Capping accounting partners weakens audit quality: EY Australia

EY Australia’s submission to Treasury’s options paper on regulating Australian accounting, auditing and consulting firms said the accounting giant does not support mandating changes to the legal structure and organisational form of multidisciplinary audit firms.

The options paper proposed reducing the partnership limit for accounting firms (currently 1,000) and requiring a percentage of partners to be registered to deliver regulated services. Under this option, accounting partnerships would be limited to natural persons, and the definition of “accounting partnership” would be clarified.

A portion of partners would also be required to be registered as tax agents, registered company auditors (RCAs), and insolvency practitioners to deliver the relevant regulated services. They would be subject to a code of conduct to maintain their registration.

However, EY Australia said it does not believe this measure would address underlying concerns about governance and accountability in large partnership firms. Instead, it said other reform options that strengthen the regulatory framework would be more effective in achieving these outcomes.

Noting that the partner caps in Australia are relatively low compared with the size and scale of partnerships in other countries, the firm also argued that a cap on partner numbers would stifle the growth of audit firms and limit their ability to attract, retain, and incentivise capable professionals and subject matter experts.

“It would also restrict career pathways to partnership, reducing opportunities for talented professionals to progress within the firm and adversely impact the long-term sustainability of the audit profession,” the submission read.

“As audit firms increasingly require specialists in areas such as AI and sustainability, capping the number of partners would limit the firms’ ability to bring these capabilities into the partnership, ultimately weakening innovation and audit quality.”

Partnership limits could result in another form of structural separation for large multidisciplinary audit firms, EY Australia said. This could create disruption for audited entities, increase operational complexity and costs, and result in more uncertainty. This could have implications for audit quality, and make the market less attractive for local and international investors, the accounting giant said.

“Structurally separating the multidisciplinary firms in Australia would also diminish access to global subject matter experts and resources and reduce the global integration that supports the delivery of high-quality audits, in particular for large, complex multinational corporates,” its submission read.

“Accordingly, there would likely be a direct impact on the audits of large Australian corporates as well as large internationally headquartered corporates with an Australian presence.”

EY Australia has supported the proposal to require reporting entities to obtain audit services only from audit firms licensed by ASIC, with quality management and ethical obligations imposed as ongoing conditions of holding their licence. It also backed requiring RCAs to comply with professional conduct obligations as an ongoing registration obligation.

It recommended that entities be required to comply with ASQM 1 Quality Management Standard and APES 110 (or equivalent Code of Ethics) as licensing conditions for audit firms, and require compliance with APES 110 (or equivalent Code of Ethics) as a registration condition for RCAs.

“It is important that quality management and ethical obligations for all audit firms are aligned to internationally accepted standards ISQM 1 and the IESBA Code as they provide a comprehensive, globally recognised framework that promotes audit quality, independence and consistency across jurisdictions,” the submission read.

EY Australia underscored the need to consider long-term sustainability and attractiveness of the audit profession when reforming the sector, particularly as the number of RCAs declines, and strongly encouraged further public consultation on the preferred reform options.

“Given the breadth and complexity of some of the options, it is essential that stakeholders are given the opportunity to provide feedback on the detailed design and implementation of the reforms to avoid any unintended consequences that could adversely affect audit quality, impose unnecessary cost or complexity on audited entities and impact the efficient functioning of capital markets.”

It also called for adequate transition periods and a staged introduction of any measures to minimise disruption and adverse impacts on audit quality.