requirements could risk becoming laden with processes but offer limited value.

This reform must be part of a broader suite of audit reforms, CA ANZ stated, and indicated that it could come with implementation and oversight costs.

More robust whistleblower protections needed

Elsewhere in its submission, CA ANZ appealed to the government to “protect people who speak up” by strengthening whistleblower protections so people in large professional services structures are not excluded because of their legal form.

The submission noted that this was progressed through the government’s separate review of corporate and tax whistleblowing laws.

CA ANZ addressed the Treasury option of mandating structural separation where reporting entities can only procure audit services from firms that do not offer non-audit services.

It said this separation would eliminate the influence of non-audit services on the conduct of audit services and address any real and perceived risk of non-audit services’ culture affecting audit quality.

CA ANZ responded that these prohibitions should focus on services that compromise auditor independence (including perceptions of independence) while differentiating between audit and review, audit-related assurance, and other assurance and non-assurance services.

“Independence requirements should evolve with market expectations while preserving critical service distinctions,” the submission said.

Operational separation should be realised through firm governance requirements and the audit firm governance code rather than by mandating structural separation, it said.

It said that prohibiting reporting entities from engaging their auditor for non-audit services could remove audit and assurance-related services that support audit quality, or it could make the provision of these services less efficient.

Make key changes to avoid disruption

Commenting on the proposed reforms, CA ANZ said: “By addressing the key drivers of audit quality, this package avoids the need for more disruptive structural reforms. Measures such as mandating audit-only firms, requiring authorised audit companies, or limiting partnerships would create significant cost and disruption without clear evidence they would improve audit quality.”

“Audit quality also depends on auditors identifying as members of a profession with public-interest obligations. Professional identity, supported by professional accounting bodies such as CA ANZ through education, ethical standards, continuing professional development, discipline and peer expectations, helps reinforce the judgement, courage and speak-up culture needed when auditors face ethical dilemmas or commercial pressure.”