Deloitte opposes partnership limit for accounting firms

In its submission to Treasury’s options paper on the regulation of accounting, auditing, and consulting firms in Australia, Deloitte said it is not supportive of an option put forward by Treasury to reduce the partnership limit for accounting firms and require a percentage of partners to be registered to deliver regulated services.

According to Treasury, this option would cut the maximum number of partners (currently 1,000) that could comprise an accounting partnership. It noted that legal partnerships are limited to 400 partners and legal practitioners are also subject to other conduct requirements.

It said the maximum number of partners at accounting firms would be set at a level where partners can be expected to jointly manage the firm’s affairs while complying with their legal obligations.

However, Deloitte said in its submission that reducing the partnership limit would have considerable negative impacts that are “detrimental” to Treasury’s stated objective and, as such, should not be pursued.

“Overall, there is no evidence globally that restricting the size of accounting firms has a positive impact on Treasury’s objectives to enhance the regulation and trust in the system and to ensure that the audit sector is accountable and that the market can continue to rely on it,” the submission read.

“Indeed, there are no such limits in the US, UK, Singapore, Japan, Canada and other comparable markets. One of the benefits of the multi-disciplinary firm model is that it supports sustained investment in audit quality, technology and specialist capability, while also providing the financial resilience required to undertake large, complex and higher-risk audits.

“Limiting firm size may not only reduce investment capacity but may also reduce the willingness and ability of firms to compete for the most complex audits, which could ultimately reduce market choice and competition.”

Any partnership caps could also restrict multidisciplinary firms' ability to provide diverse capabilities, which could erode firms' operational and financial resilience when responding to market disruptions, litigation, regulatory action, or audit failures, which could impact market confidence, the firm argued.

“Audits of large Australian listed entities typically require a large number of partners given the scale of their operations. A reduction in the partnership limit may impact on an audit firm’s ability to conduct an audit of such large, listed entities,” the submission read.

It added that partnership limits could reduce the diversity of expertise available to undertake audit engagements.

Furthermore, it said this measure could limit its ability to hire and invest in graduates at scale, and attract and retain talent compared to other larger corporate entities.

“We also note that incorporated audit companies, where the owners or shareholders are equivalent to partners in a partnership, have no restriction as to the number of shareholders. Thus, limiting partner numbers would create regulatory imbalance in the market,” the firm said.

The submission also opposed mandating structural separation, and said it would require multi-disciplinary professional services firms to separate, creating a separate audit firm prohibited from providing non-audit services.

“Structural separation would create insurmountable and significant practical, operational and market challenges,” the submission read.

“It would adversely impact the audit system of quality management, accountability of the audit sector and the system as a whole. For these reasons, we are not aware of any market in the world that has adopted this model.”

Further, it argued that specialist capabilities contracted from third parties by audit firms may not meet independence standards, including year on year, and as a result, firms may need to source different specialists each year. It could also make it more challenging to ensure accountability for quality issues.

In addition, it warned that structural separation could increase costs to reporting entities and the broader economy, and create uncertainty in relation to the Australian capital market relative to global peers.

Treasury's options paper has proposed mandating that reporting entities can obtain audit services only from firms that do not offer non-audit services, to remove the influence of non-audit services on audit conduct and address any real and perceived risk of a non-audit services culture affecting audit quality.

Deloitte’s submission said the firm supports reforms that improve audit quality, strengthen market resilience, and enhance trust in the system.

“In our view, reforms should be evidence-based, targeted to clearly identified regulatory gaps, and designed to improve accountability and oversight without creating unnecessary cost, complexity or unintended consequences for reporting entities or the broader market.”